Mondelez International Inc (MDLZ) — Q3 2017 Earnings Call Transcript

Good afternoon and thanks for joining us. With me today are Irene Rosenfeld, our Chairman and CEO; and Brian Gladden, our CFO. Earlier today, we sent out two press releases and presentation slides, which are available on our website, mondelezinternational.com/investors. During this call, we'll make forward-looking statements about the company's performance. These statements are based on how we see things today. Actual results may differ materially due to risks and uncertainties. Please refer to the cautionary statements and risk factors contained in our 10-K and 10-Q filings for more details on our forward-looking statements. Some of today's prepared remarks include non-GAAP financial measures. Today, we will be referencing our non-GAAP financial measures unless otherwise noted. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation. And with that, I'll now turn the call over to Irene.

Thanks, Shep, and good morning. Q3 was a good quarter on both the top and bottom lines. Organic net revenue was up 2.8%, fueled marginally by the strength of our Power Brands, improving momentum in emerging markets, and strong performance in Europe. We estimate that our top-line results included a benefit of approximately 60 basis points associated with recovery from the malware incident as we recaptured some delayed shipments from the end of Q2. Of course, we had some challenges in the quarter from hurricanes, earthquakes, and the India GST, but they netted out to a very small number. On the bottom line, we delivered another quarter of strong adjusted operating income margin expansion and double-digit adjusted EPS growth. We're pleased with the underlying growth drivers. Our Power Brands grew 3.8%, significantly outpacing the category with Milka and Cadbury Dairy Milk in chocolate and Oreo and belVita in biscuits performing especially well. Emerging markets grew 4.8%, including positive volume growth. Key markets that fueled revenue growth included India, Russia, and Mexico. We think sequential acceleration in emerging market category growth is consistent with our view that these markets are generally improving and we’re well positioned to win as conditions continue to improve. Developed markets grew 1.6%, led once again by Europe. Our performance in chocolate was strong across nearly all of our largest markets in the region. For example, in Germany, we expanded market share on a year-to-date basis with distribution gains and the solid performance of Milka. And in the UK, our Cadbury sponsorship of the Premier League drove strong share gains. Our growth strategies continue to gain traction. We're contemporizing our core by distorting resources behind our Power Brands and by upgrading the well-being credentials of our portfolio. Our belVita brand continues to be a standout. It’s growing mid-single digits globally driven by our base breakfast biscuits, as well as impactful line extensions like belVita Protein and belVita Bites. RITZ Crisp & Thins, with all the taste and half the fat of the leading potato chip, is taking share and exceeding our expectations. We’re also increasing our presence in convenience stores thanks to our more flexible price pack architecture. We successfully launched a new savory snack brand, Véa, during the quarter. We're off to a good start as we ramp up distribution. We continue to make good progress as we fill geographic white spaces. Milka Oreo chocolate in the U.S. is performing well and we recently expanded our offerings to include Milka Oreo mint. The repatriation of our Nabisco brand in Japan is also going well as we recently launched Oreo THiNS and new RITZ sandwich biscuits. Our Milka brand has established a solid beachhead in the chocolate market in its first year in China. Finally, we continue to drive sales and channel ubiquity for our iconic brands with especially strong progress in e-commerce. Across the globe, we delivered net revenue growth of more than 40%, fueled by key markets like China and the U.S. In fact, our U.S. e-commerce net revenues have grown more than 70% year-to-date, and our China e-commerce business grew at twice the growth rate of the online market. These strong results reinforce our belief in the importance and future potential of e-commerce as the key snacking channel, and we've taken the necessary steps to capitalize on that opportunity. Before I turn the call over to Brian, let me comment briefly on North America, which is our only region performing below expectations. We're pleased to have returned North America to positive growth in the quarter, and we're making progress in addressing the challenges we’ve discussed previously, including recovery from the malware incident. Importantly, we're encouraged by the momentum on some of the strategic initiatives that I mentioned earlier, including Milka Oreo chocolate and the rollout of our pipeline of well-being innovations and renovations. Additionally, we continue to see our direct store delivery system as a competitive advantage and expect the benefits of this system to play out more clearly in the coming months. That said, we have more work to do for this region to deliver its full potential. We look forward to the arrival of Glen Walter next month, recently named as the North America Region President, who brings an impressive track record of building brands and driving growth in North America and internationally. His operating and sales background has prepared him well to lead our North American business. As we hand the reins over to Glen, I’d like to take a moment to thank Tim Coffer, who graciously served as Interim President over the past six months in addition to his role as Chief Growth Officer. Tim and his team have significantly strengthened the business fundamentals and positioned it for future growth. Let me now turn it over to Brian to provide more detail on the financials.

Thanks, Irene, and good afternoon. We're pleased with our results in the third quarter, which played out roughly as we expected. Organic net revenue was up 2.8% driven by strength in Power Brands, emerging markets, and Europe. As Irene mentioned, we've benefited from the positive net impact of 60 basis points related to the recovery from malware-related shipment delays in the second quarter. However, as we said to expect on our last call, we also experienced some additional malware-related disruptions in the third quarter in certain markets, and that negative impact was most pronounced in North America. Overall, we estimate that the year-to-date negative impact from the malware incident was approximately 60 basis points to organic net revenue, or just over $100 million of lost revenue across the business. Importantly, we're now confident that the issues are substantially behind us, and we're back to pre-incident levels of service and operational stability. Emerging markets grew nicely at 4.8%. Our geographic footprint has always been one of the most compelling strengths of our long-term vision for profitable and sustainable growth, and we continue to see positive momentum in many of these countries in terms of macro conditions, our share performance, improved category fundamentals, and a good balance between vol/mix and pricing. Now let's take a closer look at our margin performance. We continued to improve margins with another quarter of strong adjusted OI margin expansion. Adjusted OI margin was 16.9%, an increase of 130 basis points, driven by ongoing overhead reductions with improved performance across all regions outside of North America. Our efforts in ZBB, supply chain reinvention, and global shared services continue to deliver results, and we see more opportunities in front of us. Adjusted gross margins declined by 60 basis points, although we delivered improvements in volume and solid net productivity, these benefits were offset by inflation in dairy costs and select investments and trade spending. We are pricing in our cheese business to offset the dairy inflation, and that should be more balanced as we enter 2018. On the trade spending, we increased spend in a targeted way in North America as part of our DSD initiatives, and in Russia and France where we're seeing good growth and strong returns. We continue to feel good about our mid-term gross margin opportunity for a few reasons. First, we're delivering strong net productivity at around 3% on a year-to-date basis; improving volume trends, which we saw this quarter, will also provide cost leverage as we move forward. Second, we're starting to see the transactional benefit of a weaker U.S. dollar in some markets. So, it's still early, and there will always be some markets that are exceptions, but this is a good trend for us. In total, our gross margins are up approximately 300 basis points since 2013, and we see continued gross margin expansion as an important component of our 2018 margin delivery. So we feel good about the adjusted OI margin performance and remain on track to deliver a mid-16% outlook for the year. We also remain committed to our 17% to 18% margin target for 2018. Let me now turn to our regional performance. Three of our four regions delivered good results, building on the underlying trends from the first half of the year. Europe delivered another strong quarter of margin expansion with an increase in adjusted OI margin of 70 basis points to 19.4%. Strong net productivity and ongoing overhead reductions drove the improvements. Organic net revenue increased 3.2%, including a benefit due to the recovery from the malware incident. Our Power Brands in this region continue to perform well, driven by solid vol/mix growth. As Irene mentioned, our European chocolate business delivered strong results in nearly all of our large markets, while both the U.K. and Germany turned in good performances in biscuits, including Oreo, which was up double digits. Our growth was also fueled by our chocobakery business, which generated double-digit increases in Q3 driven by new product launches including Milka brownie and Cadbury Roundies. Our EMEA region delivered strong growth of approximately 3%. Similar to last quarter, Asia Pacific performed well while the Middle East was mixed as challenging economic conditions continued, though we are beginning to see easier comparisons. Adjusted OI margin increased by 80 basis points to 13%, driven by lower A&C spend as we selectively pulled back in markets like the Middle East where we’ve seen lower ROIs and overhead reductions. Our India revenue grew double digits as our chocolate franchise grew share behind ongoing momentum in our core successful new launches such as Fuse and Silk Oreo. China returned to growth in the quarter. Our biscuits business improved as we delivered low-single-digit growth, led by our Oreo relaunch. In addition, our e-commerce investments continued to drive solid share gains. Our gum business also grew share while milk and chocolate was in line with expectations. In Latin America, adjusted OI margin increased by 200 points to 17.7%, primarily driven by lower overhead costs and improved net productivity. Organic net revenue grew 5.4%, which includes a positive impact from the recovery of malware-related shipments. Mexico continued to deliver solid growth, driven by strength in candy, while growth in Argentina was led by pricing to offset currency-driven inflation. In Brazil, improving dynamics in chocolate drove a fourth straight quarter of growth. And as we've said, our biscuits business continued to face headwinds from price gaps and downtrading. In response, we're making appropriate adjustments to increase the range of our portfolio. Overall, Brazil was up low-single digits in the quarter. Turning to North America, organic net revenue grew 1%. These results were driven by an increase in U.S. biscuits, partially offset by lower gum revenue. As I said, malware-related disruptions continue to present challenges. The good news is that we now believe that these issues are substantially behind us. As Irene mentioned, we still believe the DSD model provides us with a number of competitive advantages. While the persistent malware-related issues impacted our ability to capture the initial market share opportunities in the quarter, we remain confident that we will see incremental share gains as we move to the next few quarters. Despite the challenges in North America, it's encouraging to see the improved trajectory in our revenue performance and some recent improvement in category growth. Now let me spend a few moments providing some highlights by category. Snacking category growth improved incrementally on a year-to-date basis, now at 1.8%, but our overall share results were mixed. Our biscuits business was essentially flat, driven by strength in key countries such as the U.K. and Germany, offset by year-to-date weakness in the U.S., which was partially driven by malware-related issues early in the quarter. Approximately 30% of our year-to-date revenue grew or held in this category. As our DSD initiatives gain traction, we expect to see improvements in this metric. In chocolate, our business grew mid-single digits, driven by strong results in India, the UK, Germany, and Russia. The U.S. chocolate expansion also continued to be a solid contributor to growth. Approximately 65% of year-to-date revenue grew or held share in this category. In fact, our chocolate business has gained more share this year than any other competitor in the market. Gum & candy declined mid-single digits as gum category weakness persisted, most notably in the U.S. Only about 20% of our year-to-date revenue in gum & candy gained or held share. Consistent with our commentary last quarter, our focus is on stabilizing our share within the category while migrating our portfolio toward candy and mints to meet consumers' refreshment needs. Turning to earnings per share, we delivered adjusted EPS of $0.57, up 12% on a constant currency basis, primarily driven by our strong operating income growth. We continue to expect to deliver double-digit EPS growth on a constant currency basis for the full year. We also continued to reward our shareholders with a strong return of capital. In the quarter, we returned approximately $1 billion to shareholders through share repurchases and dividends. As you know, we recently raised our dividend by 16%. As our long-term free cash flow improves, we're targeting to grow our dividend faster than adjusted EPS. Let me review our outlook for the year. We now expect an organic net revenue growth of approximately 1%, given the larger-than-expected magnitude of the lost revenue related to the malware incident. We still expect to deliver adjusted OI margin in the mid-16% range and double-digit adjusted EPS growth on a constant currency basis. We now expect no currency impact for the year. And with respect to free cash flow, we continue to expect to deliver approximately $2 billion for the year. In summary, many of our global markets and categories are improving, and we remain focused on driving improved top-line performance while maintaining discipline around operational efficiency and margin expansion. We're encouraged as we see macro trends that have been headwinds over the past several quarters turn more favorable, including improving GDP, global consumer trends, and accelerating category growth in emerging markets, and more favorable exchange rates in both developed and emerging markets. In addition, many of our recent growth investments are delivering solid results, including in well-being, in white space expansion, and in penetrating other channels, especially e-commerce. As a result, we remain confident that we're well-positioned to deliver sustainable growth on both the top and bottom lines over the long term. Now let me turn it back to Irene for some concluding remarks.

Thanks, Brian. For the past three months, we've been preparing for a smooth transition as Dirk Van de Put takes over as CEO next month. Dirk has already been engaged in our 2018 financial planning process, and over the next few weeks, he'll be spending time getting immersed in the business as he begins working with our management team, our board, and other key stakeholders. And of course, we expect our strategic planning process will be a key focus for Dirk in the first half of 2018. It's hard to believe that earlier this month marked the 5-year anniversary of Mondelez International. I'm very proud of the company we built and the shareholder value we've delivered over that time. I'm pleased to see the macro environment and the underlying business momentum beginning to improve, and I'm confident that Dirk and the team will build on this momentum to take our company to the next level. It's been a privilege to have created and led this great company, and a pleasure to have worked with all of you over the years. I especially want to thank my partner, Brian Gladden, and the rest of my leadership team as well as my 90,000 colleagues around the world for your passion, your hard work, and your tireless commitment to our company in the exceptionally challenging environment over the past few years. Through it all, you kept your eyes on the prize, and I truly believe the best is yet to come. With that, let’s open the line for questions.

Hi, thank you. And Irene, thank you for your help over the years and best of luck to you ahead. I get the feeling that you'll have a more active retirement than most retirees out there, knowing you. So again, thanks again. I wanted to ask two questions, if I could. You talked about your commitment to your margin target for next year, but you also talked about the process of strategic planning still being underway. So Irene, if I could ask you to sort of put on your Chairman of the Board hat right now. And knowing Dirk, what are his thoughts in terms of the margin targets for next year? Is there much of a risk, in your view, of him tweaking the data a little bit? Sometimes, new CEOs come in and want to set the bar a little bit lower. So that would be my first question, is sort of what your thoughts on that. And my second question is – and I think you sort of highlighted this a little in your optimism about the environment, but how do you feel, in general, about the environment for you in 2018 and in terms of the sales line? And do you feel like you'll need to invest more in gross margin to kind of hit your sales numbers, or is the macro trend going to be enough? Thank you for that.

So first of all, Ken, I’m sure you'll have a chance to engage with Dirk over the coming months. He's actually going to officially start on November 20. He's been involved in a number of areas, as I mentioned, particularly the development of the 2018 plan to ensure a smooth transition. So we start there. Brian continues to confirm our margin target for 2018 between 17% and 18%. But certainly, our strategic plan will be a key focus of Dirk’s in the first half of the year. That said, we fully understand that the margin targets are very much top of mind, and I can assure you that Dirk fully appreciates the importance of margin delivery to our overall algorithm. So I think in the spirit of you've got to wait until he gets here, I think we can give you as much assurance as that.

Ken, I would just say obviously to deliver on 2018, the plans and actions are underway. I mean, it's not like we can decide that in January and deliver. So there's been a lot of work, and Dirk has been very engaged in that process. We also gave you some clarity, so we're not giving guidance today, obviously for 2018, but we've confirmed the margin target and we've talked about cash flow. We still feel good about $2.8 billion of cash flow for next year. So maybe those are two hints as to where we're headed. In terms of the trends that we're seeing in the environment, maybe just a few comments, and we've talked about most of these. But the global economy's consumer sentiment is generally improving in most markets. Emerging markets are favorable and obviously, that's good for us, given our exposure, but I would also say that Europe feels pretty good. It's about 40% of our revenue and it's solid and stable and growing. Category trends, yes, I'd say they've stabilized a bit and some recent improvement over the last couple of months, but maybe it's a little too early to start the call that yet, but not a bad trend. North America packaged food trends, I think that will continue to be a challenge, and that's a place that we're planning for that environment to continue. Commodities and currency, I guess I would say they appear to be, for us, relatively stable year-over-year and how you think about that in aggregate. We obviously have favorability in cocoa, but we're all set with pressure in things like packaging, dairy, and transportation even. So maybe some overall tailwind there, but we're planning for relatively stable. And then maybe the last piece, just as we think about tax – tax rates, probably roughly the same in 2018 as what we would see in 2018, short of getting some clarity on what U.S. reform looks like. So maybe a few pieces of insight as we think about the environment and how we're thinking about 2018 without really giving you the guidance at this point.

Hey, good morning everybody, or good afternoon, I mean, and best of luck to you, Irene.

Thanks, Bryan.

So a couple of questions. First, I guess as a follow-up to Ken’s question, first just gross margins in the quarter were, I guess down versus last year, but operating profit margins expanded. So just in terms of how the P&L shaped, how is that relative to what your expectations were, I guess going into the quarter. Meaning, I guess were gross margins in line better or worse than what you were thinking?

Look, I think they were a little bit tougher. As I said, higher input costs specifically very fast have been challenging over the course of the last several months here. And we’re – we’re now in the process of raising prices, just can’t really raise them fast enough. And then the trade spend, I think we were thoughtful and knew we were going to make some of those decisions to spend some of those dollars. But look, I would just go back to mid-term reality around gross margins. We’ve delivered 300 basis points improvement; it’s about half of the expansion that we’ve delivered over the last few years. And we’re executing pretty well, I mean our execution was as expected around net productivity and the COGS reduction program that we have. So I think the one outlier was really very fast and how we sort of had to manage that across the cheese business.

And then I guess my second question. Just if emerging markets in Europe continue to get a little bit better as we're looking out, I guess into 2018 and 2019 maybe, can you just talk about how much flexibility there is to invest behind that in your current plans? And I guess if volumes actually start to grow, is – how that affects leverage and maybe the margin expansion. We’ve been also focused on cost reductions to drive margins, but could you get a sense that there’s some volume growth, just how that might affect the margins and margin expansion?

Yes, Brian. I mean that’s obviously we saw the early stages of some volume improvement; a lot of it was driven by Europe in the quarter. But obviously that helped us a lot as you think about volume absorption, plant leverage, and the capacity equation in the manufacturing world. So I think that’s going to be – as we think about next year and look at the trends, it's encouraging to see some of that volume improvement. And we feel good about the underlying dynamics in emerging markets. That is – we've been investing in Power Brands. We've been investing in some of these markets that have seen improvements, and India is probably the best example where we’ve been able to put some additional spending up against growth, and I think we’ve seen very good returns for that. So it’s part of the course in terms of our strategy. And I think you’ll see us react as these markets get better to be able to put some additional spending supply.

We also don’t underestimate the impact that the volatile commodities as well as the strong dollar had in terms of our pricing actions, which then put a lot of pressure on volume. So one of the reasons the macro environment improvement is encouraging is it’s going to allow us to temper a lot of those actions, which should also in turn help volume in addition to the other actions we’re taking.

Good afternoon.

Hey, Andrew.

Irene, I was hoping maybe to get a little more perspective from you – particularly as you head off into whatever you’ll do next, really on the state of the industry. I guess you’ve worked on many different brands and categories, in multiple capacities for various companies. And I think even your tenure. I guess my question is, is this time different? Because if one listens to many of the headlines about the death of brands and private label taking over and all the rhetoric from retailers and so on, one would like to think that this time is different, even if the industry’s weathered many disruptive forces before and seemingly always found ways to thrive. So I guess, I was hopefully to get perspective there: do bolder actions need to be taken? And I know it’s a broad question, but you’ve sat at kind of the nexus of many of these forces for some time, and I mean your unvarnished perspective would be valuable.

Yes, I think as we – as I have witnessed the evolution of the industry, there have been cosmic changes every couple of years throughout that tenure. Whether you think about the advent of the supercenter, you think about the rise – the beginning of the rise of e-commerce. We have seen many different trends, and those companies that have been successful have seen those trends coming and have addressed them. So I don’t think this is radically different; I do think the speed of the changes is perhaps more pronounced than we might have seen in the past. But I have great confidence as we look ahead, particularly to what we’re seeing going on the consumer front, the customer front, and the channel shift that we're well positioned. But I do think companies have to take those cosmic changes quite seriously and have to adapt accordingly. But I don’t believe that this is a radically different set of circumstances than we would have seen in the past. They’re different, but we’ve seen a fairly sizable evolution in our industry over the last decade, and the winners have adapted to it accordingly.

Yes, okay. Thanks for your thoughts and all the best going forward.

Good evening everyone.

Hi, Alexia.

First of all, thank you, Irene, for your help over the years, and I wish you all the best in your future endeavors. I have a couple of questions. I'm particularly focused on the trade investment you mentioned this quarter that is impacting the gross margin. Could you provide more details on the geographies and categories where we've seen increases? And do you anticipate this trend to accelerate moving forward? My second question is about North America. It seems there hasn't been a strong push behind the North American chocolate launch that you referenced in the prepared remarks. I don’t believe we’ve seen a significant marketing campaign yet. Similarly, regarding the strategy to leverage Kellogg’s system, you mentioned that there are developments ahead. Can you comment on whether we can expect to see substantial progress in these areas? Thank you, and I’ll hand it back.

.

As we think about Alexia, as we look to the balance of the year. As we said, we think we’re pretty well positioned to begin to capitalize on the opportunity in North America. We have significantly put the malware issues behind us, as Brian mentioned. We are starting to see the hard work of Tim Coffer and his team has done to stabilize the business and improve our execution. We saw the fifth category turn positive for the first time this year. And we’ve got a number of investments, some of which you’ve mentioned, that are starting to come into the marketplace. They launch at the end of July. They’ll be the protein that is now fully in the market and doing well. Our Ritz share continues to grow behind RITZ Crisp & Thins. We’re pleased with the momentum on U.S. chocolate. We’re up to a great start there, both in terms of velocity and repeat rates. So we have a number of elements that are starting to come together, and we are quite optimistic as we look to the fourth quarter and then out into our 2018. Obviously, Glen Walter’s arrival will be an important catalyst to build on all of this momentum. But we are quite optimistic as we look ahead.

Great, hi everyone. And Irene, best of luck to you as well. I just had one more follow-up question on North America. The message still seems to be pretty cautious on the near to mid-term outlook, but as I look at results in the third quarter, sales improved quite a bit sequentially, and we’re probably essentially in line with our expectations and maybe a bit ahead of consensus, despite the fact that you have these additional malware headwinds. So I guess, I’m just wondering, is that a reflection in the short term of comps, or was there any acceleration in shipments around the innovation pipeline? And then if you move through the process of shelf resets in the biscuit category, can you give us a sense of how that process tracked versus your expectations?

Yes. So the year-over-year comparison should not have been – the year ago should not have been a factor. We are truly starting to see our execution come together; obviously, we were flying blind on some of our inventory for some of our products over the course of the summertime. But as we exited Q3, most of those issues, as we said, are substantially resolved. We are seeing retailers begin to reset their shelves. We’re seeing our displays in share of shelf increasing, and we should see that play through as we’ve said in our biscuit shares for the balance of the year. So we are not particularly bullish on the near-term North American market, but we do believe that our business within that environment should start to pick up.

Yes, I think it’s a little early, and we’re seeing some improvement in the overall category trends in North American U.S. biscuits. But I think it’s really early to declare that that’s headed in the right direction.

Okay.

Yes, I think it’s a little early, and we’re seeing some improvement in the overall category trends in North American U.S. biscuits. But I think it’s really early to declare that that’s headed in the right direction.

Okay, great, thanks. And just I guess one more question on biscuits on a more global scale. Obviously, there were some malware-related issues in North America, but the market share trends in terms of gaining in holding did weaken sequentially. Is that principally a reflection of that malware shift, or are there any other areas of market share pressure globally maybe just sort of hotspots from a pricing perspective that would have showed up in the quarter?

Yes. No, Matthew, really the major pressure on the biscuit share was North America; in fact, if our U.S. biscuit had held share, our biscuits would’ve been growing at around 80%. So it’s all about the turnaround in North America. And as we’ve said, we have good confidence that we will start to see that improve.

And the lost revenue related to malware, the majority came, that’s truly stuck, is what consumptions within North America and in U.S. biscuits.

Hi, good afternoon. Two questions. The first one be for Brian. Can you help us understand the implied fourth quarter revenue acceleration, X the shift specifically, giving some better textures so what’s driving the underlying baseline improvement? You called out emerging markets; I’m curious if there’s anything else that you've put upon a point on, and I got a question for Irene.

Yes, look, I think there’s reasonably good momentum in the majority of the emerging markets. I would call out two unusual that give us a little bit of help in the fourth quarter. The first being the year-over-year impacted demonetization in India. And then the second would be inventory trade stock levels, especially in the Middle East where we had some adjustments. So I think those are two things that give us a little bit better number and in terms of reported results. But the momentum in general is good and we see continuing.

Okay, great. And then Irene, if you had another two or three years in your current role, who would you think would be the largest payback or quickest payback on investments that you could have out there for your business? Would it be greater sales force internationally in emerging markets? What would be the quickest and large payback on your investment?

You know I actually think as we see the economy recovering around the world, I think we’re seeing very good payback in both our developed and our emerging markets. So I would have told you a couple of years ago that the big return would have come from emerging markets. As we've watched the challenges in those markets over the last couple of years, that's been less evident. And at this point, we're getting a very nice return on our investments in Europe. And as North America comes back, we expect to see that as well. Those are our highest margin markets in the world and so that's a great place to invest. But at the same time, we are seeing our category growth come back quite dramatically in the emerging markets. And so we're being quite planful in terms of thinking about where to invest there. So actually, the recovery of the broader macro environment will benefit both our developed as well as our emerging markets looking ahead.

Great. Thank you and good evening. Congratulations, Irene, on the retirement, and thanks for everything over the many, many years. Two questions for me. First on the DSD. To be clear, did you guys say that the malware issues were what really prevented the DSD team from executing even better during the third quarter? Was that the correct takeaway to link those two issues together?

Yes, it really came down to our ability to serve customer service and operations. And the results were somewhat challenged by the carryover impacts from malware. So yes, I think as I said, we're substantially past that. We're back to service levels that we would expect in the business, and we're going at it now.

Okay. And then just following up on this. If the DSD folks are in the store several times a week, have you seen shelf space gains maybe here in October? I know it's outside your quarter, but have you seen shelf space gains in October versus what you were in say, July?

Yes. I mean, as we were talking about, as we see our retailers resetting their shelves, we're picking up some shelf space as well as we're increasing our displays. And again, those are the actions that we think will help us as we look to the balance of the year in North America.

That should turn into share gains.

Okay. Last question just on the earnings guidance. So double digits didn't change, but looks like your revenue comments is a little weaker. So then can you put some quantifications on these other things? I always going to hate modeling at midnight on this company. So foreign exchange, interest expense. Is the basic message here, revenue is a little bit softer than you thought? Things are still pretty good, but basically everything's a little bit softer? Or are these other items, FX and interest expense, enough to offset any of this revenue change within the guidance?

David, all I would say is that the real driver of the revenue – the change in revenue outlook is the year-to-date impact of malware. So as we put all that together, it resulted in about $100 million of lost revenue for the year that we're not going to get back. And that's the pressure that causes us to adjust the top line outlook. Everything else is consistent with what we said, and I would say consistent with the trends that we've delivered year-to-date.

Thanks and congratulations. Best of luck, Irene. A question on Europe. You mentioned some promotional pushes in France and Russia, and those seem to be paying off, or at least those targeted ones. And you mention the environment generally feeling better. Could you do your best to break down what is working better for you there? And perhaps tease out what is consumer versus the competition in your pipeline because obviously, you're seeing some spending work better for you than it has in years past. It's been a difficult market. And then what factors, out of all these, make this feel sustainable if you think this turn indeed feels that way.

Yes. I would say, David, it's – we certainly did have a couple of tailwinds that made the quarter exceptionally strong in terms of a hot summer a year ago. And we did see a situation with the competitor in – early in the quarter, a recall of a competitor product that was helpful. But fundamentals are good. And we're seeing very strong category growth. We're seeing strong share and very strong vol/mix. And we believe a lot of that is driven by programming. I alluded to the Premier League tie-in that we have in the UK, which has been a sizable factor in driving our shares there. We've been very pleased with our strength in Germany. We've had a very strong performance there. Our chocobakery business is doing very well as we have repatriated the Burtons license in the UK and across Europe. So there's a lot of actions we are taking that are driving our strong performance that we would expect will continue.

Hi, good evening and best wishes, Irene, in your retirement. I want to start – I just have two questions. First would be you quantified the effects from the malware incident on revenue. And I'm just curious how that's kind of flowed through the P&L. So what effect has that had on gross margin or operating margin? Could you give a little more color around that if you haven't done already? I may have missed that.

We didn't. It's had a minor impact on gross margins, as we would have lost some volume leverage related to that. But you can assume it came out at roughly average gross margin rates, and then maybe a little bit of volume leverage leakage. We also, as we've talked about and you'll see in the filings, have adjusted out the direct costs that relate to the incident, which year-to-date for the two quarters is now in the range of $50 million. But those are related to the incident in terms of improving our infrastructure and restoring and in some cases, manufacturing distribution logistics related to that.

Okay. And just a follow-up question. As you think about the operating margin improvement that's occurring currently and you expect for next year, SG&A has been lower than I expected. And you've talked about overhead control, I think, across most of the divisions today, if not all. So I'm just trying to understand if there are other incremental restructuring activities that are taking place to achieve this operating margin expansion you expect both this year and next. Or is it just part of the natural kind of the benefit of previous activities that you've undertaken?

Well, we're still, Chris, in the middle of the restructuring program, and that will continue through 2018. We've still got additional programs that we're funding as we speak, and then are still executing to deliver. So it's still continuation of the same key programs with ZBB and shared services, and all of those activities. So yes, we've still got more work to do there. We've still got funding to do that.

Hi, thanks for the question, and best wishes to you, Irene. I wanted to ask about China, only growing low single digit. You did execute a relaunch of the product – of the Oreo product there. I was hoping for something a little better, considering a lot of other consumer staples companies have been reporting stronger growth. Is there an obstacle to getting back to high single-digit or double-digit growth in China?

First of all, it's early days on our biscuit relaunch, so we're encouraged by the early signs. And we are looking forward to continued performance there. Our chocolate was down a little bit year-over-year because we would have the benefit of the pipeline a year ago. So in aggregate, that was a bit of a headwind for us. Our gum continues to gain share. We're feeling very good about the performance there. So I think net-net, China continues to be a strong market – will be a strong market for us as we look ahead. And we are pleased to see the early signs that it's returning to growth, but again, there were a couple of variables in the quarter that dampened that overall performance.

Okay. And a quick follow-up for Brian. Brian, your tax rate guidance is pretty wide. The implications for fourth quarter are very wide. Do you think you can get us to closer to what you expect in fourth quarter and then maybe interest expense as well?

Yes. I mean, there's always puts and takes, Rob. I mean, there's always discrete items that are playing out. And you can see what our estimated tax rate for the total year is. It's in the range of 23% to 24%. So I – and that's probably the best I could do, given all the discrete items and the volatility around that. On interest, I think as we said coming into the year, we had a little bit of conservatism in that I think as you can see from the results, we're tracking a little bit below the guidance we gave you, which was $500 million. There are some other income items that were favorable and have impacted that. But the $500 million I would still say there's some conservatism at that number as you play to the fourth quarter.

Good afternoon, guys. Thank you for squeezing me in. First, congratulations, Irene. The value you've created for shareholders since you took over at Kraft has really been impressive, so congrats for that. Two questions if I may, first on the top line and then one on margins. First on the top line, excluding some of the malware stuff, I think you implied if we look at the implications, the front half of the year was growing 30, 40 basis points. And underlying, you've accelerated to something closer to 230 basis points in the third quarter, which is very encouraging. But if I look at your market growth and your market share charts, it suggests the markets certainly ticked up, but your shares ticked the wrong way. So it's hard to flip what we're seeing reported results in terms of the acceleration with what you guys are showing on the slide, so I was hoping you could help me bridge that gap.

Yes, so we set the category is growing in the range of 1.8%, and reported year-to-date revenue growth is in the range of 80 – 1.8% at snacking, so that's not going to tie to total, but that's just snacking and the categories snacking as well. So if you look at that, there's about 100 basis points difference. The largest piece is going to be malware. And as I said, that's 60 basis points year-to-date. And then you would have basically 40 basis points tied to year-over-year trade stock changes, and that's a combination of India, GST, Middle East destocking and we talked about. And then a bit of North America where we built some trade stocks last year and returned to more normalized levels this year, so that explains the difference.

It doesn't really explain acceleration now. So your categories ticked up; if you just run the simple average, they ticked up from around 1.5 in the front half to 2.5 in the third quarter, simple average to get to the 1.8%. You accelerated by far greater margin with market share rolling the wrong way. So that's what I'm trying to foot, because if I look at category growth and market share, I would say this quarter shouldn't have looked any different than the front half of the year, but clearly, it did, which is encouraging to see. I'm just trying to really understand the underlying component so we can gauge the durability of that turn.

Yes, I would just say, Jason, that we have seen categories pick up; I would agree with that. I think we've seen our business improve a bit better. A lot of that is a bit confusing because of the malware timing of first half versus second half. I think we've seen stabilization in North America that's improved. And our shares have not been dramatically different. If you look at the total year, we did, in U.S. biscuits, mostly because of malware, turn to a losing share position, which impacts the metric that we're sharing with you, which is the holding and gaining share. So I think it's reconcilable. We're improving a bit faster than the market in the second half of the year. Some of that is North America has gotten a bit better, and I think malware confuses that a little bit.