億滋國際 (MDLZ) 2002 Q3 法說會逐字稿

Please welcome to Kraft Foods third quarter earnings conference call. All participants have been placed on listen-only mode and we'll have questions and comments following the presentation. It is now my pleasure to turn it over to the Vice President of Investor Relation, Mark Magnesen. Sir, you may begin.

Thank you. Welcome to Kraft Foods third earnings conference call. I'm the Vice President of Investor Relations and I'm here with James Dollive, Senior Vice President and CFO, and Marla Gottschalk, Senior Vice President and Investor Relations. After a few opening comments, Marla will take you through a review of the third quarter results. The majority of the hour will be available for questions. Earlier today, we issued our third quarter earns release. You find can find a copy at WWW.Kraft.com.

For those accessing the call through the website as well as media representatives, you are on the call and in a listen-only mode.

Today's remarks contain projections remarks an are made only of today's date. Please go to the safe harbor results that can differ from projections. As was the case in the previous releases this year, results will be discussed on pro forma basis to provide more meaningful year over year comparisons.

There are four key components to our pro forma definition. First, these results assume the IPO occurred as of January 1, 2001 with net proceeds used to retire debt. Second, pro forma results adjust 2001 to exclude businesses that were reclassified as assets held for sale during 2001 and to include Nabisco's Canadian grocery business. Third, pro forma results assume that the company's 2002 adoption of the SAF 141 and 142 was effective January 1, 2001. Finally, pro forma results exclude the reconfiguration and consolidation charges as the Kraft and Nabisco businesses were integrated with that, I'll turn it over to Marla.

Thanks, Mark. Thank you all for joining us. Today, I'm pleased to report our results in the third quarter were strong. We continue to deliver growth on both the top and bottom lines, despite weak economic conditions in many parts of the world. Our reported net earnings were up 72.8%, and our fully diluted earnings we are share were up 72.4%, reflecting the elimination of substantially all goodwill amortization following our adoption as SFAS 141 and 142, growth in operating company's income, and lower interest expense. Reported volume in revenues were up 6.9% and 2.8% respectively in the quarter.

Now, turning to our pro forma results, third quarter volume was up a strong 3.3%. Driven by new products, and developing markets. Revenue was up 2.1%, with minimal effect from currency as the favorable impact of the weakened dollar against the Euro and most other currencies was offset by the significant devaluation in Latin American currencies. The difference between our revenue and volume growth of 1.2 points is largely attributable to the impact of lower commodity-based pricing on cheese, meat and coffee. Currency and mix were not significant factors.

While we have begun to lap the impact on revenue of lower coffee price, cheese and meat will likely remain prior year, which may continue to debreast volume growth relative to growth. Our net earnings of $869 million were up 14.5%. And fully diluted EPS of 50 cents per share was up 13.6% versus last year. Importantly, earnings growth was driven bay combination of volume gains, cost reduction initiatives and lower interest expense.

Looking at volume results in more detail, our growth was relatively broad based with North American volume up 3% and international volume up 4.2%. Tack on acquisitions contributed 0.7 points, resulting in total Kraft volume growth excluding acquisitions of 2.6%. It's important to note as context for these results that U.S. consumers are continuing to shift their purchases to non-measured channels. This shift has obviously affected our reported take away in many categories as tracked by Neilson and RIR. When you include Wal-Mart in our consumption trend, both our take away and market shares remain strong.

Let me give you a few data points using Neilson information for the periods ending September 7th. These figures include Neilson's estimate of Wal-Mart and are on a pound basis. Year to date consumer take away in the top 25 categories is up over 4%. With our aggregate share up 0.8 points. Look at it another way, on our year do day basis, our consumption growth is positive in categories representing three quarters of the company's income and our shares are up in categories representing about two-thirds of our operating company's income. The year to date results are impressive. But we won't have the data including Wal-Mart until the end of October, our three outlet trends are in line with our year to date trends. We've achieved these results despite the weakening consumer confidence and economy.

Ongoing trade inventory reductions continued in Q3 with our quarter end retailer inventory levels once again below prior year. However, on an aggregate basis the level of inventory reductions was consistent with our expectations. As you know, since the beginning of the year we have identified new products as a key volume driver with more of the benefit coming in the second half. In Q3, we are seeing the results. Our new products have been very well received by our retail customers, and now we're gaining traction with consumer as we execute our innovative marketing plans.

For example, in our biscuit division, OREO delight have been hits. The double delight OREO line with two flavors peanut butter fudge and mint cream, is on track to be as large as chocolate cream Oreo's, one of last year's major success stories. In Q4, we'll launch the next double delight flavor coffee and cream. Congress cookie bars lab a big success, providing consumes were convenient on to go snack. With these and other initiatives the OREO trademark is moving closer to becoming the next billion dollar Mega brand.

In desserts, Jell-O extreme gel sticks which extends the portability of one of America's favorite foods has been a key contributor to the division's growth. Year to date, consumption in our refrigerated ready to eat gelatin business is up almost 25% and our shares increased by more than seven points. Jell-O extreme gel sticks is another good example of how we're continually reinventing the established trademarks to keep them relevant and contemporary.

In cereal, Honey Bunches of Oates was lost in March and continued to drive growth in the division. In fact, since the launch T entire honey bunches of oats trademark has gained more than one full share point. Internationally, we've had great success with premium filled tablets in France and Belgium. We extended it to Norway under the friar trademark, and have plans on entering additional geographies in Q4. In addition, the new chicken burger variety has fueled growth of the dairy Lunchables business with voluming growing double digits in year to date.

Given these and many other product successes in Q3, we expect new product revenues to exceed $1.3 billion in 2002, well above the $1.1 billion generated in 2001. Developing markets also continue to be a key volume driver for us. Our volume in these markets were up 5.1%, despite ongoing economic weakness, particularly in Latin America. Gains in developing markets were driven by the successful integration of the Stover Chocolate business and strong base business growth. For example, we've expanded tank plus into many new geographies, including Brazil, China and the Czech republic. In our expansion of clubs crackers into Brazil has been successful. In fact, Club Social is the number one selling cracker brand in Brazil, the second largest biscuit market in the world.

Beyond new products and developing markets, let's look at the highlights within each of the segments. Continuing with international. In our Latin America/Asia Pacific segment, volume was up 1.4% with shares up in most categories. In Asia Pacific, our integration of the lanes biscuit acquisition in Australia is going very well. However, Latin America is a particularly challenging region as we have had to price aggressively due to the significant currency devaluation which has considerably increased our costs.

We also Posted strong results in Europe, Middle East and Africa segments with volume up 6.4%. Growth here was driven by our Stover Chocolate acquisition, strengthen our coffee business across most key markets and solid gains in cheese and convenient meals. In total, central and eastern Europe continue to perform very well. We were also pleased that our Q3 volume in Germany was up as we began to see some of our expanded promotional programs with retailers gain traction. Germany, however, remains a long-term challenge due to low consumer confidence and a shift to hard discount retailers. Within our North American segment, we once again Posted very strong results in beverages desserts and cereals with volume up over 10%. This quarter, Kool-Aid Jammers became the latest edition of $100 million brands. And our coffee business showed growth across three of our key brands, Maxwell House, ja value ya and Starbucks. In biscuit, snacks and confections, our volume was essentially flat, off 0.3% as strong growth in our cookie and cracker businesses was offset by lower confections volume. Our cookie and cracker business in the U.S. had one of the best quarters since the acquisition of Nabisco with volume and revenue up mid single digits.

We've had success in driving volume growth through new products as well as based brand marketing. For example, Kraft branded cheese nips continues to develop into a great Nabisco synergy story with it up 26% versus prior years. On confections, lower volume was driven by trade inventory reductions as well as continued intense competition. Altoids has responded to the competition with our new Altoids sour line, which launched in Q2 and is performing very well in market. And we'll further benefit from the launch of Altoid spearmint in Q4. In Oscar Meyer and pizza, volume was up 0.5%, as gains in pizza were partly offset by slight declines in our meat business. In pizza, volume growth and strong share gains were driven by continued momentum in the DeJourno stuffed crust pizza.

In meats, gains in hot dogs and our Boca business were essentially offset by consumption declines in luncheon meats. Volume in our cheese males and enhancer segment was up slightly 0.7% as solid results in our enhancers and food services businesses were offset by continuing challenges in cheese. The results in food service were particularly encouraging, despite the continuing economic weakness, our food service business Posted solid gains in Salad dressing, snacks and food ingredients. The primary challenge we face is in our U.S. cheese business. In this category, the primary competitor, private label, has been very aggressive in spending back lower commodity costs. During Q3, U.S. cheese prices remained very low with barrel cheese averaging $1.10 per pound down 6 cents per pound from Q2 and just above the government support price. With the lower commodity costs, we reduced our promoted prices in Q3 and increased our merchandising levels by 9% versus last year. In comparison, private label reduced its prices even further, and increased its merchandising by 24%. The result of this situation is that we operated at higher than optimal price premiums versus private label, particularly on a promoted price basis in several of our cheese categories.

We continue to believe that the way to drive category growth is not through short term price promotions, but through product innovation and brand support. Therefore, we're responding to the challenges in cheese by increasing our spending levels against product and marketing innovations. Importantly, we are focusing on consumer spending in categories where our marketing has historically been most effective and efficient.

To give you a flavor of the programs in Q4, Philadelphia cream cheese will be supported by increased spending on proven advertising and in packful promotions that highlight holiday usage ideas. Also, in cream cheese, we'll be launching Philadelphia bagel and cream cheese to go, a new product which provides consumers with the convenient way to enjoy launching Philadelphia bagel and cream cheese to go, a new product which provides consumers with the convenient way to enjoy one of their favorite combinations. We believe strong marketing and innovative new products and packaging are the way to grow our cheese business and will continue to see more of these from us in Q4 and in Q1 of next year. One of the benefits of the broad diversification across product categories and geographies is that success in certain businesses can offset short-term issues in others. Given our diversification, it's likely that at any given year or quarter at least one of our businesses will face a difficult environment or competitive situation. In 2002, that business is cheese. Importantly, we have successfully managed through situations such as this on cheese and other businesses before and we'll do it again. So as you look at our volume results across the total business, new products and developing markets have accelerated our growth and five of our six segments were up in the quarter. All in all, given the weak economic conditions in the U.S. and much of the world, we feel very good about our 3.3% growth in the quarter.

Turning now to the cost side of the business. We achieved strong results from the ongoing productivity programs and remain on track to capture saves equal to 3.5% of cost of goods sold. We expect to achieve our 300 million target on accumulative Nabisco synergies this year and on track for $600 million in ongoing savings. Generally, our major commodities remained favorable in Q3. Although several commodities began to turn higher. As a reminder, in most instances we pass on commodity cost changes through either price or marketing supported adjustments. In addition to cheese, meat prices remained low due to the general surplus of protein supplies in the U.S. Coffee prices also remained low due the an oversupply situation. Cocoa prices, however, rose rapidly in the quarter, driven by political unrest in the ivory coast. Grain prices rose due to drought conditions in the U.S. which have reduced crop sizes to the lowest level in years. While the impact of commodity volatility is somewhat mitigated by our coverage and risk management strategies, it remains a washout for us going forward.

One cost area that continues to pose a particular challenge for us is devaluation-driven cost increases in Latin America. Here, some key procured materials such as cocoa and wheat are tied to the U.S. dollar. The significant currency devaluations have caused our costs in local currency to rise dramatically. To recover these devaluation-driven cost increases, we have priced aggressively. For example, we've priced our biscuit and confectionery products in Argentina 85% so far this year, and crackers in Venezuela 33%. Despite these actions, we continue to face significant margin pressure. We expect Q4 results to be continually negatively impacted by the Latin American situation, particularly in Brazil, given the significant devaluation of the Riyal over the past few months. Here, again, we will work through these challenges and believe that our growing shares in Latin America will position us very well for the long term.

Our marketing, administrative and research costs were up in the quarter, due to high-single digit increases in marketing spending. As previously indicate, much of the increase is driven by new product introduced earlier in the year and the impact of lower commodities. This increased spending level is even more substantial than the numbers would indicate when you consider the media synergies we have captured this year as well as the generally favorable media rates. As we look toward Q4, we expect marketing spending to be up double digits as we continue to support our new products and build momentum in our businesses. The net result of our solid volume growth and the delivery of targeted productivity and synergy savings was growth in operating company's income with growth of 6.4% to $1.6 billion, and an overall increase in OCI margin by 90 basis points. In North America, OCI was up 6%, and internationally OCI was up 8.3%. Adjusting for the impact of foreign currency, total company OCI was up 6.2% and international OCI was up 6.1%.

Net earnings were up 14.5%, and fully diluted EPS was up 13.6%. In addition to the impact of OCI growth, EPS continued to benefit from lower interest expense. Third quarter interest expense was $210 million, down $46 million from last year driven by our refinancing activities and our lowered debt level. Our tax rate of 35.5% in the quarter was consistent with our first half rate.

There were several other items of note in the quarter. First, we announced in August a 15.4% increase in our quarterly dividend to 15 cents per share, reflecting our long-term intention to grow dividends in line with earnings. Second, we initiated a $500 million share buy back program through 2003 to prevent the potential dilution from the exercise of employee stock options. During the quarter, we bought back a total of 2.2 million shares, committing $85 million. Third, at the end of the quarter we acquired Cargeta, the number 2 salted snacks company in Turkey with roughly a 30% share and revenues of $35 million. And finally, earlier this week, we confirmed the completion of the sale agreement of our Fleischmann's yeast and industrial baking ingredients business in Latin American [inaudible] for $110 million. The sale was expected to close prior to the end of November.

In summary, despite a tough economic environment, we delivered strong volume growth of 3.3%, driving our year to date volume gains to 2.6%. We expect momentum to continue in the fourth quarter, keeping us on track to deliver full year volume growth of around 3%. While conditions are more challenging than expect earlier in the year, several important factors remain in our favor. First, our overall volume trends are improving. Second, our marketing support levels in Q4 will be of significantly versus prior year. Third, the impact of our new products this year is skewed to the back half and we're seeing the benefits in Q3. Finally, we expect strong results from our developing markets to continue during Q4. Based on our Q4 volume, we continue to project fully diluted earns per share of $2 to $2.05 or 14 to 16% growth.

As good as we feel about our momentum, as always, there are risks. Generally, weak economic conditions and continued low consumer confidence are watch outs. In currency, particularly those in Latin America, commodities and competition remain difficult to predict. However, we feel that we have the right products and right programs in place to deliver a very solid Q4, and importantly we should exit the year with good momentum.

Before moving on to questions, one quick comment regarding 2003 guidance. In January when co-CEO's Betsy Holden and Rob Deromedi join us in the webcast, we'll provide guidance for 20303.

Jim and I will now take your questions.

Thank you, ma'am. The floor is now open for questions. If you do have a question or a comment, please press the numbers one, followed by four on your touch tone phone. If your question has been answered, you may remove yourself from the queue by pressing the pound key. Please pick up the handset to provide optimum sound quality. Our first question is coming from David Nelson of credit Suisse First Boston.

Good afternoon.

Hi, David.

This is the first I heard of you doing any share repurchasing. Is this there a change of thinking on that or taking advantage of the lower share price?

Not really, David. We had this in the queue that we published in the last quarter with where we put notice out that we would be doing not a significant, but enough share purchase to cover the stock options that are outstanding. As I'm sure you know, we've got about 21 million options outstanding, the bulk of which will vest in Q1 of next year. And this is merely to prevent the dilution as employees choose to exercise those stock options.

Okay. Refreshing beverages are starting to be a big part of the portfolio. Are you looking at alternative channels of distribution there?

Well, we're in most of the channels with our business in the beverage business. We have our powdered soft drinks which are mostly in the grocery and then our refreshment, like the Capri Sun line and take which we cover in most channels. We don't sell those single serve at this point, but that business has been growing very strongly for us, and we can -- we think it will continue to grow that way.

Could you get the pouches into vend?

I'm sure that's being looked at, David, but I don't think I want to make any commitments on whether or not we're prepared to go in that direction yet.

All right. I'll just ask one more and then pass it on. You attributed the weakness in confectionery to aggressiveness in breath freshening, could any of that be attributed to weakness for Halloween?

There's two things really, David, that impacted that. One was we had some really trade inventory loading across our entire confection portfolio. And really, the other thing really is the competition in the breath freshening segment. I think you're very aware of all the new entrants that have come in there and all of the new forms and flavors that have entered that segment. So it's not really that we can see anything due to Halloween at this point. We have looked at it from more from the intense competition that we're seeing and that's the continuing theme throughout the year.

Thank you very much. Thanks, David.

Thank you. Our next question is coming from John McMillin of Prudential Securities. Please state your question or comment.

Good afternoon, everybody. Congratulations on the quarter.

Thank you.

Marla, thank you for giving the internal number of 26. Can you break that out by North America and international what the internal number was? I assume most of that that came internationally?

The majority of it from acquisitions was from international. If we take the acquisitions out of our international business for the quarter, it was up about 1.7%.

Okay. And the domestic three was still three?

Yes.

Jim, if you have an incremental cost saves of $200 million this year, is it safe to say you're getting around $50 million a quarter? I know you're not going give the exact number from Nabisco, but is that roughly a right number?

Well, it is somewhat uniform, although it's building as the year progresses, but it's not a dramatic difference between the individual quarters.

The full year guidance of 2205 kind of leaves you a lot of room in the fourth quarter. Why did you choose not to narrow that range?

Well, we did talk about this, but there is an awful lot of uncertainty out there. You know, we've given annual guidance and we want to stay focused on annual guidance. I realize we could have narrowed the range in that process. But we feel very good at sticking to the guns. We have been at 2205 from day one. We haven't altered from that one bit. We think that's the appropriate number for us to be at. As you look to the fourth quarter, you know, there is a lot of uncertainty out there. The economy still weighs into the discussion. Latin America has been a challenge for everybody I think who does business in Latin America. I feel absolutely terrific about the way we have managed the challenge. But nonetheless, the currencies have gotten progressively worse as the year has unfolded. You know, if you look at Brazil during the quarter, its average devaluation would have been 20%. Right now it's about 30% so that doesn't bode well going into the fourth quarter. So just given that degree of uncertainty, we felt it appropriate to keep the range as wide as we have, and it's consistent with everything we have done so far.

Great. Thanks a lot.

Thank you, John.

Thank you. Our next question is coming from Andrew Lazar of Lehman Brothers. Please state your question or comment.

Good evening.

Hi, Andrew.

On the last conference call, you had mentioned that volume in sales growth and the alternative channels like Wal-Mart had accelerated from already very high levels relative to traditional grocers. I think we'd expect those trends to continue because they're continuing to take share from traditional supermarkets. But as you look into '03, what gives you the confidence that you can continue I guess at this very heady pace versus the tough comparisons or, you know, put another way was there anything in '02 that led to above average trends that might be tough to repeat?

I don't think so, Andrew. We have seen for the last five years a continual shift to what we'll call the non-measured channels. And I think that trend will probably continue, but that was not a new phenomenon obviously this year. And nothing in particular happened this year that was unique. We have always partnered with the alternate channel customers, as well as our retail grocery customers to try to drive our business. I think the good thing is that we see pretty strong growth as well in our measured businesses as well as our non-measured. So I think we feel very good as that we can continue that as we continue to partner with them.

: So there weren't any sort of -- given a lot of the new product launch, I'm sure you're doing that often, no one-time shelf gains in the Wal-Marts of the world will make it tough going into the next year that's out of the ordinary?

The thing to remember, we have a wonderfully broad portfolio and we'll have one part of our portfolio that's going to get a little extra attention and another one that may get a little less attention. But when you look at it in aggregate as Marla indicated, I don't think there's anything unique to focus on between last year, this year or the pending year. We're certainly as Marla indicated going to work with all of our customers to try to maximize both our business and theirs.

Great. The last thing on the top line, you know, oftentimes now that promotional spending is being netted off of the sales line, I realize most the differential between volume and revenue is commodity cost. Was there anything due to a higher or lower levels of promotions that affected the top line? That's, you know, material to talk about?

We actually looked at total Kraft, it really is substantially driven by the spend back of commodities. If you look at the American business there is a little bit higher spending on trade behind our new product launches as we put some of the trade and consumer spending that does come off of the revenue line behind the new products. We did see an increase there, but certainly those are things we want to do to get our products off to a terrific start.

Thanks very much.

Thank you. Our next question is coming from David Adelman of Morgan Stanley Dean Witter. Please state your question or comment.

Good evening, everyone.

Hi, David.

I have a couple of questions. First N the United States excluding cheese, could you talk about areas of the portfolio where you're seeing private label share growth or accelerated private label share growth?

Well, as you know, any time we have an economic down turn of the commodity volatility that we have seen, we have seen increases in private label activity. While share gains really have historically come from the weaker competitor, we have strong performance from private label this year. There was obviously a big impact in cheese, but we have also seen an impact in the slice pack business, our bacon business and nuts business in this quarter. The one thing I would tell you, Louise looked at the data, we see some of the growth of private label in the latest data we've look at moderating a bit.

Is there an extent it's not economically tie and see an impact of non-Wal-Mart retailer emphasis on if label? That's more secular in nature?

I would very hard to draw that conclusion. I can't say yes, I can't say no, but it would make it very hard to draw that conclusion.

Okay. Marla, in your comments about commodity costs, are you trying to articulate a hire level of concern about commodity than you may have had earlier in the year?

Well, I think we have seen an up tick obviously in cocoa. I shouldn't call that an up tick. We have seen a big up tick in cocoa costs and that's obviously something that we're monitoring very closely along with the grain. Commodity costs are a big mart of the business and while we usually try to pass them back, through our marketing programs or through our spending, you know, that's something we want to be very mindful of as we go forward.

And then lastly, should we expect in the fourth quarter, relatively similar volumes, shipments to the third quarter, maybe slightly stronger?

We're not going to get into quarter by quarter volume forecasting. We are targeting the year about the same level. Certainly, we feel terrific about the third quarter, the results and the fact that it has helped pull up our year to date results. So obviously we are looking for the full year to be a pretty solid number in the process. You can back into a third quarter implication if you'd like -- or a fourth quarter implication from that.

Thank you.

Thanks, David.

Thank you. Our next question is coming from Eric Katzman of Deutsche Bank Alex Brown. Please state your question or comment.

Hello, everybody.

Hello, Eric.

I guess that you want to be somewhat cautious going into 2003. But can -- Jim can you at least update us on a few things that we need to forecast, depreciation, tax rate, maybe your interest expense kind of assumptions at this point?

Are you looking for current year or trying to get a handle on '03?

'03.

I don't want to get into too much detail on '03. I'll repeat some of the things we said in the past. On cap-ex we have said that the rate run tossed 1. billion and this year into '03 it would be higher on that, $1.2. Interest expense F we look at it through the third quarter of this year I believe is -- the depreciation is about $520 million. Last year we did $680. This year, we're on pace to run at 700, so it will pick up a little bit next year as we spend the capital, you know, that kind of range. What else were you trying to get a handle on here that can help you in this process?

Tax rate.

Tax rate this year is 35.5%. We might see a little bit of a wiggle around that. A couple of a tenths of a point, but I'm not looking for anything major that will depend on the balance by where the earnings come from, by country, by state as we work through that calculation. But it could wiggle within a couple of tenths, up to as much as half a point, depending upon how things shake out.

Okay. And can you -- you know, in terms of your debt where you stand now and interest expense for next year?

Well, we have been pulling down the de if you look at where we are, we right now are ending the quarter at $15.2 billion in total debt that's down about $800 million from where we were at the start of the year. It's actually down $1.5 billion from the third quarter of last year, so I feel very good about bringing down the debt level.

Interest expense, I'm not going to get into and forecast because short-term rates have been a benefit to us this year. And I don't want to make any forecast on where the short-term rates are going to be going either for the balance of this year or into next year. But certainly, that will have some bearing. The good news is that a lot of the debt with some of the issues that we've done over the last 12 months, we have floated actually $6.5 billion of Kraft debt over the last 12 months or so, that does lock in some of the rates we have seen on longer term debt in the last 12 months. So that will help lock that number in. But as you look at our interest rate trend, it has been coming down. Certainly the pace at which it's coming down slowed in the third quarter as we expected it and as we communicated. But I feel very good about where we are in terms of overall debt position or ability to bring it down and the trend we're seeing right now on our interest expense.

Okay. And then with respect to I guess your comments about raw material costs, can you -- I mean, I realize you're not going to say anything specific about your, you know, where you're hedged, but can you talk a little bit more in general which commodities you actively hedge versus longer term contracts and, you know, that what that all means vis-à-vis your policy of, you know, never wanting to put through price increases, you know, versus competition?

Well, I'm not going to get into it commodity by commodity discussion on that. What we do is we will look at all of our commodities, particularly those where there's activity exchanges in markets where we can take positions on them. When we deem it appropriate, we will take prudent positions based upon our forecast. Not necessarily try to beat the market, but to eliminate some of the risk in the outlooks that we have for our respected businesses. You know, and that really does vary business by business, situation by situation. The thing I feel terrific about is the discipline that exists in the organization is how we manage that process because it's a very rigorous process. We go through to make sure that we're protecting the total franchise. You know, as we look forward, obviously some of the commodities are moving. Marla mentioned cocoa which is about double where it was last year. But if you have been following the cocoa market today, it actually had a rather substantive decline, particularly in the London market on the opportunity for a peace accord in the Ivory Coast. I believe they're hoping to sign something tomorrow. And I think that brought down the London market over 120 pounds today. So that will be terrific news for the people who live there and certainly the people who deal in the cocoa commodity. So we follow all of these things in a lot of detail and we pay close attention to these as a way to really protect the business.

Last question and then I'll pass it on, but can you comment on the changes that Betsy made in terms of the line of management into her and why the need for another layer, I guess between her and the direct operating managers?

Well, first and foremost, what we're really doing is just part of what Kraft does best, and that is develop people within the organization. This is a way to take some -- a couple of people and I know you know the individuals involved and have met them, outstanding people and just give them new assignments, new things to help us perpetuate the talent in the organization. As far as what it does for us in aggregate, it does free up a bit of time for Betsy to devote her time and attention to where she thinks she can have the most value, both inside the company and with customers and other ways to help push Kraft forward. So it's real good move. I think it's great move for the individuals involved and I'm sure it will help make us an even stronger organization.

Should we expect the same thing for Roger's side?

Well, I don't want to get into that kind of discussion that's something that Roger will have to look at his own organization and decide how best he can utilize his resources.

Okay. Thanks.

Thanks, Eric.

Thank you. Our next question is coming from Christopher Growe of A.G. Edwards.

Thank you, good afternoon. Hi, I think there are two follow-ups first is we have heard a lot not only from you but other companies on the weak consumer. I guess how that's affecting your business and how private label has fared in your categories. I know there were a couple of general comment on private label can you give us an idea how it fared in the say top 25 categories?

I don't have the top 25 category information right in front of me, Chris, but we have seen private label pick up some share in our cheese business and our slice pack and bacon business and our nuts business. And, you know, I think the key thing for us is really we feel like we need to just continue to innovate, deliver superior products and support our brands with strong marketing. That's the best way that we compute against private label. Obviously when you have an economic down turn, you see an up tick in private label, but we have seen their growth moderate as we have looked at the latest data.

Is it your sense that the promotion you're putting behind the brands will help at least to some extent stave some of the market share losses or keep your volume up?

Absolutely. In fact, I would say that given the volume performance we just delivered, I mean, we feel very good that we have the right programs in place to move our business forward. And there's always going to be a blip here or there in one of our categories, but I think we're well positioned.

Okay. The other question I had for you I think it's been -- to some extent, if you look at commodities as a basket and you have different exposures here, some are up and some are down, kind of the outlook for 2003, is there any view you have there preliminarily?

Well, again, we talked about commodities. We have touched on cocoa and if you look at where the trends are running right now, we're starting from some historical lows on a lot of the commodities particularly cheese, meat has been relatively low recently. Wheat and some of the grains were low. They have started to move north. Coffee jumped about ten cents I think since the beginning of the week, which is a 7% or 8% increase on coffee on concerns about weather in the Brazilian market, because the crop going through its flowering stage right now. So it's hard to see how the commodities are going to get much lower as we go forward. But, again, we stay very close to the forecast to the growing regions on these commodities. The issue isn't where whether the commodity is going to be a one-price or another, but how it transitions between the price points, and what that means as we manage through the transition period.

Okay. So as a basket F you look at all the commodities kind of put together into one, my guess is they'll look at that being up in 2003?

You know, I don't want to get into a forecast, but we are starting for the most part with the exception of cocoa from low starting points.

Fair enough. Thank you.

Thank you. Our next question is coming from Jaine Mehring of Salomon Smith Barney.

Hi, good evening. How are you?

Great.

I have a few different questions. First of all the incremental synergies going from 300 to 600 million, can you refresh me a little bit -- I know sort of overall what your mix is, the total number was coming from, but just incrementally what are the new sort of areas?

Let me start off by remarking at how well the integration has been going for us. You know, not just domestically, but internationally for the most part, the international integration has a lot of it behind us. In the north American piece the admin side is basically done. We have pretty much got a lot of the sales pieces in place. The operations pieces that we need to do a lot of those are -- a lot of those are done, but a lot more of them are still in process. So it's in those areas where you're going to start to see a little more of the impact shift. The admin piece have been driving a lot of it in the first year. It's been more balanced in year two, and some of the longer term initiatives, manufacturing, restructuring and so on will bear a little more of the weight in next year.

Okay. Secondly, unrelated to that, the rating agencies put MO on negative watch and is it just a rule that the sub has to go with the parent? I mean, as you said before, you have issued $6.5 billion of your own debt. Can you walk me through a little bit -- I'm not asking you to say whether or not you think they'll get a change in the rating, but is there any way for Kraft to be detached ratings wise?

That really is not up to us. That's how the rating agencies choose to rate Kraft and the debt that we hold. In the case of the agency that did put out a negative outlook, they have said quite frankly that it's driven simply by the relationship.

Okay. That's just the way they feel? There's not a lot you can do?

Well, I -- I don't think there's a lot I want to say about that right now, Jaine.

And then lastly, again there is sort of an '03 question, I don't know if you're ready to touch on it yet, we just did some numbers looking at pension assumptions and this is an issue for the whole market, not just for you. But you could on the surface look at it and it could suggest that your pension income could decline not overwhelmingly but meaningfully next year is that the right way of looking at it or am I missing something?

Well this is not something that's unique to us or anybody else. And I think we have been talking about this for a while. But, you know, taking a step back, when I look at this, I don't look at the pension income but the total pension and Post and pension benefits which includes the Post healthcare activities, the Post employment and so on. And if you go back and look at where we were, you know, in 2000 we actually published a number on this which was about $100 million of income from the aggregate of all the activities. And in '01, that number had already shifted to be an $80 million expense. So in that year, we saw about $180 million transition on these pension activities and Post employment activities. Obviously a lot of that depends this year on where the markets head. We've anticipated some of this and it's built into the guidance that we have provided, you know. I feel good about where we started on the year with an over funded pension plan, certainly in the U.S. plans, which is the primary ones to focus on. We had reasonable rates of return on our asset base as well as the discount rate. But how it's going to end up in '02 is going to depend on how some of the markets react. I'm sure as you can appreciate, they have been moving around quite a bit.

Right.

As you look at '03, obviously that's going to have some impact on our funding status, how we end up. And on what the amount of pension income will be. I think it's pretty fair to assume that the number going to go down next year as well as this year. I saw you had something published on that today. You know, but right now we're not prepared to talk specifically about whether we're going to change any of our assumptions. What we do each fourth quarter is go through a rigorous process of reassessing those assumptions. When we do our '03 guidance in January, we'll give you pretty hard specifics on that. But we will take a look at whether we need to change any of those assumptions. We'll build that into our estimates. But obviously, the financial markets are going to weigh into how we end up this year.

And then lastly, if I may, you know, you have of course a very impressive confection business, chocolate-based outside of the U.S. The businesses that you got with Nabisco right now are maybe, you know, not where -- they're not on the same trajectory that they were a couple of years ago. I mean, can you just address the issue of how you feel about your critical mass in confection in the U.S.? And strategically, you know, how quickly you think you can either -- sort of just what you want to do in the business in the U.S.

Well, I mean, I guess first I would say from certainly from an international standpoint, we have a terrific confections business as you know. We have very strong positions around the world in our chocolate business. And in our U.S. confections business, we have really focused on our breath freshening area that we have a great business on. Also in our life savers and cream savers we have a nice business. So I think we feel like we have a very nice U.S. confections business. You know, we have suffered some trade to loading in this quarter and we suffered from some competition. But they're nice and strong businesses. We do pretty well with them.

: Okay. And no feeling like you'd like to sort of balance out your confection portfolio?

I don't think we want to get into that in this discussion, Jane.

Thank you.

Thanks, Jane.

Thank you. Our next question is coming from Romitha Mally of Goldman Sachs and Co.

Hi. Just sticking to confectionery for a second. You got out of Hollywood gum business in France. Is it something unique to the French business?

Pretty much unique to our European business. That was really the only significant gum business that we had. We had a little bit in some other markets but that was really the heart of the business. And as consistent with our strategy of looking at our portfolio from time to time, there are businesses where we decide that it's more strategic for us to divest the business that had more value to somebody else. You know, and that was one of the businesses that fell out of that equation.

So basically, it wasn't anything particular to the category?

: No.

Marla, I just wanted to follow up on a comment that you made earlier. You said that take away was 4%?

Mm-hmm.

To the top 25 categories?

On the year to date including Wal-Mart.

What was it for the overall north American business?

We don't get a number. Through the measure -- the AIA and the Neilson numbers we do not get that type of an aggregated number that 4% take away takes the Neilson numbers that we get year the date with the Wal-Mart projections that they provide to us. And it was roughly around 4% but I can't really put in all the other businesses for that. I don't have an 5b89 to do that.

So even for the quarter you can't give me a comparison. Shipments were 3%, but you can't give me the take away.

Well if you look at the north American business, you know, our shipments were as you noted 3%. If I take out a lot of my non-retail businesses, like my food service business on the year to date basis and I just look at my north American retail business, you know, my volume was up well over 3%. If I add my projection of what's happening on deloading on trade inventories, I round back up to 4% so that's kind of how I do my gut check on the numbers that we get back. Does that help you?

Yes. Thank you. And then just one final question. You mentioned bagel and cream cheese on to go?

Yeah. Doesn't it sound delicious?

Can you describe that for me.

Basically you described it perfectly. It's a bagel with cream cheese that would be in the refrigerated section that is already ready to go. So instead of having to prepare that yourself in the morning, you'd have a prepackaged item that's ready to go that tastes terrific. We're actually really excited about that concept. Cream cheese on a bagel is one of the top usages here in the United States and we think that's a sleeper idea that we think will be really successful.

That's a pretty short shelf life product?

I would imagine that the shelf life obviously won't be really long on that, but obvious obviously it's manageable for us.

It's reminiscent of what they do in the U.K. like with sandwiches? That's the type of product you're talking about?

I'm not familiar enough with the U.K. product to comment on it.

This is one of our food service type packages of cream cheese with a bagel. So it doesn't have that freshness perish ability issue that I think you're referring to.

Okay. Great. Thank you.

Thank you. Our next question is coming from Jonathan Feeny of Sun Trust. Please state your question or comment.

Hi, guys. Congratulations on a solid quarter.

Thanks.

I just wanted to ask a quick one. You know, looking at your volume growth, you know, clearly 3.3% is a nice number and 3% in North America on a pro forma basis. Without, you know, I know you're not commenting on Q4 or '03, but would you expect in the future a little bit better balance across the four areas like cheese, biscuit, Oscar Meyer, et cetera?

Well we certainly look do grow all of our businesses, and as Marla went through some of the details within the portfolio, there have been a couple of businesses this quarter what are dealing with particular challenges. You know, as we said earlier that's really the beauty of having the breadth of the portfolio that we have, is you'll see a business that will have a particular challenge in a quarter and another businesses that they'll hit one out of the park. And that helps us feel confident in the kind of volume projections that we put forward that we can stay within that range.

You know, and as Marla indicated some of the new items that are coming on board are really doing quite well for us in just highlighting the biscuit business in the U.S., an outstanding quarter for that division. So the good news is, some of the key businesses there are in fact performing very well.

And just one final detail question. You have talked before about inventories were up year over year, but since year end as of your last 10 Q I see assets are kind of the same. It is fair to say are you -- it was because you were buying cheese before? Are you still buying any commodities opportunistically, does that go on any place else besides cheese?

Well, we certainly buy a lot of commodities, but in the case of the raw materials we have leaned into the cheese buy given the fact that prices are above government support. So it makes economic sense for us to hold a little more inventory on cheese.

But as you look at the balance sheet and there is a consolidated balance sheet that is in the press release, we are up on our current assets and the real bulk of that is on the inventory side. Cheese is part of it, but there are some structural things that are affecting that as well. For example, the Canadian grocery business last year was in a separate line that was in assets held for sale. It has been moved up into its respective components and that's added a little bit into current assets. Currency will play a factor in this particularly as some of the European currencies and others have strengthened relative to the dollar so that will play into how some of the things work out. And then the other piece that's affecting the inventory level as well for us is just the new product items. Obviously, we're bringing out the quantity of new items that we have that does cause the inventory to tick up a little bit until we reach more of a steady state. But those are the big pieces that are driving the inventory and the inventory is, in fact, the source of change in our current assets.

Great. Thank you.

Thank you.

Thank you. Our next question is coming from Leonard Teitelbaum of Merrill Lynch. Please state your question or comment.

Good twilight. I'd like to ask a couple of questions. First of all, do you have any comment other than what's in the papers about your friends at the teamsters over there in Nabisco?

Well, I think what you're referring to is the fact that we are looking to do some consolidation within some of our distribution. And we're hoping we can work effectively with them. This is really just moving some of the routes around within the Nabisco network, and it's all within the same union. You know, all teamsters in terms of who's currently delivering and who will be delivering in the future.

Leonard Teitelbaum So basically saber rattling on the part of the union boss?

Well, I wouldn't use the words.

I'll take you off the hook.

We can hopefully work with the union. We have a good working relationship with all of our labor unions and hopefully we can do that on a very positive basis.

Do you have any contracts coming up that we should know about? Regarding health benefits and other contributions?

Well, we have -- we always have contracts coming up.

Well, I was referring to one that affected Hershey's that I think all the bakers and confectionery workers union -- I know Keebler is slated for it, are you guys slated for it this year?

We do have contracts coming up within that group as well. But every month we've got some labor contracts that are being negotiated and almost all of them are usually negotiated very amicably.

Leonard Teitelbaum I don't want to beat this cheese and meat thing to death here, but when we take a look at some of the statistics, at least what we're getting from some of your competitors, it seems like they reduce the shelf price significantly greater than yours, percentage wise. You came down some and merchandised hard against it. Considering that there may have been some shift in demand on some of the more staple items, does this mean that you're going to stay with that strategy or does it mean that you're going to meet price for price?

Well, certainly in our cheese business, you know, we feel that there are certain promoted prices that we want to be at. We've really worked very hard this quarter to get our base prices in line and I think we've done a very good job of that. From a promoted price basis, while we have gone a little deeper on the promoted prices, we have seen private label to go to levels that we are not interested in matching. They're just too deep we think for the long-term health of the business and we don't want the consumer to be trained to buy our products at that deep a discount. I think the key thing for us still is to really focus on superior marketing, to focus on the innovations on our products and our packaging, to really deliver a better bundle to the consumer and that's what we're going to continue to try to do.

I guess, Marla, what I want to make sure of at least in my own mind is we're not going to return to the days of about seven or eight years ago to where we didn't put up an umbrella, we put up a tent for private label and rather than keeping it at a reasonable let's say spread between private label and branded. I presume you're saying you're going to do that and you're not going to keep the umbrella so high that you have to promote heavily against it?

I think you can rest assured that this is top of the list for us, and we're monitoring it closely by every category and by every skew for cheese. And trying to make sure that we do keep our price gaps in line. So --

That would be the same for Oscar Meyer as well? That would be the same for Oscar Meyer as well. There you have two different. You have the private label and then the regional price competitors. We're working hard to manage that. We have done a lot of modeling on knowing what the right price gap is, knowing what the right price thresholds are. And we will make sure that -- make sure that we manage that well and manage it within the guidelines we need to be in.

Lenny a lot of this is really the whole benefit [inaudible] that will you provide and the value that you offer that gets into as Marla indicated the innovation, marketing programs, how well we're promoting it and the service that we provide for the business as well. And that goes into some very sophisticated modeling.

We feel like we have a good new product pipeline going on meat and cheese as we're rolling into year. So we feel very strongly about the businesses.

Thank you. Please arrive home safely.

Unknown Speaker*: Thanks.

Unknown Speaker*: Thanks, Lenny.

Thank you. Our final question is coming from Terry Givins of Bear Stearns. Please state your question or comment.

Good evening, everyone.

Hi.

I slipped in under the wire here. A lot of questions. I only have two quick ones left here. If you look at the discrepancy between your volume and your pricing in North America, it seems to come primarily in cheese meals and enhancers, and I guess the other is beverage, desserts and cereal. Marla, your remarks lead me to believe that the pricing in cheese, meals and enhancers is primarily cheese. How about beverage, dessert and cereal? Where --

Two things going on there. We have the coffee business and beverages and cereals which has been definitely impacted withed by the lower commodity cost in the revenue line that particular segment has had a bevy of new products, and we have supported those very strongly which also has gone through into the revenue line. ))

Okay. So I'm correct on the cheese element in cheese, meals and enhancers?

And some meat in there because the food service business sits in that segment and that's impacted by both cheese and meat.

And the last one, just on this confection, I have a hunch that Hershey's going to talk about a similar trade deload tomorrow. Is there any challenge in particular that's deloading the trade here in terms of confections?

No. It was actually pretty broad-based across the entire channels that we look at.

Really? Wal-Mart included? Because I assume it was primarily grocery driven, but I may be wrong there.

Well, we don't want to get into of course talking of specific customers, but we have seen confections have an inventory deload this quarter. It was a little more than we had expected. So -- we pretty much plan for that stuff in advance.

But overall on any given quarter, you know, we have seen that the trade inventory come down. The good news is that in aggregate it is pretty much on where our expectations were and we planned on these events. Not only third quarter but to continue into the fourth quarter and even into '03.

So you think they'll bring it down a little bit more in the fourth quarter aggregate?

A lot of different customers, a lot of different categories and it doesn't move at once. It moves by customer, by category, but on average you tend to get a fairly consistent decline. You know, that's what we have assumed is we're going to continue to see a fairly consistent decline over time. A very prudent way for us to put our plans together.

Okay Doak. Thanks very much.

Thank you.

Well, that's all the time we have for questions. We appreciate your participation. Look for a notice our Q4 conference call after the first of the year. Thanks again, everybody and have a good evening.

Thank you. This does conclude today's teleconference. You may disconnect your lines.