億滋國際 (MDLZ) 2002 Q2 法說會逐字稿

Ladies and gentlemen, please remain on the line. Your Kraft conference call will resume momentarily. If at any point through out the conference you experience audio difficulties, you may press star zero and an operator will assist you.

Once again ladies and gentlemen, thank you for your patience and please remain on the line, your Kraft conference call will begin momentarily. Good afternoon, ladies and gentlemen, and welcome to the Kraft Foods second quarter earnings conference call. At this time all participants have been place on a listen-only mode and the floor will be open for your questions and comments following the presentation.

I would know like to turn the floor over to your host, Mark Magnesen. Sir, the floor is yours.

Welcome to Kraft Foods, second quarter earnings conference call. I am Mark Magnesen, Vice-President of Investor Relations and I'm please to be with you today.

After my opening remarks, I'll turn the call over to Marla Gottschalk, Senior Vice-President of Finance and Investor Relations, for some prepared comments and then to Marla and Jim Dollive, our CFO, for a question and answer session.

Earlier today we issued our second quarter earnings release. If you don't have a copy, you can get one at www.kraft.com. Those of you have accessed this call by our Web site as well as media representatives who follow Kraft are on the call in a listen-only mode.

I remind you that today's remarks may contain projections of future results and are made as of today's date. I also refer you to the safe harbor statement at the end of our news release for a review of the factors that could cause actual results to differ from projections.

As was the case in our Q1 release, these results will be discussed on a pro forma basis to provide a more meaningful year over year comparison. To quickly recap our definition of pro forma results, first these results assume the IPO occurred as of January 1st, 2001 with the net proceeds used to retire debt. Second, pro forma results adjust 2001, to remove businesses that were reclassified as assets held for sale after the first quarter of last year.

We were able to subsequently dispose of all of these businesses except for the Canadian grocery business. Because this business will be reported in our 2002 results, we have added it back to the 2001 results for pro forma purposes.

Third, pro forma results assume that the company's 2002 adoption of FSAS 141 and 142, which eliminates almost all goodwill amortization, was effective January 1st, 2001. Finally, pro forma results exclude the impact of integration related charges as we bring the Kraft and Nabisco businesses together.

With that I will now turn it over to Marla.

Thanks, Mark.

Before I get started, let me apologize for the delay today. We experienced some transmission issues with our release and we wanted to give you all a few extra minutes to read the release before we got started.

I know from all my friends out there on the East Coast, it's a little late already. So with that said, let me get on with it.

I'm going to briefly review our Q2 results and the key factor that drove our performance. Then Jim and I will devote the majority of our time to your questions.

Overall, Q2 was another good quarter for Kraft. We delivered strong earnings growth through a combination of volume gains, cost reduction initiatives and lower interest expense.

Our second quarter EPS growth of 17 percent keeps us on track to achieve our full year targeted proforma diluted EPS increase of 14 to 16 percent. Volume growth was solid. Despite softness in our U.S. cheese and food service businesses and select international markets.

We expect volume growth to accelerate in the back half of the year, driven by new products, increased marketing investment and gains in developing markets. For the year we expect volume growth to be around 3 percent.

Turning to the specifics for the quarter. Net earnings on a reported basis, we up 78.4 percent to $901 million. And diluted EPS was up 57.6 percent to 52 cents due to reduced interest expense following our June 2001 IPO and the elimination of substantially all goodwill amortization's.

On the more meaningful proforma basis, which allows us to make apples to apples comparison with last year, net earnings of $960 million were up 17.1 percent, while diluted EPS was up 17 percent to 55 cents.

Volume in Q2 improved 2.1 percent, with North America up 2 percent and international up 2.4 percent. Revenue declined 1.1 percent reflecting the adverse effect of currency translation were the paths of impact of the weakening dollar was more than offset by the negative impact of Latin American currencies.

Excluding the unfavorable impact of currency, revenue was up 0.4 percent, with volume growth partially offset by the impact of reduced prices in response to lower commodity cost and by produce mix.

Our product cost in Q2 were favorable driven by key commodities and our own ongoing efforts to deliver productivity of 3.5 percent of cost of goods sold. Within commodities, cheese cost in the U.S. fell throughout the quarter ending Q2 at recent lows. Cocoa, which primarily impacts our biscuit and international businesses, was our only major commodity unfavorably. In most instances, commodity cost changes is passed on to consumers through either price or marketing support changes.

Marketing , administration, and research expenses in Q2 were down, primarily due to currency translation and synergy savings. On the quarter, total marketing spending was up as we supported a number of new product launches in addition to base business increases.

On the Nabisco integration front, we remain on track to deliver our cumulative net synergy objective of $300 million in 2002 and continue to project ongoing annual synergy's of 600 million once the integration is complete.

We've finished the bulk of our administrative integration with the remaining efforts focused on manufacturing activities and on optimizing the potential of our combined organizations in areas such as selling and marketing.

Our reported results for the quarter included $92 million in pre-tax charges related to the closing of the Kraft facility and other consolidation programs as we've combined the Kraft and Nabisco organizations.

This quarter's charge brings total integration related cost to $314 million, slightly above the 200, 300 million estimate originally provided.

Our operating companies' income, or OCI, improved 6 percent to $1.8 billion increasing our OCI margin by 1.5 percentage points to 23.4 percent. Adjusting for the impact of foreign currency, OCI, was up 6.5 percent.

Second quarter interest expense was $221 million, down 29 percent from last year's proforma interest expense as we reduced our overall debt level and benefited from our recent financing activities.

While we will continue to benefit from lower interest expense in the second half of this year, the magnitude of the decrease will be less as we begin to compare the period with more comparable interest rates.

Net earnings growth of 17.1 percent reflects the growth in OCI as well as lower interest expense. During the quarter, , a Mexican based juice company with 2001 revenues of $367 million filed with the Mexican stock exchange a notice that they have preliminary agreement with Kraft to acquire their company.

Since many of the terms of this transaction are still being negotiated, we will only confirm the accuracy of their filing and cannot respond any questions regarding this business or the likelihood of completing the transaction.

Additionally, we have entered into a preliminary agreement to sell a Nabisco bakery ingredient business in Latin America to for $110 million. Here again, the transaction is still pending so we cannot respond to questions.

Now, turning to Kraft Foods, North America. Operating companies' income improved 6 percent to $1.4 billion. Volume gains, productivity, and synergy primarily drove this growth. Margins in North America grew 1.3 points to 25.9 percent.

North American volumes grew 2 percent, driven by strong results in beverages, desserts, and cereal segment and Nabisco snacks and confectionery segment. Overall, we feel good about the quarter as market shares were solid, growth in non-major channels was very strong, and our new product launches were on track.

Year to date, equivalent unit shares on our top 25 categories are up in businesses representing two thirds of our OCI. Trade inventory levels for the quarter, as estimated using Nielsen data were down versus last year, which is consistent with our expectations.

Now, let's look at the volume performance for each North American segment. Beverages, desserts, and cereals, again recorded very strong volume growth, up 7.5 percent. Double digit volume gains in ready to drink beverages were fueled by the continued success of Capri in Big Pouch and Kool Aid Jammers.

In Maxwell House, our packaging improvement to easy open cans and strong merchandising programs drove volume growth and share gains.

Volume growth in desserts was driven by our recent introduction Jell-O Extreme Jell sticks. Share gains on Jell-O refrigerated ready to eat desserts, strong holiday programs for Cool Whip and new goal varieties on Balance Bar Nutrition Energy bars.

Driven by the success of honey bunches of oats with strawberries and a tactical promotional program, Post cereal delivered strong consumption and share results. However, Post volume was down as these gains were more than offset by a trade inventory decline to compare to last year.

The biscuit, snacks and confectionery segment has a strong quarter, with volume up 2.9 percent. In biscuits, our core cookie and cracker businesses drove growth through an array of successful new products including Chips Ahoy , Double Delight Oreos, Reese's Peanut Butter Fudge, Honey Maid Sticks and continued momentum on our cold branded Kraft Cheese Nips line.

After only three months in market, our Chips Ahoy product is already the number three chocolate cookie product in the category behind our based Chips Ahoy and Chewy Chips Ahoy. And we are entering the market with a chocolate filled version in the third quarter.

On confections, volume was also up reflecting the launch of Creme Savers soft candy and Sourer. In snacks, momentum continued to build with shipments up versus prior year, primarily in alternate channels.

Volumes at our Oscar Mayer and Pizza segment increased 1.4 percent during the quarter. Oscar Mayer recorded volume gains from recent new product initiatives and lunchables lunch combinations, hot dogs and Boca meat alternatives.

Frozen pizza shipments also grew due to continued momentum on DiGiorno and the expanded distribution of our California Pizza Kitchen product line.

In Q3 we will continue our Pizza momentum with introduction of DiGiorno deep-dish pizza in select markets.

Volume in cheese, milk, and enhancer's were down 1.5 percent. In cheese, volumes were down due to aggressive competitive activity for both private label and regional brands and the challenge of getting lower commodity cost quickly reflected into lower retain prices.

In the quarter, we began re-investing dairy commodity favorability back against marketing initiatives. While we have strengthened our marketing programs for the second half of the year, we expect cheese to continue to face challenges from commodity volatility and aggressive competitive activity.

In food service, shipments were lower driven by our continued exit from low margin, non-branded businesses, and by a key distributor consolidation.

In meals, shipments increased, led by gains in Kraft Macaroni and Cheese dinners and by the addition of It's Pasta Anytime. Volume of enhancer was also up driven by A-1 steak sauce, Kraft salad dressings, and Kraft barbecue sauce.

Turning now to the international side of the business. Operating companies' income grew 6 percent in the quarter, driven primarily by productivity and synergy. Excluding the impact of adverse currency, OCI was up 8.7 percent.

International volume grew 2.4 percent with increase in both our Europe, Middle East and Africa segment, or EMIA, and our Latin America, Asia Pacific segment or LAP. In developing markets, volume grew 5.9 percent including acquisitions despite economic weakness in some countries.

In EMIA, volume increased a strong 3.7 percent benefiting from the recent acquisition of Stouffer in Russia and Poland and continued growth in most countries.

In Germany, our business was lower, reflecting continued competitive activity from hard discounters following the Euro conversion.

Snacks, grew in EMIA driven by new product introduction, successful marketing promotions and the recent acquisition of Stouffer. In France, our coat door chocolate, grew behind continued base momentum and the introduction of a new premium filled chocolate tablet.

In central Europe, three bit chocolate bar volume grew double digit across all key markets including Poland, the Czech and Slavic Republics and Hungary, benefiting from successful advertising, consumer promotion and line extensions.

Overall, confectionery growth was moderated by a shortfall in Germany, reflecting the competitive price environment.

Healthy snacks volume grew benefiting from strong performance of Australia in the Baltic region and Russia and chips in the Ukraine.

In beverages, volumes were down slightly as growth in refreshment beverages was offset by lower coffee shipments. In coffee, gains in numerous markets including Sweden, the UK, Poland and the Ukraine were more offset by a decline in Germany which was impacted by market softness and price competition.

In the growing ready to drink coffee segment, we recently launched Kinko Iced in the UK and we also Iced under the Yabus and Gevalia brand in Germany, Greece and Sweden after a successful performance in Austria.

Refreshment beverage growth benefited from expansion of Tanga beverage in Morocco and the Slavic Republic, along with new product introductions in the Middle East and Turkey.

Volumes were higher in cheese, with gains in the Middle East, Africa, Spain and across Nordic markets. Several new products were launched under our global brand Philadelphia, including line extensions in Germany, Belgium, and the Nordic markets.

Convenient meal volumes were up driven by higher canned meat sales in Italy and the continued strength of lunchables in the UK, which benefited from , a successful new product introductions from North America.

Grocery volume also increased with growth in Miracle Whip in Germany and dressing in the UK.

Within LAP, volume increased 0.6 percent as growth in numerous markets and our acquisition of Lanes Biscuits in Australia was moderated by declines in select countries due to weak economies and lower results in China.

In LAP, snack grew strongly driven by new product introductions, expansion into new geography's and the benefit of the recent acquisition of Lanes Biscuits in Australia. peanut cookies grew strongly in Brazil benefiting from the success from the recently new products.

Club Social crackers also grew strongly in LAP driven by continued gains in Venezuela, and our roll out in Brazil. The current economic weakness in Argentina drove a decline in snacks. However, Kraft shares were up solidly.

Biscuit volume declined in China due to inventory reductions. In beverages, double-digit volume growth was driven by the continued success of Tang powdered beverages in Argentina, Brazil, the Philippines and Venezuela.

In Brazil, beverage volume also benefited from growth in the juice concentrate driven by new products and successful marketing programs.

Overall, the second quarter was another good one for Kraft Foods. Productivity, Nabisco synergy, and new product launches are all on track and we benefited from lower interest expense. We experienced volume challenges in three areas: cheese and food service in the U.S. and select international markets.

We are addressing these challenges and expect stronger performance in the balance of the year. We expect full year volume growth to be around 3 percent with volume acceleration coming from new products, increased marketing investment and gains in developing markets.

On a full year basis, 2002 revenues from new products should exceed our prior year new product revenues of $1.1 billion. Most important, we remain committed to delivering our full year earnings guidance.

We expect pro forma diluted EPS of $2 to $2.05, a 14 to 16 percent increase over last year. With that Jim and I would happy to answer your questions.

Thank you. Ladies and gentlemen, the floor is now open for questions and comments. If you do have a question or comment, please press the numbers one followed by four on your keypad.

If your question has already been asked and you would like to remove yourself from the queue, please press the pound key.

Please note, questions will be taken in the order in which they are received. And we do ask as you pose your question to please pick up the handset to provide optimum sound quality.

Our first question of the evening comes from . Please announce your affiliation and proceed with your question, .

Good evening.

Hi, .

Hi, .

Your integration costs are coming in a little higher than expected. Could you flush out why that is please?

Well I wouldn't exactly get too excited about the overall integration cost here, David, because we came in at 314 versus an objective of 2 to 300 that was made, pretty much at the start of the whole process.

Really, when you think about what we do and what we did in fact during that process, is we looked for opportunities across the total portfolio of the Nabisco and Kraft businesses as to how we could bring them together and the best way to drive down cost.

And as the programs, and as the year progressed we kept finding new and better ways to do things. Now one of the big components in there, if you remember was the early retirement incentive programs to bring down head count. Obviously a program like that is really contingent on how many people accept the initiative. And it's really those kinds of initiatives, of going after ways to bring down our cost, finalizing the cost structure as we get into implementation that drove the number.

The important thing is we are doing the things that we said we were going to do and we are very much on track with the overall integration program. So I feel actually very good about where we came in on that piece of it.

Could then synergy number be higher?

Well, right now we are on track , David to deliver our synergy number. We said we are going deliver 300 million cumulative by the end of this year. We've got 600 for the total program.

Certainly we are going to be looking for the same kinds of opportunities to drive synergy. Part of our culture is how aggressive we are and how diligent we are in managing cost. And certainly going to look for every opportunity to drive not only the cost synergies but the revenue synergy's as well.

I would like to ask one other please on , which was again negative in the quarter, both in the U.S. and international. I realize that some of that's been coffee. Could you comment on how much of that might still be coffee and when we might see more of a positive with revenues maybe getting higher than volumes?

If you look at our revenues, David. You know, about 1.5 point was currency. So on a constant currency basis we were up about 0.4. And actually if you look at the commodities, and proof those out to see if the ones we reflect in price, that has actually well over point of growth.

So the remainder of the various centers due to mix. And we've really seen lower meat, lower coffee and lower cheese prices. And I would just actually tell you that as we look at the rest of the year, I think you are going to see that discrepancy as we go through the remainder of the year due to the pricing impacts.

And just to follow up on that, the lapping of the food service was done this quarter?

Well, 3/4 certainly the impact in terms of the pruning of the non-branded, lower margin products is still with us. Its impact is becoming less, but quite honestly our focus, David, in food service is really drive the branded higher margin items. So while we are seeing less of an impact, we are going to be taking a hard look at the whole portfolio. We are going to make sure that we are doing the right things to drive that business and from time to time we may have further items that we prune as it relates to lower margin, unbranded business.

OK. Thank you very much.

Thanks David.

Thank you Mr. . Our next question comes from . Please announce our affiliation and proceed with our question.

Good evening.

Hi .

Hi, .

I guess a few questions. The first one is 3/4. I was little bit surprised at the Oscar Mayer and the Pizza business given the lower cheese cost and the lower meat input cost that profit was just basically flat there. Is that just all being plowed back into A&P?

Really the majority of that is yes, . We did put back some merchandising programs as the cost came down and we really wanted to step up our marketing and that happened really toward the end of the quarter.

And the other tell you on Oscar Mayer and our Pizza segment is, we are really up against some very strong comparisons from last year on that business. So we feel pretty good about where we came out on that.

We've seen a lot of aggressive competitive activity. Especially in the meat area on slice pack and bacon. And we've seen a lot of lower of commodity cost, both the meat side and the cheese side. So we really expected our performance on the Oscar Mayer Pizza segment was going to improve in Q3 behind the impact of our marketing programs and our new products that are coming.

And I guess one of the concerns that I had that I think you kind of confirmed where we were last there, was that there was trade de-loading that was going on. You obviously touched on that in cold cereal. Is that pretty much passed and that's what gives you confidence that between the higher A&P and the new product efforts that your volume can accelerate?

Well, we actually thought trade inventories down year over year, but that's in line with our expectations. And that's been going on for a number of years. We expect to continue to see that and we plan for that in our numbers as we did when you gave you the numbers at the beginning of the year. So for us, I don't think there was any big surprise there.

You know, we think we have planned appropriately, but as we have talked about there can be fluctuations at anytime from quarter to quarter. So I think that is going to be an ongoing part of our business and we do plan for it before we give you any projections.

OK. And then Jim, if you could respond to this one. You know, just looking at the big picture here for the numbers, you've kind of kept the outlook for earnings at 2 to 2.05 the same and yet it seems that, you know, with better currency, assuming the dollar stays where it is today, better commodity cost trends, probably more cost savings from Nabisco coming in the second half of the year versus the first half, that 3/4 are you seeing like competitive activity coming up and that's why you are going to be plowing more into A&P and that's why you can't raise expectations a bit? Or maybe you could kind of touch on some of those changes.

Sure. We can kind of address the elements, but let me approach it from more a global perspective. If you look at the numbers that we have, the 2 to 2.05 which is our expectation, I actually feel pretty good about that. That's consistent with what we have been saying all along, 14 to 16 percent EPS growth.

One of the things that really has helped drive that performance in the first half of the year, where we are up about 17, a little over 17 percent, has been the interest expense line. And as I'm sure you are well aware, that is skewed to the first half of the year.

We will continue to see benefits on interest expense I think in the second half of the year, but the impact of interest expense on a year over year basis isn't going to be as much in the second half, only because we started to see some of the impact of lower rates in the third quarter of last year.

Now on commodities, and some of the other elements that you mentioned, let me just tick those off very quickly to be complete. Commodities we typically do pass through to the consumer, the changes in the commodity cost as Marla indicated earlier. We do that either through pricing or through spending changes.

That's the appropriate way for us to manage the business and it really doesn't have that much of an impact on our bottom line.

As far as currency goes, remember we have pretty broad array of currencies. The one you specifically mentioned , the Euro is certainly trending favorable, and having just crossed the dollar recently, but we also has a fairly sizable business in Latin America. In particular, I look at countries like Argentina, I look at Venezuela with the . I look at Brazil.

Those countries in aggregate generated about a billion dollars, in fact over a billion dollars of revenue for us. And we've seen some fairly sizable declines in those currencies. So I'm not sure I want to get into making just an expectation on one currency, because I think you have to look at the breath of the currencies, since it really is a global kind of perspective.

And then finally on Nabisco, as we mentioned, we feel very good about where the integration is. Synergy's are on track. The programs are performing well and most importantly the business is performing well.

So all in all, the 2 to 2.05, we think is a good number. We are comfortable with that estimate and right now I think you know we are going to work hard to make sure that we deliver it.

OK. Thank you.

Thanks.

Our next question of the evening comes from . Please announce your affiliation. Proceed with your question, sir.

Hello, ?

Unfortunately his line has dropped from the queue. Our next question then comes from . Please announce your affiliation and proceed with your question.

Can you hear me?

Hi, .

Hi, .

Hi, Jim, Marla, Mark. The reported volume gain of 2.5 percent included small acquisitions. I know in the first quarter, the benefit was about half a point. Jim, was it about the same in this quarter?

Directionally, yes. You know, historically, as we've said before, acquisitions have added about a half a point of growth and that obviously that excludes the impact that Nabisco brought to us.

So the internal volume number in the quarter was about 1.6? Because you have given us this number in the past.

Let me give you some specifics on that before we jump to the details. You know, for the second quarter, within North America, acquisitions really didn't have any significant impact on the volume growth ...

OK ...

... and what we are really talking about are two terrific acquisitions in international that really are contributing positively. It's the Stouffer business in Russia and Poland, the confectionery business that we acquired there. And it's the Lane Biscuit business in Australia.

And both of those businesses are doing very well. They are ahead of their business plan. On we have already integrated the distributors, and that gives us a terrific platform to expand our business in Russia.

Lanes is doing very well and we expect to leverage the breath of our biscuit portfolio. But on the quarter to answer your specific question, we saw a little stronger impact from those acquisitions. It was on the order of 0.7, 0.8 points of growth from the acquisitions. And overall that is pretty much consistent with the historical trend.

So then internal volume growth was 1.3 percent, about 1.3 percent.

yes.

I'm still here. Can you hear me?

I apologize for that sir, just give me one second.

That might have been a shareholder. Just in terms of the statements in the press release because I don't want to make too ...

Operator, please.

... OK. maybe

Can you hear me?

We can hear you. mcmillian: OK. I'll wait till it ends. You sure it's not and ?

We never put them on hold and we never get a busy signal. Operator, are you there please.

Just give me one second, sir.

?

Sir, you may proceed.

Thank you. ?

, are you there?

While you try to get John back, can you go to the next call?

Please.

Our next question comes from . Please announce your affiliation and proceed with your question, .

Can you hear me?

Yes , we can.

Good afternoon, everyone.

Hello, .

First, Jim or Marla, can you help me understand better the new product activity broadly second half of the year versus first half. Clearly that's going to have to make a contribution to accelerated volume growth in second half of the year. Is there a way you can quantify either the number of introductions, or you know, the expected sales, or the billion one plus that you talked about in new products?

Let me start and I will ask Marla to contribute as go through this. And obviously what you are trying to get at there is the fact that we are looking at about 3 percent volume growth for the year and we obviously going to do a little stronger performance in the second half of the year to do that.

But overall our business is doing well and for that second half performance, we do expect new products to make a very strong contribution. We've got a terrific pipeline of products and it really is a pipeline because they are staged to introduce this quarter and the fourth quarter and even into '03.

Some of these items you are probably familiar with, like the Double Delights Oreos, which we introduced the first flavor of that in Q2. We've got a creme and a mint flavor coming out which is an absolutely terrific tasting cookie.

We have new flavors on coming out. There is a biscuit item from Canada that we are fast adapting and moving into the U.S. called Cookie Bars on both Oreo and Chips Ahoy. It's actually a bar shaped cookie similar to which you would see with like a shape of balance bar, and I believe that it is chocolate and . It's a terrific product.

On cheese, the product is just recently gone into market. DiGiorno has got its deep-dish pizza that's now being sold in. We've got some items that recently have gone into the market that are doing terrifically, like Honey Bunches of Oats with Strawberries.

Every time I see a share report, that thing has notched up a little bit more. So as more people try it, we are getting more and more success with that product. Even the international markets are doing quite well.

The ready to drink items that are going into Europe should give us some nice success. We've got a lot of cookie items throughout Latin America that we are fast adapting given the breath of our portfolio.

I think the message I want to leave you with is we are well on our way to beating that 1.1 billion of new products that we saw last year. We are well ahead of that through the first half of the year and the momentum, I think is even going to be stronger as we get into the second half of the year.

Just to build on what Jim said. I think if you look at our Chips Ahoy and the fact that really in a very short period of time we've gotten that to be number three cookie in the chocolate chip cookie aisle. I hope that kind of illustrates for you the power that our new products can have when we really get something out there that's great.

So we feel terrific about the number of things that are coming out there. And I think that is just kind of a great example to let you know how we really do feel it can accelerate.

And adding even more when you look at the second half of the year, we are going to take up our marketing support for the balance of the year compared to prior year, both domestically and internationally. That's going to help drive it.

And then some of the base fundamentals, like the growth we've been seeing in the non measured channels where we've had double digit growth in our volumes, and the gains we've been having in developing markets. All of those we expect to continue into the second half and really help drive the volume for the balance of the year.

And just follow up. Are you maintaining your long -term volume target of 3 to 4?

Well, yes, in a word. Right now I don't see us backing off on the 3 to 4 percent volume growth and depending on what happens with some of the acquisition activity, we may even do better than that.

OK. Thank you.

Thank you Mr. . Our next question comes from . Please announce your affiliation and proceed with your question, .

Good afternoon.

Hi , how are you this evening?

Very well, thanks. Just a couple of quick ones. I guess in previous conference calls you've talked about what sort of measured take away was to try and give us some sense of the relationship between kind of take away and shipments.

And I was trying to get of sense of take away, meaning if consumer level was ahead of sort of the volume trends that you showed from a shipment perspective?

Let me try to answer that for you , . One of the things that we really have been spending a lot of time looking at, is the data that you guys have. Because we have seen such strong, strong growth in our non-major channels. And we have really done a lot analysis to try to make sure that we can marry all those aspects up.

And I guess I wanted to share one thing with you guys tonight, which is as we have looked at the non-major channels 3/4 I think we have told you to add about 2 points in there for our take away.

As we are doing the analysis now, it's actually increasing going to about 2.5 to 3 points of impact. And I really think that makes it tough on you guys to kind of take the data and project our performance out from it. But we really feel good about where our volumes are coming in.

Our share on a year to date basis are very strong. As I said in the Web cast, in our top 25 categories, businesses representing over two thirds of our OCI are up year to date. We have had some tremendous shares on ready to drink beverages, cookies, crackers, refrigerated ready desserts, coffee and cereal.

And where we've had our challenge has really been cheese. And you know we've got some new products coming. We've got three thing marketing coming in the back half. However, I think as you look, you are going to continue to see a little share weakness in the next IRI period on cheese as we move forward.

But the non-major channels really are the big impact that I think that is making it hard to do the analysis.

Right. If I looked at your, let's say internal volume growth rate, you know, this quarter, say it's 1.4 or so. You are saying add on say 2.5 points to that or so, so you get actually closer to 3.5 or 4 from a take away perspective.

Right.

So again 3/4 the second is just on the marketing spending. Can you give us a sense of perhaps of what marketing been up in total, let's say first have versus where you will be year over year in the second half? Or just extent of what the acceleration will be in marketing spending?

Well, on a constant currency basis for the quarter, our total marketing spending was up in the mid single digits.

I can't give you an specific guidance on our projected marketing and advertising spending. But I will tell you is we do further increases in the balance of the year really behind our new product initiatives and our commodity spend back.

Right. Great. OK. Thanks very much. I appreciate it.

Thanks.

Thank you Mr. . Our next question comes from . Please announce your affiliation and proceed with your question.

Good evening.

Hi, .

Just a quick question for you. Regarding your international businesses, particularly in an uncertain economic environment in Argentina 3/4 if you can give us an idea, for example, of how you respond to a currency devaluation there? I'm imaging mostly it's price, to that extent what the effect has been on mix as well and that sort country?

Well, that's a very good question because if you look at Argentina , which I guess these days is the poster child for some of the transitions. We were actually in a very good position because we were in the process of integrating our Kraft and Nabisco businesses and that gave us the opportunity to drive very hard to bring down our cost structure and get our cost structure in line.

We've done some things to re-size some of our businesses in Argentina in particular. So the price points become more affordable for the consumer. And we have made some progress in terms of how we manage cash in the country. All of which is designed to help our business in there.

And as I look at Argentina and how the business is performing, the categories are soft and you can understand that, but the important thing is that our shares are actually very good in Argentina. Our biscuit shares are up and our PSD shares are up significantly.

I mean I think that's going to leave us very well poised for when that market eventually does recover to take advantage of that recovery.

In terms of the currency itself, as I said we manage it through the business. What we don't do is we don't speculate on those currencies and try and hedge any of the translation implications into U.S. dollars.

Regarding currencies as a whole, would you anticipate, especially with the Euro holding at roughly at this level 3/4 I think there was a comment earlier in the call about it. But do you ... hello...

... you still there ... we are still here. Go on please.

In an improved Euro, for example, holding this level for the rest of the year, is that sort of an impetus for spending more behind marketing? Is that sort of the reason for the second half kick up? Or how does that go through?

I doesn't necessary see the currency as a means to be spending more, because remember the spending impact we are talking about here would be in the local country and the currency isn't really going to effect the spending with any particular country.

As Marla indicated what is driving some of that is the new product initiatives. Spending behind them and some of the commodity spend back against those businesses.

OK. I don't know if I heard this correctly or not, but did you give a number on how much food service is down in this quarter? I know that you gave some issues that pertain to that business.

Well, we don't get into giving specifics in terms of the impact of any particular division or subsegment. But it was down slightly during the quarter.

And it's not going to be up in the second half by chance?

Well, we are certainly going to work hard to improve our prospects in the second half, but again I don't want to get into forecasting specific divisions.

And that is a small piece of our business.

Sure. Understood. Thanks very much.

Thanks, .

Our next question comes from . Please announce your affiliation and proceed with your question,

You have not one but two CEO's and you couldn't bribe either one of them to get on this call?

I suspect their both listening. You could say hello, if you would like?

No, I would actually rather, you know , have the chance to have an open discussion with them sense you know ...

... well we will do our best, to answer you questions.

I know. Not that you are not good enough. All right. Back on cheese. I guess I want to understand maybe a little bit more specifically when you say competitively things are tough and also talk about why there were some difficulties getting the commodity savings re-deployed? I usually think of this company as managing those commodity swings very, very effectively. So it sort of feels like maybe something missed a little. What happened? And elaborate a little more on this competitive situation for the rest of the year?

I think the one thing that I would start with is cheese cost really declined rapidly. They were over $1.50 in the first quarter, all the way down to a $1.07 at the end of the second quarter. And that type of rapid change, really takes some time to manage through. And that type of volatility is the one thing that makes it hard really, and a challenge to get those prices quickly reflected on the grocer's shelf.

Where is the stumbling block to rolling that quicker. Because you know, I think when we spoke on your last call, you pretty much knew that dairy cost were coming down.

remember, we really don't control retail prices and all we can do is pass those savings on and it's 3/4 you know we will work with our customers and work with our accounts to try make sure that they get to the consumer as quickly as they possibly can but obviously we don't control he prices at retail.

I still thought, like you managed changes in underlying cheese commodity more through promotional spending than like say in coffee where it's a list price change. So isn't that in your control more?

It is but as you know, retailers plan out a lot of their promotional activities in their store well in advance. So we've got to go in there and work store by store to get those promotional dollars reflected and reflected at the price points that we want them to be at.

So it's been a challenge for us but we are very much going to rise to the occasion and work on that.

You know you also asked about competitive activity and we've just seen a lot activity both in private label and regional brand. And really some new entries into some of our businesses.

So that's just one of those things that we are going to have to continue to manage through.

Right and can you , you know you say well your plans to take care of it. And aside from pumping some of this commodity savings back in, is there anything else you can share?

Well, we are going to continue to strengthen our marketing programs. We've got some new products coming like in the back half of the year. We've got a new flavor in our cheesecake snack bars that we think will be a good success and a good add on.

But I think the key things that we need to continue to do is innovate, provide good marketing programs, to provide high quality products, like our slide lock and different programs that we've got out there. You know we just need to continue to strengthen those things to be successful.

OK. On the Oscar Mayer and Pizza, I think you were doing some back and forth with before and you talked about the operating profit not being up that much because you plowed more marketing back in, but yet I look at the volume overall in that segment and it was, you know, sort of deceleration or sales were deceleration as were weak volumes. So you put more money in but I don't necessarily see it reflected in the top line.

Well one of the things I would tell you that last year that segment had really a huge second quarter, up in the mid single digits. So we are up against a pretty tough comparison. So that is part of what you see happening.

And as we really put the dollars in they really came in more towards the back part of the second quarter.

You said that you had some success on new products in lunchables. Did lunchables grow year over year in terms of sales and volumes?

Yes.

OK. And then I guess back to sort of the back half acceleration of top line. If you are at all sort of in tune with , you know, investor psyche, you have to know how much hankering was going about volumes going into this quarter and you know, what that meant to your stock price. So this is a very, very critical issue, I think for the stock going forward.

And I know you say that there is more marketing spend, and there is more new product and stuff like that. You know you do have a very , very tough comp, I believe in the fourth quarter on volume, right? You did like over 5 percent in the fourth quarter, so ...

... that's correct...

... I know we talked about this on the last conference call, but just go through that a little more in terms of your thinking now that you are a little closer, a little closer to it and how that impacts your confidence in 3 for the full year.

For the third quarter?

Well, I'm sorry 3/4 didn't you do over five in the fourth?

Oh, yes, for three- percent growth.

Right.

Well, I think we feel 3/4 well I know we feel good. I mean our new products, as kind of illustrated earlier, are really doing well. They are really on track. They are very broad based, both across our North America and our international markets.

So from that standpoint we see those very much accelerating. And an actually a little bit different skew than we've even had in prior years. Much more waited to the back half of the year. So that gives us a fair degree of confidence.

Our non-major channel growth has been outstanding. Very strong. We expect that to continue. So we feel positive about that. As I said our market shares were solid. As we look at our international business we've had good gains in our developing markets.

And quite frankly in our international business our volume issues are really very concentrated, just a couple of areas. So those are just focus areas that we will go work on to make sure that the rest of the business which is actually humming along really nicely doesn't get drug down by some of the key focus areas that we face challenges on.

So you know, we feel like volume coming in around 3 percent is really very reasonable from everything we see, we think we can do that.

And yet there will be analyst who will come out of this quarter with a headline on their first call note, you know, saying that organic growth in the quarter is 1.3. Which would be 3/4 I think that is below trend, you know, versus historical even when you strip out acquisitions.

So I don't know, I mean I think it's come in much lower than you I think you anticipated but the bias still a little negative.

Let me just clarify one thing when you were you were talking to 3/4 I think he was asking you about the gap between shipments and take away. And you answered his question as if there was 2.5 to 3.0 point gap between shipments and take away. I though what you meant was that there was a 2.5 to 3 percent gap between what we see in IRI and what real consumption is ?

That's correct. That's the right way to think about it.

That's correct. Right.

OK.

But let me go back to your earlier comment. And I understand exactly what you are saying. But as you look at the breadth of the activities, as you look at the things that we've already mentioned, that does give us some comfort in the outlook on the year.

I'd be cautious about taking one quarter's trend and assuming that that is the new paradigm. Our merchandising support on the U.S. businesses on Memorial Day was below our expectations.

We had a great start to the year with our Super Bowl program. With our Easter initiatives, we had terrific results. Memorial Day came in a little bit soft for us.

Wait, you said your merchandising support. You mean the amount of funds that you've put into the businesses.

No, not the funds, but in terms of the performance in market.

Oh, OK. And why do you think that is?

I've seen some of that in some of the market trend data that would be reading. We think we've got many of the programs in place to drive the business for the balance of the year.

And why do you think it was below? You think you just missed a little bit on some of your activity? Maybe it was a little off the mark and now you are tweaking it? Or ...

... well , I think one of the things is last year we had one of the best Memorial Days we had ever had. So that was a hard one on that. And I think really in just some key categories we were up against some pretty strong competitive activity.

So that really hampered our results a little bit on Memorial Day.

OK. All right. Well, thank you. Hi, . Hi, looking forward to talking with you on the next conference call.

Thanks, .

Thank you . Our next question comes as a follow up from . You line is live sir.

I'm back.

Sorry we lost you.

Would you admit, Jim, that you are kind of back tracking off your 3 to 4 percent volume target that was stated previously by going around 3 percent ...

... no I would not admit to I'm backtracking off of my 3 to 4 percent. We are around 3 percent. And that's within the range of what we said.

Then why use the word around. Maybe I'm getting particular. And I'm a little like that I think the market is somewhat sensitive to that.

In terms of the specifics, you know, there is nothing wrong with and the business has done terrifically. But as you think of Memorial Day and you hear Coke talk about Minute Maid and so forth, is there some competitive issue there that slow down what has been just a stellar performer for you.

No, I think, you know,3/4 you are asking about the ready to drink business, which did exceptionally well on. Coke has had some good results on some their initiatives as well. And I don't see us taking our foot off the gas on that business at all.

You know the thing, I think, that does help us in trying to manage this down into the lower end of our guidance to around that 3 percent number is what we saw in the second quarter.

We've already talked about that in terms of how Memorial Day came in for us. We still feel comfortable with the 3 percent on the year. And that's really what's guiding us in this direction.

OK. Thanks again.

Thanks, .

Thanks, .

Thank you, Mr. . Our next question comes from . Please state your affiliation and proceed with your question.

Hello, back to the volume, the 3 percent for the year. Does that assume that you do the Mexican juice acquisition?

No, we are not assuming that we need or will successfully execute any acquisitions to deliver our 3 percent objective.

In terms of the three percent, in terms of the second half, it seems like you are pretty confident about the new products and you've talked about that, but why is it that target has come down from the three to four? What is it that gives you caution in the second half of the year?

Well, I don't actually think we have so much caution in the second half of the year, . I think the fact is we faced some very specific issues in Q2. Our cheese business was softer than we expected. Our food service was softer than we expected. Our German business was softer than we expected. And our China business was softer than we expected.

And we faced some really challenging economies in Latin America. Given that in Q2, we just felt that it was prudent to call the volume at around 3 percent. Think if we sat here and told you it was going to be 3 to 4 , you would be sitting here saying to me, well Marla, surely it's going to be closer to three than four after your second quarter.

So we thought we were being prudent and kind of putting it closer to 3 percent. And some more of you guys have called me on the phone, I think you expected that.

And obviously to deliver the 3 percent on the year, we are going to see some very good performance, we are going to have to see some good performance in Q3 and Q4.

And in terms of just the third and fourth quarter, would you expect volume growth to be stronger in the third relative to fourth give the tough comparison?

I really don't want to start making quarterly forecast. Right now we are comfortable with the 3 percent objective on the year.

And can you give me one figure 3/4 in terms of EMIA, what would the volume had been excluding acquisitions?

In EMIA, I would have essentially been flat, had we excluded the impact of the acquisitions.

And within that, not to just leave that as dangling there. But within that it's really excellent performance coming out the . They are basically on fire in that region and doing an exceptional job.

The breadth of our European portfolio, excluding Germany, is in very good shape. And the issue that kind of kept it flattish, was the fact that we did see a decline in a very tough German market.

Now the German confectionery business as recently been sold right? Do you expect any changes in the competitive dynamics as a result of that?

Well, not really. It's not going to change the competitive dynamics. It will still be in markets. And the new owner I'm sure will do what they can to manage that business.

Thanks.

Thank you.

Our next question of the evening comes from . Please announce your affiliation and proceed with your question, sir.

It's been asked and answered. Good night.

Have a great day sir. Our next question comes from . Please announce your affiliation and proceed with your question, .

Good evening everyone.

Hi, .

Just so we know that we are comparing apples to apples, what level internal volume growth, excluding acquisitions is needed in the back half of the year to get to that 3 percent target?

Well, I'm not sure I can go into its specific component. I think what I would want you to do is, look at what we've done with acquisitions for Q1, Q2 and historically as we've said, it's been on the order of half of a percentage point. Year to date it's up in that point 0.6, 0.7 range. And you can assume that that is pretty much going to continue for the balance of the year within that objective.

And then, as far as interest expense in the next couple of quarters, would it sequentially be pretty much in line with what it was this quarter or trend slightly downward?

Well that's really going to depend on what happens with some of the rates in the market place. But assuming , you know, that current rates hold, we should see a little bit of favorability because we just recently launched a $2.5 billion global bond offering which we did use to bring down some of our highest coupon debt.

So we might see a little bit of a favorably but I don't want to forecast anything specific, only because it is going to be subject to what happens to short term rates and I'm not prepared to make forecast on short term rates, give how volatile things are these days.

You can control only so many factors. If you look at the OCI 3/4 the fact that you are going to have less of a benefit from interest expense over the next couple of quarters, is it fair to assume, that the OCI growth is going to accelerate over the next couple of quarters?

Well, I think we will have some good OCI growth for the balance of the year. Certainly, it's going to be helped by the synergy programs as they continue to kick in. Productivity has been a strong driver of that performance.

The real issues though and not really an issue, but the thing that is going to drive it is going to be the fundamentals of the business. The way we manage it in terms of volume growth, in terms of the cost drivers. That will all help deliver the performance in the balance of the year.

Because you are obviously looking for higher volumes, but you are also looking to spend more to get those volumes, so might OCI, just be similar in the back half as it was in the first half?

Again, I don't want to get into a specific forecast about OCI. What we have forecast is our volume performance and our EPS performance, and that is pretty much the only numbers that I want to put out there as objectives.

I guess what I'm trying get at is, if we look to the lower end of the range, the $2.00 range, you know that represents 10 percent EPS growth in the back half of the year, which really sharp reduction in growth rate from the high teens in the first half. What are some of the factors that would push you toward the lower end as opposed to the higher end of the range.

Well as I said the interests expense has certainly help us deliver the strong growth in EPS in the first half of the year. That will also be a factor in the second half, but it want be as much of a factor.

So, you know, the OCI piece is the other thing has been the real driver of our year to date performance on EPS. And obviously that's going to continue to be a key driver.

Now what you are really asking are the risk that we have for the balance of the year. And those are the same kind of risk that we've dealing all along here. It gets into concerns about how currency can move, particularly some of the Latin American currencies that are out there.

You know, there could be changes in some of the competitive activities that go on that could influence some our forecast. And it really gets to those risk factors that we put into our cautionary statements.

Thank you.

And our final question of evening comes from . Please announce your affiliation and proceed with your question, .

I guess I was lucky to make it.

Hi, how are you this evening?

Good, on cheese, I was just wondering if you could give us an idea 3/4 with a number of new plants that we see going up, basically every week and with production and expectations for the year continuing to escalate, it looks like dairy prices are low for awhile. Is there any reason to expect the cheese business to turn around in the second half? Or is it your expectation that things could even get worse?

Well, as I said, we have strengthened our marketing programs, really coming out of the second quarter and into the rest of the year. We have some new products scheduled for the back half. So we feel like we are on top of the cheese business and we are going to do what we can to strengthen our business in the back half of the year.

I don't think cheese cost can much lower than they are although I probably shouldn't say that. But you know, I think for us the volatility is what's tough for us to manage.

We can really 3/4 it's easier for us to manage whither it's low cost or high cost if they are a little more stable. The volatility sometimes us some short term blips.

So , you know, we will have to wait and see obviously, but you know, I guess I would like to leave you with the thought that we feel like we've strengthened our programming in the back half of the year. We've got some new products coming.

Is all that cheese branded at this point? Is anything going into food service at all?

Well, we certainly do have some cheese in food service, but we talk about the cheese in the cheese division. That is branded product that we are talking about.

And then separately, you had mentioned the weighting of the new introductions toward the back half of the year. Any risks that in that short a period of time, that those products wouldn't be able to generate the amount of sales that you are looking for from these new introductions?

Well, there is always risk in any new introduction. The thing I feel good about is when do introduce a new product, it usually, and it almost always has gone thorough some very thorough research. It's typically tested. We've got a pretty strong idea of the consumer response. How it's going to play out. Many of our customers look for us to accelerate those products so that they can get them even earlier that what we are doing it.

But a lot of the impact that we are going to see in the balance of the year are from products that have already been introduce during the course of the second quarter. Because we've only got a portion of that in the current period.

So next quarter we will see the full impact of those, plus the additional items that we introduce. So I feel really terrific about not only the stuff that is scheduled, but just the whole pipeline. Because it's essentially a two to three year pipeline of products that they organization is working against, so that mechanism can continue to be a source of strength for us.

Is the weighting more like 60/40 , 60 in the back half of the year, 40 in the front? Or is it heavily weighted toward the back? Because the cost of putting these products on the shelf it seems like would mitigate a lot the benefit of these new products.

Well as said, we've put a lot of the products come out already in Q2, so we've already absorbed a lot of the cost for putting some of them out there.

And I don't think we want to get into percentages of how it's really weighted. But obviously, we've got a lot of new product launches over time and we think we feel really comfortable that we've weigh out our volume and our cost assumptions and we put those right into the forecast that we are providing for you. So we feel very good about that.

Fantastic, thank you.

Thank you.

OK. That's all the time we have for questions. We appreciate your participation with us this afternoon and apologize for the technical difficulties of the release and of the call.

We look forward to talking with you again next quarter. Look for a notice of our Q3 conference call information in early October. Thanks again everyone and have a good evening.

Ladies and gentlemen, we do thank you for participation in today's audio teleconference. You may disconnect your lines at this time and have a pleasant evening.