Apr 29, 2015
Executives
Dexter Congbalay – Vice President, Investor Relations Irene Rosenfeld – Chairman and Chief Executive Officer Brian Gladden – Chief Financial Officer
Analysts
Andrew Lazar – Barclays David Palmer – RBC Capital Markets Chris Growe – Stifel Ken Goldman – JPMorgan Rob Moskow – Credit Suisse Eric Katzman – Deutsche Bank Ken Zaslow – Bank of Montreal David Driscoll – Citi Jason English – Goldman Sachs Alexia Howard – Bernstein Rob Dickerson – Consumer Edge
Operator
Good morning. Welcome to the Mondelez International First Quarter 2015 Earnings Conference Call.
Today's call is scheduled to last for about an hour, including remarks by Mondelez management and a question-and-answer session. [Operator Instructions] I'd now like to turn the call over to Mr.
Dexter Congbalay, Vice President, Investor Relations for Mondelez International. Please go ahead, sir.
Dexter Congbalay
Good morning. Thanks for joining us.
With me are Irene Rosenfeld, our Chairman and CEO; and Brian Gladden, our CFO. Earlier today we sent out our earnings release in today's slides which are available on our website, MondelezInternational.com.
As you know, 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 form 10-K and 10-Q filings for more details on forward-looking statements.
Some of today's prepared remarks include non-GAAP financial measures. You can find the GAAP to non-GAAP reconciliations within our earnings release and at the back of the slide presentation.
With that, I'll now turn the call over to Irene.
Irene Rosenfeld
Thank you, Dexter. Good morning.
As you know, 2015 is a year of big change for us and we're off to a solid start. We've continued to make good progress in a challenging environment by focusing on what we can control.
This includes executing our transformation agenda, prioritizing margin expansion, and strong constant currency earnings growth while delivering solid revenue growth. Specifically, organic net revenue grew 3.8% driven by pricing actions to recover currency driven input cost increases.
We significantly expanded adjusted operating income margins, up 160 basis points to 13.8%. Importantly, adjusted gross margin contributed more than half of the increase while lower overheads contributed the rest.
Adjusted EPS was $0.41 up nearly 26% on a constant currency basis, driven almost entirely by operating gains. As we discussed at CAGNY, we're executing three transformation priorities that will further leverage our advantage portfolio and geographic footprint while setting us up to deliver top-tier financial performance as global demand improves.
Let me give you a quick update on each of our transformation initiatives. To further focus our portfolio on snacks, to reduce our supply chain and overhead costs, and to continue investing for growth.
On the portfolio front, we expect our Jacobs Douwe Egberts coffee joint venture to close this year, likely in the third quarter. We're working to secure the necessary regulatory approvals from the European commission and are awaiting the results of the Phase II review.
We anticipate closing our acquisition of Kinh Do’s Biscuit business in Vietnam around mid-year and are looking forward to leveraging the growth opportunities of this attractive business. With about $175 million in sales, Kinh Do is one of the largest snack companies in Vietnam with iconic brands and leading positions in biscuits and moon cakes.
Going forward we intend to accelerate its growth by introducing our power brands into its distribution network which covers 130,000 outlets. We also welcomed Enjoy Life Foods into our family last quarter.
While starting from a relatively small revenue base, the company provides us with an excellent platform for future growth. We're very excited about the opportunity to leverage its strong brands and market position in fast-growing, better for you allergen-free snacks.
Turning to our cost reduction programs, we're continuing to make good progress across our supply chain and in overheads. Net productivity in the quarter was very strong at more than 3.0% of cost of goods sold, building on the record rate of 2.8% we delivered last year.
These productivity gains were instrumental in driving our 90 basis points improvement in adjusted gross margin. We're complementing the supply chain savings by aggressively managing overheads, leveraging the zero-base budgeting process we began about 18 months ago.
This includes reducing indirect expenses, as well as streamlining infrastructure and internal processes. In fact, we've already begun to migrate some transactional processes to our new global shared service centers.
As a result, we continue to reduce overheads as a percent of revenue. Of course these savings not only enable us to expand margins, but they also provide the fuel for investing in growth.
As we highlighted at CAGNY, this includes investing in new advantaged assets as part of our supply chain reinvention. For example, our biscuit plant in Salinas, Mexico opened on schedule in the fourth quarter.
By the end of the first half, we'll have five new lines up and running to support growth, and repatriate volume is currently co-manufactured. As you'll recall, each of these new lines gives us 1000-point margin increase over existing assets.
We're also bringing on stream advantaged lines of the future at other facilities around the world. In emerging markets like India and China, as well as in Europe and the U.S.
Each of these state-of-the-art lines has operating costs that are about half as much as our current lines, and runs twice as fast while taking up only a fraction of the floor space. We've also continue to invest in working media to strengthen our brand equities, backstop our pricing, and support innovation.
Total advertising and consumer spending was essentially flat on a constant currency basis as we maintained marketing support particularly on our power brands. That said, as a percent of revenue A&C was down slightly as we continued to drive efficiencies in nonworking media, move more advertising to lower cost digital channels, and shifted the timing of certain marketing programs.
For the remainder of the year, we expect A&C to rise modestly as we invest behind new product launches and marketing programs to drive revenue and improve share. Let's take a more detailed look at our top line results for the quarter.
As you can see on slide five, organic net revenue grew 3.8% with pricing contributing 6.5 percentage points. Consistent with our strategy we've raised prices to recover higher input costs, including the impact of currency.
As we've discussed previously, this protects profits and enables us to continue to invest in our people and in our key growth drivers, our brands, innovation platforms, sales and distribution capabilities, and supply chain. It's important to note that in the first quarter a significant contributor to the increase in price was the carryover benefit of pricing actions taken last year.
Of course, rising prices especially when the increases are significant typically have a short-term impact on consumer demand. In Q1, vol/mix was down 2.7 percentage points due in part to elasticity.
As we discussed in our earnings call last quarter, we're also experiencing the impact of some strategic decisions to improve revenue mix. These include discontinuing some low-margin customer specific product lines especially in Europe, exiting low-margin products associated with short-term brand licenses from Kraft Foods, and ongoing SKU simplification.
In the quarter, these strategic decisions accounted for about 140 basis points of the decline in vol/mix. For the full-year, we expect these decisions to be about 100 basis point headwind to our organic growth, and as we've said before, this has been incorporated into our revenue guidance.
Partially offsetting this headwind in Q1 is about a 50 basis points benefit from a shift of Easter-elated shipments into the first quarter. Our power brands, which represent about two-thirds of our revenue, grew nearly 6% led by OREO, chock, Club Social, and belVita biscuits, Lacta chocolate, Trident gum, Halls candy, Jacobs, Carte Noir, and Tassimo coffee.
Emerging markets were up nearly 11% with the BRIC countries up double digits. Developed markets were down 0.5%.
Turning now to our results by region, as you can see on slide six, Latin America and EMEA fueled by higher pricing drove much of our overall growth. Latin America was up nearly 19% driven by the inflationary economies in Venezuela and Argentina.
Brazil was up nearly 10% including a meaningful contribution from vol/mix and solid growth across all categories. EMEA grew 11% primarily due to pricing in Russia and Ukraine in response to the sharp devaluation of those currencies.
Despite this, vol/mix was up in both countries and share performance was solid. Russia grew mid-teens with strong growth in our two largest categories.
Chocolate was up high-teens behind Alpen Gold and coffee was up over 20%. Asia-Pacific grew modestly with solid gains in China and India.
China was up high single-digits driven by strong performance of both OREO and Stride gum. We continue to be encouraged by our progress, this is the third consecutive quarter of high single-digit growth there.
Our team is executing well, and we're selectively investing to continue and hopefully accelerate our momentum. India was up mid-single digits as Cadbury Dairy Milk share topped 40% its highest ever.
However, chocolate price increases tempered consumer demand. We expect category and revenue growth in India to improve as the year progresses, not only as we increase A&C investments but also as consumers adjust to the industry-wide price increases implanted last year.
North America revenue declined modestly largely due to a change in a large customer's in-store strategy the reduced merchandising and display opportunities. Although this led to a decline in the overall biscuits category and a modest decrease in our revenue, we grew our share driven by strength in crackers.
To accelerate revenue and category growth for the remainder of the year we're stepping up marketing support behind our power brands and innovation platforms, as well as increasing investments behind in-store execution. Finally Europe was down 0.6% in line with our expectations.
Frankly, we expect Europe's first half to be soft as the macro environment continues to be challenging. In addition, the strategic decisions to improve revenue mix that I mentioned earlier, tempered Europe's volumes by about 200 basis points which was only partially offset by 60 point benefit due to the Easter shift.
We've continued to experience some negative volume elasticity as a result of our decision to lead pricing higher input cost especially in chocolate. However, we expect this pressure to ease in the back half.
Turning now to our categories, for the quarter snacks categories grew about 4.5% globally up from the low three's as we exited last year. Of course, the Easter shift helped boost growth rate somewhat including beverages cheese in grocery our categories edged closer to 5% growth.
Along with overall category growth modestly improving, our share performance began to stabilize with 48% of our snacks revenues gaining or holding share in the quarter. That's up from 40% in 2014.
In addition, compared to the softening trends we saw in the back half of last year, our share performance improved across almost all of our snacks categories. The biscuits category grew about 4% down from 5% last year, much of this slower growth came in North America and Europe.
Our biscuits revenue grew in line with the category as we gained or held share in key markets fueled by our power brands which grew high single-digits. For example, OREO was up mid-teens driven by innovation in China and distribution gains in Brazil and Europe.
Top Club Social grew more than 30% with launches of new flavors and pack sizes in Brazil. BelVita was up high single digits with strong growth in the U.S.
behind the continued success of the BelVita Bites and in the U.K. with the belVita Tartine and crunchy.
Turning to chocolate, the category grew 6.5%, aided by the Easter shift. Our sales only increased slightly more than 1.0% with only about 35% of our revenue gaining or holding share.
The softness was due primarily to our European business which accounts for half of our global chocolate sales. We expected this knowing that a significant portion of the decline would be due to our decision to discontinue some low-margin product lines, and that we'd continue to experience some volume elasticity and share losses because we led pricing.
Although we expect continued share pressure in Q2, we're encouraged to see that most of our European competitors have now begun to raise prices. As a result we expect our shares to strengthen in the back half of the year.
In the meantime, we're selectively stepping up our marketing and promotional activity to narrow price gaps and regain share. In emerging markets, increase mid-single-digits and we gained or held share in our key markets.
For example, in Brazil our largest Chocolate business in emerging markets, sales grew high single-digits and we increased share by about a point. In India, our second-largest emerging markets Chocolate business, although the category slowed, revenue was up mid single-digits and we held share.
And in Russia and South Africa, revenue was up mid to high-teens, holding share as well. Looking ahead, as price gaps narrow and we increased marketing support in the back half of the year, we expect global chocolate revenue growth in both developed and emerging markets to accelerate and our shares to rebound.
Turning to gum and candy, the category grew about 1.5% while our revenue was up nearly 6%. For the first time in a while, I'm pleased to see strong gum growth.
Like chocolate our gum results are a tale of two cities. Developed markets continued to be down mid-single digits with share losses in France, Japan, and the U.S.
But in emerging markets, gum was up mid-teens led by strong revenue and share performance in Brazil and China. To summarize we're very pleased with our performance in the first quarter.
We delivered solid revenue growth in a challenging environment and made good progress in stabilizing our shares. We're executing our transformation agenda well, including aggressively reducing cost to expand margins and to provide the fuel to invest in our franchises to drive sustainable revenue and earnings growth.
With that, let me turn it over to Brian.
Brian Gladden
Thanks, Irene. Good morning, everyone.
Building on what Irene just said, we're feeling confident about our execution especially the strong progress we're making to drive down costs, expand margins, and grow earnings per share. Starting with slide eight, you can see that adjusted gross margin increased 90 basis points to 38%.
Pricing, including the carryover benefit of actions taken in 2014, more than offset the increase in commodity and currency related cost inflation this allowed strong productivity of more than 3% of COGS or about $175 million to fall through. Adjusted OI margin was up 160 basis points to 13.8%.
Adjusted gross margin expansion accounted for more than half of the increase, the rest was driven by lower overheads as we continued to aggressively reduce expenses by leveraging our zero-base budgeting approach and other cost saving tools. Looking at margin performance by region, you can see that North America, Europe, and Latin America drove our adjusted OI expansion.
North America was up 400 basis points, more than half of this improvement was driven by strong net productivity with the remainder largely due to lower overheads. Europe was up 180 basis points as strong net productivity positively impacted adjusted gross margins.
Latin America increased 120 basis points predominantly driven by overhead leverage. In contrast EMEA declined 240 basis points.
The sudden and severe devaluation of Ukrainian and Russian currencies made it difficult to fully recover input cost inflation in the near-term without sacrificing volume declines or share losses. As we exit the quarter, we're in a much better position with margins in these markets.
We expect margin will improve as the year progresses as we continue to implement additional price increases to cover higher costs. In Asia-Pacific, margin was down 30 basis points, while we improved gross margin and lowered overheads, the phase out of the local tax incentive program offset underlying year-over-year operating margin improvement.
Turning to EPS on slide ten, adjusted EPS for the first quarter was $0.41 up nearly 26% on a constant currency basis. The year-over-year improvement in our operating income accounted for $0.09 of this increase.
Below the operating line, lower interest expense from our successful debt refinancing added $0.01 and lower outstanding shares add another $0.02. Also below the line our effective tax rate was higher, driven mostly by the geographic mix of where our earnings were generated.
The higher tax rate hurt our EPS by $0.02 versus last year. Even after accounting for the $0.08 negative impact of currency translation, adjusted EPS was up more than 5%.
On the next page, you'll see that we returned $1.75 billion of capital to our shareholders in the first quarter. We purchased $1.5 billion of stock that represented 41.7 million shares and an average price of just under $36 as we frontloaded most of our buyback activity given the relatively attractive share price and our liquidity.
Consistent with our outlook, we expect to buy back up to $2 billion of stock for the year. However, this doesn't include additional share repurchase activity related to the expected cash proceeds from a coffee deal in the second half.
We also paid about $250 million in dividends. As we previously stated, we intend to pay a modest dividend with shareholder returns largely driven by EPS growth.
Nonetheless, we're committed to maintaining a payout ratio of at least 30%. Today our payout ratio is about 35%.
Turning to slide 12, in the first quarter we took advantage of an opportunity to refinance some of our higher cost dollar debt into lower coupon, euro, Sterling, and Swiss franc denominated notes. The weighted average rate for the $2.5 billion of U.S.
dollar notes we tendered was about 6.2%. We financed the tender by issuing the equivalent of about $3.5 billion of notes at very attractive rates securing a weighted average coupon of 1.9%.
As a result we lowered the weighted average cost of our long-term debt by about 100 basis points to 3.6%. We also extended the average tenure of our long-term debt by nearly a year from about 7.5 years to 8.5 years.
For 2015, this lowers our total interest expense by $75 million to $100 million depending upon how currency rates evolve for the year. Now turning to our outlook for the year.
Given our solid start, we're increasingly confident in our ability to deliver our 2015 outlook. With that said, we still have much to do as we execute our transformation.
So in the near term, we want to be prudent and we are substantially reaffirming our outlook for the year. We continue to expect organic revenue to grow at least 2% including a headwind of about 100 basis points from the strategic decisions to improve revenue mix that we discussed earlier.
We anticipate adjusted OI margin of approximately 14% and double-digit growth in adjusted EPS on a constant currency basis. And we expect free cash flow excluding items to be approximately $1.2 billion.
While our overall guidance for constant currency adjusted EPS has not changed, the makeup of the below the line items will be somewhat different. Due to our debt refinancing our interest expense is likely to be around $750 million rather than the original guidance around $825 million.
In addition, due to earnings mix and consistent with what we saw in the first quarter, our effective tax rate is likely to be higher than we originally anticipated. Instead of an estimated tax rate in the high-teens, we currently expect a rate in the low-20s.
Of course, currency continues to be a significant and increasing headwind this year given that 80% of our revenue is not tied to the U.S. dollar.
Using April 27 spot rates, we anticipate the currency headwind would be about 12 percentage points for revenue versus our earlier estimate of 11 points. We also anticipate a $0.33 impact to adjusted EPS compared to our initial $0.30 estimate.
While the currency impact is significant, we believe our underlying performance and operations are solid. We remain confident in our ability to deliver strong constant currency earnings growth and solid organic revenue growth this year.
One last point, since we don't have the necessary regulatory approvals to know the precise closing date for the coffee JV, our 2015 outlook includes the full-year results for the Coffee business. Assuming a closing sometime in the third quarter, we'll likely update our 2015 outlook for the impact of the coffee transaction when we report our second quarter results.
So to wrap up, we've had a solid start to the year by focusing on what we can control as we prioritize margin expansion and strong constant currency earnings growth, while delivering solid revenue growth. We're making good progress on our transformation agenda.
Our initiatives to focus our portfolio on track including the coffee JV, we're executing well against our cost reduction programs, and we're continuing to invest in our power brands, our supply chain sales, and distribution capabilities to drive sustainable revenue and earnings growth over the long-term. As we anticipated our market share performance has begun to stabilize we expect it improve the second half as price gaps narrow and we continues to selectively increased marketing support and promotional programs.
All of these actions have as well positioned to achieve our 2015 outlook and our 15% to 16% margin target for 2016. With that, let's open it up for questions.
Operator
Certainly. [Operator Instructions] Your first question comes from the line of Andrew Lazar with Barclays.
Andrew Lazar
Two questions if I could. First, Irene, you mentioned most European competitors have now started to take pricing and follow some of your moves and that's a new development and clearly positive one.
But you also mentioned I guess promotional spend, it will be needed to narrow price gaps. I'm trying to get a sense of whether the pricing that others have taken are not enough to get the gaps still where you want?
Or if it's one player in particular that maybe hasn't yet moved, I'm trying to just connect those two dots.
Irene Rosenfeld
The way it works is first of all, we've now seen most of our competitors announce as I mentioned but till it plays through, it takes some time. And in fact, it's one of the reasons I said we would still expect to see share softness in the second quarter.
It'll take probably till the back half. In selected markets we want to continue to make sure that we're protecting our market position.
So we've been very disciplined in looking market by market and seeing where we stand, and on that basis we're making that decision. But I feel quite confident that we will see our chocolate shares rebound in the back half of the year.
Andrew Lazar
Brian, initially, I knew you expected margins to get sequentially better as the year progressed, they obviously expanded quite a bit more in the first quarter than even the full-year target would suggest. Where was the primary source of that upside in the quarter to margins?
And do you expect the expansion therefore, to be less pronounced in future quarters on a year over year basis? And if so, why would that be?
Brian Gladden
Yes, Andrew. I think we did see for probably the first time in a while, pricing is in a good position to cover inflation that we've seen driven by commodities and currency, which allowed net productivity to really drop through.
I think that's the big one. As I mentioned in my comments, I think we were a bit ahead in terms of executing in a couple areas.
One is supply chain and some of the reinvention activities helped contribute to that productivity. I think some of that is timing and executing a bit earlier, which helps, and then on overheads.
We slightly beat our targets for overhead reductions, and that's really as ZBB is playing out, and our visibility and transparency to spending, and moving the culture to more cost-conscious culture I think is paying dividends for us. So those are the things I think that give us a little bit of tailwind in the quarter.
And again as we talked about, I think the supply chain reinvention is clearly a second half impact that we still expect to see. We may be pulled a little bit of that into the first part of the year, which is great but there will be more to come in the second half.
Andrew Lazar
So nothing necessarily one-off that we should expect starts to take down the rate of margin improvement necessarily as we move through the year, even though you're only looking for 100 basis points on a full-year basis of margin improvement? Because you start off the year quite a bit stronger than that?
Brian Gladden
I would just say the first quarter, 13.8 in the first quarter is a pretty solid number, not a lot of one-off items that contributed to that number were hurt in the quarter. It's a pretty clean quarter.
Andrew Lazar
Thanks very much.
Operator
Your next question comes from the line of David Palmer, with RBC Capital Markets.
David Palmer
Good morning. A couple questions.
First on gross margins, do you foresee 2015 as being a year of sequentially improving gross margin trend as you get new production up and running like the one you talked about at CAGNY in Mexico? And perhaps as you get the pricing in place and past some of these initial transactions effects, you talked about, for instance, in Russia, any color on sequential gross margin trends would be helpful.
Brian Gladden
Yeah, David, I think it's more of a first half/second half dynamic as we talked about the supply chain. I think there's clearly some markets where there continues to be volatility and some areas were going to have to continue to work pricing to offset mostly currency-driven pressures.
So it's a dynamic environment. We clearly looked at the second half as being more advantaged given the supply chain dynamic and we feel good about the start.
Without getting into quarter-by-quarter trend I think this is a bit of a first half/second story for us.
Irene Rosenfeld
But I would say, David, I do think you can see the algorithm start to play through and that's why we feel quite pleased with the quarter. The facts are that we're covering our cost increases through pricing as best we can.
That's starting to play through and that's allowing our productivity to drop and you should see that dynamic continue to play through for the balance of the year.
David Palmer
Just to follow up on your comment about reinvesting and ANC. I know you don't want to share too much with your competition, but where have you've seen the best ROI on spend?
Where should we generally think about you spending that money? Thanks.
Irene Rosenfeld
Well, what I'll tell you is we will be spending it where we get the best ROI and where we have capacity so I wouldn't know. There's certainly a number of our power brands like Oreo and belVita – we've got strong capacity coming in the back half and you'll see us spend behind those businesses.
In the near-term though, I would say in a number of our markets I'm particularly pleased with the performance in EMEA, where we had to price quite aggressively in response to the rapid devaluation, and those are some of the markets where we were able to continue to make our ANC investments which than helped to protect our share. So I think as you see our aggregate share performance around the world, much of that was due to the fact that we continue to spend and in some cases increased our spending behind franchises.
But net-net, we will be spending where we get the best return of where we have good capacity support.
David Palmer
Thank you.
Operator
Your next question comes from the line of Brian Spillane of Bank of America.
Brian Spillane
Hey. Good morning, everyone.
Brian Gladden
Hi, Brian.
Brian Spillane
Just one question just to understand a little bit about what's happened on the gross margin line this quarter, and I guess to try to bridge the balance of the year. If I did this analysis or calculation right, you got about $560 million benefit from pricing on gross margin and $175 million of net productivity gains, you did a $435 million currency headwind just translation, so is the gap there – assuming that your pricing covers your commodity costs – is the gap there in terms of the drag the transaction effect on gross margin?
Brian Gladden
The numbers we would talk but would include the transaction impact of currency not translation. That said, the transaction impact is the pressure we're seeing mostly in the COGS line.
Commodities are still up year-over-year in the quarter although they've been slightly down in the short-term so that is also a headwind. And when you think about the pricing that Irene talked about offsetting; it's really offsetting that transaction impact on our commodity prices and labor costs and other elements of the P&L.
Brian Spillane
I guess what I was trying to get at was as we look at gross margins going forward and assuming that there is not any incremental pricing or maybe even a little bit of promotional activity just how does the currency – how should we think about the currencies will affect gross margin over the balance of the year? Is it potentially more of a drag because currencies are a little bit more averse?
Or is it more neutralized going forward because you've taken some pricing in some of the markets where the currency has moved a lot?
Brian Gladden
I think that becomes a market-by-market conversation. It's obviously our intent to use pricing to keep our margins whole as we see currency move around.
So as currency stabilized over the last couple of months here a bit, we've caught up. And I think that's one of the contributing factors in the quarter.
I think we just have to watch it quarter-by-quarter. There's some markets where we're still having to price, given that currencies have moved recently or we're still playing catch-up given how we can price in those markets.
So I can't really answer the question on a global basis, I think it's market-by-market and I think we're in a reasonable spot in terms of covering currency right now. The ones I highlighted: Ukraine and Russia are places where it's taking time to get that through given the magnitude and the suddenness of those currency moves.
Brian Spillane
Okay. Thank you.
Operator
Your next question comes from the line of Chris Growe with Stifel.
Chris Growe
Hi. Good morning.
Irene Rosenfeld
Hey, Chris.
Chris Growe
I had a question for you if I could first on North America. It was a very strong margin performance in North America, obviously a little softer revenue growth.
I just want to get a sense of how the new plant would be contributing to that. Is that a major contributor in the quarter?
It's a little sooner than I expected, but certainly nice improvement in the quarter.
Irene Rosenfeld
No, actually it's not a contributor yet. As we keep talking about the fact that supply chain reinvention will have more of a back half impact, that Salinas is one of the prime examples of that.
The team has done an excellent job of cost control and particularly overhead management, and that was the key contributor to the very strong margin performance. As we're starting up the plant, we're expensing those startup costs with a lot of volume, without up a lot of leverage in this plant.
It's actually a drag in the first half of the year and that's part of why we expect improvement in the second half.
Chris Growe
Okay. That's good color.
Thank you. I have a general question on the emerging markets.
You've had a much stronger performance this quarter than many of your competitors and your peers, even in light of macroeconomic challenges. I'm just curious, is it your categories that are performing well?
Is it your own internal performance? Just any color you can give on the stronger performance there, given in light of the challenges in those markets.
Irene Rosenfeld
We're very pleased with the performance in our emerging markets particularly given the significant inflationary pressures. I think our team has executed well both in terms of jumping on the pricing opportunity, managing that through very smart price architecture, as well as managing the cost line quite actively so that we can continue to invest behind the franchises.
There's no question though, as was we look at markets like Russia and Brazil for example, and you see the GDP trends, we're cautious about that. We've got our eyes very carefully focused on inventory levels, making sure sell-in and sell-out are perfectly balanced.
But there's no question that our teams have done an excellent job in this first quarter in managing our business in the face of quite a number of challenges in those markets.
Chris Growe
Okay. Thank you.
Operator
Your next question comes from the line of Ken Goldman with JPMorgan.
Ken Goldman
Good morning, everyone. Irene, you talked about a big retailer, I assume Wal-Mart offering fewer opportunities for displays and promotions, and I appreciate this retailer has talked about doing this across the board.
But do you think and maybe, maybe not, the cookie and cracker categories were hit by disproportionate amounts? I'm curious if you see risk of further promo de-loading down the road or is this more of a one-time shift?
Irene Rosenfeld
I think it was a near-term shift, Ken. And I think as you look at the impact that some of those decisions had on categories it, had a pronounced impact on the category and I do think that the opportunity to revisit some of those decisions and particularly in our categories which are highly impulse driven.
We're big traffic generator and we contribute to overall growth. I do think that our teams are working through what the appropriate merchandising strategy should be and that's an important part of our optimism about the back half.
Ken Goldman
Thank you for that. One more if I can.
I want to ask you about the specific media reports. I know you can't address them directly but I'm curious if you can help us understand how integrated the Philadelphia brand is with the rest of your European grocery business.
I'm curious on a hypothetical basis, how hard would be to disassociate that brand and that brand alone from everything you're doing over there?
Irene Rosenfeld
That's a very hypothetical question. I would say that as we are basically dealing with the transformation in the European region, we are setting up a standalone cheese and grocery unit because I believe that is the best way for us to focus uniquely on those assets as distinct from some of our other assets.
So as coffee moves into the joint venture, we'll have a snacking unit and a cheese and grocery unit, and I think that's the best way to manage those businesses going forward.
Ken Goldman
Okay. Thanks very much.
Operator
Your next question comes from the line of Rob Moskow with Credit Suisse.
Rob Moskow
Thank you. I guess a couple of questions, Irene.
Your results in China after the last three quarters have been quite strong, up high single-digit. A lot of your peers have experienced significant inventory de-loading because of retailer slowdowns.
Can you tell us about why you're bucking the trend there? Is this an easy comp from a year ago?
Or is there something particular happening to your market share over there? And then the second question is on copy, I think the last time we talked about the divestiture, it would be accretive but maybe dilutive for the first six months.
Can you give us any update there? Thanks.
Irene Rosenfeld
I'm very pleased with the perform of our business in China. I think actually we're not bucking the trend we actually live that trend.
If you recall about a year and a half ago we ran into challenges as we saw demands slowing down quite rapidly and our inventories were not keeping pace with that. So as we talked about it we implemented a number of management tools and measurement tools to ensure that we had a good handle on sell in and sell out and that serving is exceptionally well so I think in many respects we were ahead of that curve and we've now got back behind us.
I'm particularly pleased though with the resurgence of the biscuit business which is a critically-important business for us. Oreo had a very strong quarter and is a strong contributor to the overall business performance and gum just continues to be on fire and so net/net I think our Chinese business we learned a lot in the early days as we observed what happens when consumption slows down.
I think we've got a much better balance between sell in and sell out the team is executing well and I'm extremely pleased with their performance. So we're cautiously optimistic but the continued performance of the biscuit category is important to us.
On coffee, Rob, we don't really have an update what we had said was we expected in 2016 that it will be accretive, we have no reason to believe that's not true at this point and the business has performed well. They had a very good first quarter for us and we'll wait to see really we get the approval from the European commission and then that will trigger our ability to get in and really do more detail planning with our partners.
Rob Moskow
Great. Thank you.
Operator
Your next question comes from the line of Eric Katzman with Deutsche Bank.
Eric Katzman
I guess first, just a specific question, Brian. You kind of mentioned in the Asia-Pacific that a tax incentive helped gross margin, or the phase out of the tax incentive, why is a tax incentive an operating factor?
Brian Gladden
It was a hurt in the quarter. We had historically an attack structure in place in China that allowed us, it basically showed up in our operating results and reduced our costs.
That has been phased out in a decision by the government. We began to face into that at the end of last year and it had a relatively significant impact in the quarter on AP's results.
I would say, as I said, they did have strong gross margin improvements they also reduced overheads, if you take that out, they had margins up in the quarter.
Eric Katzman
Okay. Just in terms of – I realize obviously currency is a massive headwind to earnings, but I think last quarter, maybe you had kind of said that in dollar terms, earnings per share for the year would be at least $1.70 and that included $0.30 of at least FX headwind but it also included the coffee still being in the base, but you're also suggesting that between – interest expense will be a benefit by a couple of pennies, currency is worse, your tax rate is growing now as a slight negative.
So can you give us a sense as to what you're thinking on a dollar earnings basis for the year? Is it basically unchanged also with all those things moving around?
Brian Gladden
In essence we're not really – we haven't updated the outlook for EPS, what we did highlight is the fact that interest expense will be down a bit, tax will be up a bit. I think those things would basically offset the change relative to currency is about a $0.03 difference from when we last updated you, so $0.30 going to $0.33.
Eric Katzman
Okay. All right.
I'll pass it on. Thank you.
Brian Gladden
Thanks, Eric.
Operator
Your next question comes from the line of Ken Zaslow with Bank of Montreal.
Ken Zaslow
Good morning, everyone.
Irene Rosenfeld
Good morning.
Ken Zaslow
North America as you said seems to be expanding margins before the Salinas plant and I didn't really understand for sure but it seems like maybe that is going – that margin expansion is actually going ahead of schedule. Does that mean that you think that of the areas out there that North America has the greatest opportunity to expand margins on top of where we're going from today?
Is that a fair point?
Brian Gladden
I'm not sure I'd say that. I think we've highlighted the opportunity related to Salinas and how much margin impact we would have.
I mean as we've talked about and Daniel talked about at CAGNY, as we implement lines of the future, those opportunities exist broadly across the other regions as well. They will be likely one of the first to feel the benefit of the new supply chain capabilities and the lower cost.
The team has done a nice job managing through productivity, they've done a nice job managing through overheads and I would say they're a bit ahead in the process.
Irene Rosenfeld
And also, Ken, that's one of the areas that we have of greatest return on our marketing investments and we're going to continue as our capacity comes on stream, as I mentioned a few minutes ago, as our capacity comes on stream that's an area where we're going to continue to invest as we see the margin progression.
Ken Zaslow
Great. And on that point and I just want to – you also said the back of the year you're expecting to increase your advertising spend behind new product innovation.
Can you talk about, assuming you're not going to tell us what new product innovation, but can you talk about region and categories where you'd see the acceleration of new product innovation?
Irene Rosenfeld
You're going to see it around the world. I mean one of our strong suits has been the strong performance of our innovations and I think as we continue to move to a region category model, we are finding that we're able to expand our proven platforms even faster.
So as you think about different innovations within our categories, Oreo thins in China is performing exceptionally well and you'll start to see that make its way around the world. I talked about the belVita line extensions that are doing well and that continues to be an area of opportunity.
Within chocolate, we've got continued terrific response, continued terrific response in Bubbly and Marvellous Creations and you'll see us expanding those. And gum and candy we've got a series of innovations.
Trident Unwrapped here in the U.S. is the first slab gum that you can get in the bottle and it's off to a good start and so that you'll see that when we'll play an important role as well as in China for example where we're actually going to launch a second line.
We've got our Stride brand that has done exceptionally well. We're now going to be launching Trident in China.
So in many cases what we're talking about are the expansion of proven platforms around the world.
Ken Zaslow
Great. I appreciate it.
Thank you.
Operator
Your next question comes from the line of David Driscoll with Citi.
David Driscoll
Great. Thank you and good morning.
Just two detailed questions and then a bigger picture question for you, Irene. Brian, on the share repurchase I think your slide said you did $1.75 billion of share repo in the quarter.
I think your target for the year was between $1 billion and $2 billion. So would this mean that you've done the share repurchase that you wanted to do for the full year or is there any more to go?
Brian Gladden
Yeah, we've done 1.5 in the quarter and what we said was we do up for two so I would suspect it will do up to two. That's what we said.
David Driscoll
Okay. So there's a little bit more to go.
Fine. Now marketing, Irene I think you said on the quarter it was flat on a constant currency basis.
Does that mean that with FX it was down about 14%?
Irene Rosenfeld
Directionally I don't know quite how the currencies flow through the medium money but it would be, you know, and obviously particularly in the emerging markets it would be down a little bit. I think the important point is that particularly given the aggressive pricing, we have really focused on making sure that we've got adequate marketing support behind our brands, and particularly our power brands, and that's been a key driver of their strong performance.
The aggregate A&C that I reference that was down slightly, again, that was primarily nonworking spending that we will continue to look for efficiency opportunities. So A&C is a key driver of the strong performance of our power brands which are up about 6 % in the quarter and they will continue to be the focus of our investment as we look out to the balance of the year.
David Driscoll
And then, Irene, just – Kraft tie-ins uncovered a fairly massive cost savings in their merger announcement. You do have a rather unique position in analyzing kind of what they've done.
The question here is a Mondelez question, though. In thinking about Mondelez, do you see further opportunities for larger cost savings and higher EBIT margins after you hit the 15% to 16% target?
Irene Rosenfeld
Yeah, Dave, clearly the Heinz model is something that the entire industry is watching. And we are watching very closely just to see how that plays out.
At the moment, we're quite comfortable with our approach. I think we've got a good balance between top line and bottom line.
I think the margin performance that we're delivering both in terms of gross margin as well as operating margin is strong and where we'd hoped it was going to be. And so I'm quite confident that the programs as we have laid them out today leave us well-positioned not only to deliver our 2015 targets but also to deliver the targets that we've laid out into the future.
So we'll keep watching and learning, but I'm quite confident with the approach and the path that we're on.
David Driscoll
Okay. Thank you.
Operator
Your next question comes from the line of Jason English with Goldman Sachs.
Jason English
Hey. Good morning, folks.
Brian Gladden
Good morning, Jason.
Jason English
Irene, I want to pick up on a comment you just made in response to the last question, a good balance of top line and bottom line growth. Looking at results over the last year or so, it really felt like the balance was not really balanced at all but shifted heavily towards priming the pumps for margin expansion, with the top line faltering as a result of whether it be executional issues, conscious decisions to exit things, et cetera.
Do you think that's a fair characterization, first? And then secondly, do you truly believe that we're getting back into a better balanced algorithm on a go forward?
And if so, what's the enabler that's allowing you to shift more focus back to driving sales in conjunction with margin?
Irene Rosenfeld
Jason, I think it's a fair characterization. I think we were very clear to say first things first.
We needed to get our gross margins on our key franchises where we wanted them to be. And then we were going to be in a position to start to spend back, and that's exactly what we're doing.
And so certainly, as we've said, there'll be more opportunity to spend back in the back half as more things kick in on the cost side. But even now, we're already starting to make some adjustments to our spending and making sure we're focusing it on the target areas that we think we can get the best return and where we think we need to protect the franchises.
So I think you're seeing the algorithm play through in a more balanced – you will see the algorithm play through in a more balanced way this year than perhaps you would have seen last year, but we were just getting ourselves essentially staged to be able to deliver the cost profiles that we need so we have the fuel to invest in our franchises.
Jason English
Thank you. That's helpful.
One more, then I'll pass it on. As you were going through your prepared remarks, you listed a lot of things that should get better on a go forward.
You're strategic decisions to exit business, the headwind is more pronounced, it should get easier. You're looking for better category growth in a number of markets as consumers adjust to price points.
You're looking for better market share improvement on a go forward. Lots of things you talked about in terms of anticipation of getting better.
I guess my question is do you need it all to get better to deliver your numbers? Or are is there enough flexibility in the algorithm of go forward to absorb a few of those things maybe not going the right way and still hit your numbers?
Irene Rosenfeld
I think were well-positioned if you do the math. Given our strong start to the year, we feel quite comfortable with the guidance that we've laid out.
It's a solid start. We're executing well, and there are some things that we believe will go our way in the back half.
But we continue to believe that the guidance that we're giving you is quite prudent, and we feel quite confident in the full-year projections.
Jason English
Okay. I'll pass it on.
Thank you.
Operator
Your next question comes from the line of Alexia Howard with Bernstein.
Alexia Howard
Good morning, everyone.
Irene Rosenfeld
Good morning, Alexia.
Brian Gladden
Hi, Alexia.
Alexia Howard
So just a quick question on the Enjoy Life acquisition. If I think back to when you were still with combined with Kraft, there were a number of those sort of health and wellness oriented brands, like Back to Nature that never really seemed to find their place properly in the portfolio.
They kind of got lost. As you think about buying Enjoy Life and try to figure how to scale that, what's different this time around?
And do you have an appetite for doing more of those kinds of deals over time? Thank you very much and I'll pass it on.
Irene Rosenfeld
Well, Alexia, without a doubt, better-for-you snacking is on trend. It's resonating well with our consumers around the world, and therefore, it will continue to be an important focus area for us.
We've learned a lot from the Back to Nature experience, and in fact, we still have an ownership of that business. As we bring Enjoy Life into the portfolio we've announced that we're going to keep the management separate and I think that's an important enabler to make sure that we get the lessons that we need, we learn the lessons but at the same time we're allowing the team that has been so successful to continue to drive the business.
So I think you should expect to continue to see us building on our Better For You snacks both organically and through M&A and enjoy life becomes an important cornerstone of that effort.
Alexia Howard
Thank you very much. I'll pass it on.
Operator
Our final question comes from the line of Rob Dickerson with Consumer Edge.
Rob Dickerson
Thank you very much. Just a bit of a follow-up question that Jason had, it seems like at the end of last year I think your categories were growing I believe it was 3.6% and you had said 2015 might be a little bit lower around 3% than in Q1 you're putting up 4.8% in global category growth.
I think you'd said even expect to potentially see the chocolate accelerate in the back half of the year. So if you expect – if we're seeing much faster growth that you saw in 2014 in Q1 in your categories and you're also expecting some of those categories to accelerate and you expect to gain share as price gaps narrow, why wait or why not really increase your top line organic sales growth guidance especially if comps aren't becoming more difficult?
Thank you.
Irene Rosenfeld
Rob the first point is over the long-term there is no question we expect to grow at or above category rates. As we said though in 2015, we are very clearly prioritizing margin expansion over revenue growth.
It reflects the challenging environment and we've got a very significant transformation we want to make sure that in all cases that our managers are able to make the appropriate trade-offs. So we feel good about the revenue growth in the first quarter, we're very pleased to see that the snacks business in particular is up around 4.5% which is a trend change from the end of last year but I think you also need to get underneath the covers a little bit on that number.
A big driver of that 4.5% improvement was the 6.5% growth in chocolate which is largely price driven as we've said, also benefited somewhat from the Easter shift. So the good news is we are starting to see pricing coming through and that's critical to our overall algorithm as we're said.
Our mix is still soft and we're taking some actions in the coming months and quarters to make sure that we start to see our shares rebound. So net, we're cautiously optimistic about the improved category growth, but we'd like to see more than the first quarter to feel confident about that.
Rob Dickerson
Okay. Great.
Fair enough. Just a quick technical question and hopefully I'm explaining this the right way.
But it looks like in the first quarter you bought back the 1.5 billion in shares part of that you could argue was funded by the proceeds that you got from the currency hedges off the coffee divestiture. Without that you might be apt to raise more debt to buy back the stock or whatever and not buyback.
So I'm just curious, when you announced the coffee JV, the euro was close to 140. Now current market it's around 111 so it seemed like and I think you put this within the footnotes of the release, it seems like the cash proceeds now you would receive on a dollar basis our less, which could potentially mean that you'd be able to buy back less stock with those proceeds.
But at the same time you're buying back more stock in Q1 off of the benefit of this currency hedge. So it would seem like – I guess the question is, is it fair to say that maybe some of that accretion just off of the shift in the euro has already occurred?
Thank you.
Brian Gladden
I mean, the simple way to think about it is, we locked in the rate last spring, and I think we locked it in, in the range of 1.37 euro which basically protected our dollar proceeds from the transaction. So what we did was really take that favorability from a timing standpoint and just basically cash some of that in during the course of the fourth quarter and the first quarter.
So we locked in our proceeds, our proceeds will not go down given what's happening currency that was the intent of the hedge all along was to lock that in and it locks it in – the value is in the range of $5.5 billion.
Rob Dickerson
Yeah, you just hopefully get more of a benefit upfront off of just weighted average shares outstanding. Okay.
Brian Gladden
Just liquidity in the short-term, yeah.
Rob Dickerson
Fair enough. All right, thank you very much.
I appreciate it.
Operator
We've reached the allotted time for questions and answers today. I would now like to turn the conference over to Dexter Congbalay.
Please go ahead.
Dexter Congbalay
Thanks, everyone, for joining. I'll be available via phone for obviously all day today and over the next few days.
I just ask for a little bit of patience. I'm all but lonesome right now.
So if you have any questions, just give me a call later. Thank you.
Operator
Thank you for participating in today's conference call. You may now disconnect your lines at this time.