億滋國際 (MDLZ) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the craft foods 2002 full-year and fourth-quarter conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Vice President of Investor Relations, Mr. Mark Magnesen. Sir, you may begin.

Thank you. Goods afternoon and welcome to Kraft Foods 2002 year-over-year end earnings conference call. I'm Mark Magnesen, VP of Investor Relations and I'm joined by Betsy Holden and Roger Deromedi, Co-CEOs, James Dollive, CFO, and Marla Gottschalk, Senior VicePresident.

After a few openings marks, Marla will take you through our comments of fourth quarter and full year results. As well as an outlook for 2003. After the comments, we will answer your questions. For those of your listening on your website and media representatives, you are in a listen-only mode.

Earlier today, we issued our fourth quarter earnings release. You can get a copy at www.kraft.com.

I remind you at our remarks today contain projections of future results and are made only as of today's date. Please refer to the Safe Harbor Statement at the end of our earnings release for a review of some of the factors that could cause actual results to differ from projections. The results will be discussed primarily on a pro forma basis to provide more meaningful year over year comparisons.

Before reviewing the adjustments to the pro forma definition. I want to point out a miner expansion of the format. Due to the size of the gain we realized on the sale of business in Q4 this year, we will be reporting separately all gains and losses on the sales of businesses. This change has been reflected in the 2002 and 2001 pro formaresults.

Let now review the pro forma adjustments. First these results I assume the IPO occurred as of January 1, 2001, with the net proceeds used to retire debt. Second, pro forma results adjust 2001, to excludes 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 SFAF 141 and 142 which eliminates almost all goodwill amortization was effective January 1, 2001. Fourth, pro forma excludes the impact of reconfigure and consolidation charges as the Kraft and Nabisco are integrated and all gains and losses an sales of businesses. That completes my opening remarks, Marla will now review fourth quarter and full year 2002 results and our outlook for 2003.

Thanks, Mark. Today, I'm please to report strong 2002 full-year results for Kraft Foods. Despite a number of formidable challenges this year, we met our commitments to investors and delivered top tier results.

On a reported basis, our full year earnings per share was up 67.5%, driven by the elimination of substantially all goodwill amortization, growth and operating companies income and lower interest expense. Reported volume and revenue were up 6.7%, and 1.7%, respectively. On a pro forma basis, full year EPS was up 15.4%, and pro forma volume was up 3.1%. Strong earnings growth was achieved despite a soft worldwide economy and, an economic crisis in Latin America, and lower pension income. Higher volumes were driven by success of new products, continued growth in developing markets and tack-on acquisition.

These full-year results were capped by a very solid fourth quarter. On a reported basis, fourth quarter net earnings were up 69.9% and fully diluted earnings per share were up 68.8%, while volume and revenue were up 8.5% and 4% respectively. On a pro forma basis, fourth quarter net earnings and fully diluted earnings per share were up 9.8% and 10.9% respectively, but primarily to growth and operating company's income and lower interest expense. Fourth quarter pro forma volume was strong, up 4.3%.

Looking at Q4 volume in more detail, the 4.3% increase was broad-based with strong contributions from both North America up 4% and international up 5.1%. Importantly, all six segments posted growth versus prior year. Excluding acquisitions, fourth quarter volume was up a strong 3.2%. Thus, acquisitions added 1.1 points of growth, which is slightly higher than our historical trends due to strong results from our Stover(ph) chocolate business in Russia and Poland acquired at the end of last year and a school I would start for Cardida(ph), at that sausage snack business in Turkey, which we acquired in the fourth quarter of this year.

We continue to drive solid con consumption in the U.S. in the fourth quarter. According to Neilson, for the 12 weeks ends December 28 including Wal-Mart [inaudible] consumption in our top 25 U.S. categories up 3% and aggregate pound share up as well. Based on Neilson data and internal analysis the trend of trade inventory reduction versus prior year continued in the fourth quarter. As was the case in previous quarters, the magnitude of the reduction was consistent with our expectation. New product momentum continued in the fourth quarter and developing markets, including acquisitions again, posted strong volume gains, up 11%, despite economic weakness in Latin America.

I’ll briefly review volume results for the quarter by segment. Within North America, the overall 4% growth was led by the Oscar Mayer and pizza segment, which was up a healthy 6%. This outstanding quarter was driven by Oscar Mayer Lunchables, luncheon meat and bacon, Boca meat alternative and DiGiorno frozen pizza. We are especially pleased with the pizza results. Where are new products, such as DiGiorno stuffed crust and deep dish pizza helped to generate 3 outlet dollar share gains of 3 points on the quarter.

The beverages desserts and cereal volume was up 5.7% with both the ready to drink beverages and coffee businesses posting very strong gains our new items including Kool-Aid Jammers for younger kids and Capri Sun big pouch for older kids continued to perform well. These new items along with solid base marketing drove double digit take away on the quarter allowing us to gain over 5 share points in the fast growing [inaudible] juice drink category.

Volume for cheese, meals and enhancer segment up strong, up 3.7%, and all six divisions within the segment view volume versus the prior year. Increases came from several key businesses including Kraft Singles, Philadelphia Cream Cheese, Kraft Macaroni and Cheese and its Pasta Anytime. Our food services businesses also delivered solid growth in the high single digits on the quarter.

We are encouraged that fourth-quarter total cheese volume was up versus year ago, and fourth-quarter take-away trends showed improvement on the key cream cheese and processed sliced businesses. These improvements in the fourth quarter were supported by impactful(ph) consumer promotions. In 2003, marketing innovations such as fortified, doubled the calcium Kraft Singles and new products like Philadelphia To Go, a combination of bagel and cream cheese, and natural cheese cracker cuts are already in place to fuel the momentum.

We do remain caution given that the barrel cheese market remains low and private label continues to promote heavily. We continue to believe that the way to grow our cheese business long-term is through value-added innovation and marketing support versus short-term price promotion.

Volume and biscuit snacks and confection segment was up 1.3% with continued momentum in our core cookie and cracker businesses partially offset by declines in confection. The strength in cookies and crackers was driven by a strong fourth quarter performance which helped deliver full year share gains in both businesses in 2002. In cookies, the new Oreo items, including Double Delight Oreos, Oreo Cookie Bars and Fudge and [inaudible] Oreos, continued to grow in the fourth quarter. These new products helped drove the Oreo trademark to an all time record share of the year, up almost a full share point. The re-launch of Cheese Nips under the Kraft brand is another continuing success story, with dollar consumption up 31% on the quarter and 28 portion on the year. While confection volume defined on the quarter, we are encouraged by some recent strengthening of the business in the fourth quarter behind the Altoid Sours and Altoid Spearmint product launches. Finally this segment has introduce a number of high revenue per pound products such as Go Packs and Oreo Mini’s which drove revenue up 3.7%.

Internationally, volume was up 5.1% with significant contributions from the Stover Chocolate, Lanes Biscuit, and Cardida(ph) Salted Snacks acquisitions. Excluding acquisitions, volume up 1.3%. The Europe, Middle East posted good results up 5.4% driven by very strong growth in central and eastern Europe and solid growth across most western European countries but moderrate by a decline in Germany. Across Europe, we benefited from new products such as our coffee, ready to drink ice preso(ph) products in Germany and Greece under the Yakas(ph) brand and in Sweden under the Javalia(ph) brand. Additionally new flavors and sizes of Philadelphia Cream Cheese grew growth across the region.

Despite very difficult economic conditions the Latin America and Asia Pacific grew 4.6 driven by Lanes Biscuit and continued momentum in new markets. Partially offset by declines in several Latin America countries due to the economic crisis. Beverages, snacks, cheese, and convenient meals all reported strong growth in this segment in the quarter.

Turning briefly to revenue, fourth quarter worldwide revenue was up 3.1%, which was 1.2 points below volume growth. As us with the case in previous quarters of this year, this gap is attributable to currencies and lower prices as a result of lower commodity costs, particularly dairy. On a full-year basis, the strong fourth-quarter volume kept a good year with North America up 2.8%, international up 3.7%, and worldwide volume up 3.1%. Volume excluding acquisitions was up 2.2%, with 0.9 points of growth coming from tack-on acquisitions.

On a full-year basis, U.S. consumption results were very solid. According to Neilson for the 52 weeks ended December 28th, pound consumption for the top 25 categories in U.S. including Wal-Mart was up over 4%. Further, growth within these top 25 categories was broad-based with pound consumption up in categories representing approximately 3/4 of OCI and an aggregate pound share up solid 0.8 points.

As we have highlighted throughout the year new products were a key contributor to growth with operating revenue of $1.3b. New products net revenue of $1.1b which reflects a reduction for promotional spending, according to EITF standards, was up double digits versus 2001. Full-year revenue was up 0.9% versus prior year. 2.2 points below volume growth. Again, this gap is primarily attributable to the adverse effect of currency and lower pricing as a result of lower commodity costs, which together accounted for 1.9 points of this gap.

Net, on the top line for both the quarter and the year, we will very pleased that despite challenges in several key businesses and countries, we grew volume within our long-term range and, importantly, across all six segments. Shifting to earnings and focusing first on the fourth quarter, we once again delivered strong growth. Fourth quarter pro forma earnings per share of $.51 was up 10.9% versus prior year.

Operating companies income grew 1.5% with North America up 3% and international down 2.4%. Currencies were a slight benefit in the fourth quarter with favorability from the weaker dollar against the Euro and most other currencies partially offset by continued Latin American devaluation. Excluding this currency benefit international OCI was down 4.1% on the quarter.

While ongoing productivity and synergy programs continue to deliver as expected, the fourth quarter OCI results were weaker than the first three quarters because of more significant devaluation cost decreases in Latin America and lower pension income. The impact of higher costs in Latin America is evidenced by the overall Latin America Asia-Pacific segment OCI which was down 43%. The lower pension income primarily affected our North American results.

Also from a cost standpoint, we experienced rising commodity costs in the fourth quarter, particularly in cocoa and wheat, which were up 50% and 40% respectively, versus the same period a year ago. As a result of these cost increases, we took pricing actions on several businesses during the fourth quarter to mitigate the effect on margins. From a net earnings perspective, we continue to benefit from lower interest expense, which at $186m, was down $62m versus 2001. This benefit was a result of debt reduction, refinancing efforts, and lower short-term rates.

As we look at the full year, the fourth-quarter results bring our 2002 pro forma earnings per share to $2.02 up a strong 15.4% versus 2001. And within our guidance of $2.00 to $2.05. EPS was driven by gains in operating companies income as well as lower interest experience. On the year, operating company's income was up 5.5% with North America up 5.6% and international up 4.9%. On the year, currency had no impact on our international OCI as the favorable impact of the weakened and dollar and the Euro and most other currencies was completely offset by devaluation in Latin American currencies. OCI gains driven by volume growth fueled by mid-single increases and marketing spending.

Additionally, we achieved our productivity savings target and exceeded our synergy target. However, consistent with the fourth quarter, these gains were partially offset by higher Latin American costs and lower pension income. In Latin America, the impact of devaluations on cost grew throughout the year. As we discussed in our third-quarter call, some key procured materials such as cocoa and wheat are tied to the U.S. dollar, causing our costs in local currency to rise dramatically. For example, the Brazil rial(ph) has devalued by 20% by average for the year and 30% in the fourth quarter. Additionally, the Argentinean peso and the Venezuelan bulivar devalued used 68%# and 38% respectively on the year. While we price to mitigate these increases, our margins were impacted because of the magnitude of the devaluation as well as the speed at which they occurred.

Despite these challenges, we main committed to the region and we believe our growing share positions in key markets will position us well for long-term growth. Higher benefit cost costs primarily pensions impacted us by an incremental $100m on the year versus 2001, or $.04 per share. The main drivers of the higher cost were lower pension income resulting from negative returns on our plan assets. EPS did benefit from lower interest expense, which at $847m for the year, improved by $288m or 25% from 2001. Net from an earnings perspective, we were clearly challenged by the issues in Latin America and tensions in 2002 yet we were able to offset these issues with solid volume growth, productivity and synergy savings and lower interest expense to deliver strong full year EPS.

Shifting for a moment to cash flow. We delivered significant free cash flow in 2002 at $1.6b. This is down 20%#, as we made four quarterly dividend payments in 2002 versus only one payment in 2001. On a discretionary cash flow basis, which is operating cash flow less capital spending, we generated $2.5b of cash, up 14% versus 2001. In 2002, our key priority for cash was to reduce higher coupon debt, and we did that. Reducing overall debt by $1.6b since the beginning of the year and $2.7b since the IPO. Additionally, we increased our dividend by over 15%, acquired tack-on businesses, and bought back shares to offset dilution from employee option exercises. Looking forward, we expect to continue to pay down some remaining higher coupon debt and to increase utilizing cash for internal and external growth opportunities.

Let me complete the discussion of 2002 with two summary comments. First, in a very challenging environment, we feel very good about delivering on the commitments we made at the beginning of this year. Second, across the key measures of volume, earnings and cash flow, we exited 2002 with very solid fundamentals and momentum on our base business.

Now, turning to 2003. Like many companies today, we face several challenges, both on our top and bottom line. While we will not be providing long-term guidance, we feel it is important to provide you with volume and earnings per share guidance for 2003, as many of the issues we face are both significant and can be reasonably estimated.

Starting with the discussion of volume. We expect 2003 volume growth to be around 3%. To achieve 3% growth, we must again have significant contributions from new products, and we are confident that we have the pipeline to achieve it. Let me briefly highlight a few new items already released to the trade to give you a sense of what you will be seeing in the coming months. Oscar Mayer will launch Lunchablea Fun Fuels, a lunch based on balancing guidelines of the food guide pyramid. Our beverages division will introduce Capri Sun Sports and isotonic beverage in a pouch for kids. From biscuits, consumers will enjoyed Chips Ahoy Warm and Chewy, soft microwavable cookies with a fresh from the oven taste. The meals division will launch Kraft Fresh Prep, a refrigerated just-add-meet meal kit that helps busy moms cook home made meals more easily and quickly. And internationally, we're launching a ready to drink version of our popular maguari(ph) concentrate in Brazil. These are only a few and only in the first quarter.

Net, we expect new products to once again be over $1b of net revenue in 2003. Developing markets will also continue to drive growth, particularly in central and eastern Europe as we launch new products, expand our brand offerings and, more importantly, leverage our strong global infrastructure. For example, in Russia, we are leveraging the extensive distribution network that came with the Stover Chocolate acquisition to drive volume across all our categories. We are also expanding our successful premium filled chocolate tablets to central and eastern European markets.

However, Latin America does remains a concern. Significant economic volatility continues in several countries. As an example, the general strike in Venezuela as essentially closed the country since the beginning of December, and the values of most Latin American currencies still remain well below prior year level. Thus, while overall developing market volumes should be a good story for us in 2003, Latin America is a key wash-out, particularly in the first half of the year.

Another item impacting volume timing is the shift of shipments supporting the Easter holiday which falls in the second quarter of 2003, whereas it was in the first quarter of 2002. Many of our categories, such as confectionary, dry-packaged desserts, frozen toppings, salad dressings and cheese have heavy seasonal skews, and Easter is an important holiday for us. Therefore, while we expect the first half of the year to be on track with our guidance, we expect the first quarter to be 1.5 to 2 points below average because of the Easter shift and issues in Latin America.

From a revenue perspective, 2003 revenue should track slightly above volume growth, reversing the relationship we experienced in 2001 and 2002. This shift primarily reflects higher selling prices driven by higher commodity costs and devaluation driven cost increases in Latin America. As always, currency and commodity fluctuations are wildcards that could impact revenues.

Shifting now to 2003 earnings. We project pro forma EPS at $2.10 to $2.15 per share, up 4 to 6%, versus 2002. Projected earnings growth is below historical levels due to three main factors. The Latin American crises; benefit costs, especially pension and post retirement expenses; and stock based compensation expenses. While the breadth of our company's operations typically allows us to offset unique events, the combination of these items impacts 2003 growth. None of these items, however, reflect on the health of our brands and ongoing fundamentals. We are committing to building our brands through innovative marketing year in and year out. We believe this is the best way to build long-term brand strength and by extension long-term shareholder value.

Let me address each of these items in a built more detail. As already mentioned, devaluation driven cost increases in Latin America will continue to impact us next year. While we have priced to cover some of these increases and are encouraged by the recent stabilization of the Brazil rial(ph), we expect to continue to face significant margin pressure in Latin America, particularly in the first half of the year. Lower pension income and higher post retirement expenses are driving higher benefit costs, which are expected to impact our EPS by $.07, or 3 percentage points of growth. The impact is driven by lower returns on our pension-fund assets over the past three years, and higher retiree medical costs. For our U.S. plans, we maintaining our long-term return assumption of 9% and reducing our discount rate from 7% to 6.5#%. Our U.S. qualified plans ended 2002 with fund assets of $5b, 99% of the related projected benefit obligation. Given our funding status, we will not need to infuse your U.S. pension plans with a cash contribution in 2003. Nor would a contribution be allowable under I.R.S. regulations without incurring penalties. Additionally, pensions will continue to significantly impact us over the next few years because of the accounting rules that smooth pension fund returns. Predicting the magnitude of the impacts in the coming years is very difficult, as we obviously do not know what actual market returns will be. For Kraft, there are two key take-aways on pensions. First, along with other benefit costs, it represents an impact of $.07 on EPS in 2003. Second, pension is an issue that will continue to significantly impact us in the next few years.

The third item impacting EPS is our stock-based compensation plan, which will impact our 2003 EPS by $.02, or 1 percentage point of growth. In 2003, stock-based compensation for our employees will come in the form of a three-year restricted stock grant versus our previous use of stock options. In accordance with current accounting practices, the costs associate with restricted stock are recognized as compensation expense. This program has two key benefits. First because of the three-year vesting period, the plan better aligns the long-term interests of our employees with those of our shareholders. Second, by including stock-based compensation as an operating expense, we believe our financial statements better reflect compensation costs incurred in 2003. Moreover, the costs associated with stock-based compensation are expected to impact us by a comparable amount over the next couple of years.

Thus, the combined impact at higher benefit costs and stock-based compensation expenses is $.09 per share, representing 4.5 points of EPS growth in 2003.

Despite these challenges we face in 2003, our business remains fundamentally healthy. We exit 2002 with good volume momentum, an exciting line of new products, and a full pipeline of productivity products which positions us well to achieve our targeted 3.5% of cost of goods sold. We remain on track to meet $600m in cumulative that Nabisco synergies by 2005, although consistent be 2002, we are re-investing a portion of these savings back into our business. We also expect interest expense to decline in the mid-single digits in 2003 behind the carry-over effect of 2002 refinancing.

In closing, we feel very good that we have accomplished essentially everything we set out to do since the IPO. We have seamlessly integrated that Nabisco, launched a multitude of innovative products and continued to develop the leadership capabilities of our experienced management team, all the while delivering top and bottom line results in the top tier of our pier group.

As we look forward,unique issues will constrain our earnings growth but the long-term outlook remains very positive blind our leading growing brands, successful business model and continued management team. Which are committed to building brands and will not allow the issues to deter us from our long term strategies and perspectives.

That completes our prepared comments today and we now will open up the calls for your questions. Thanks.

Thank you. The floor is now open for questions. If you do have a question, please press the numbers one followed by four on your touch tone phone. To get out of line dial the pound sign. We ask that you pick up the handset to provide optimum sound call quality. Once again, that is 1 followed by 4.

The first question is from David Adelman of Morgan Stanley.

Good afternoon everyone.

Hi, David.

On the pension, is that a potential of having an '04 and beyond significant and material incremental pension costs above this $.07 step-up?

David I'll start up off with that one. I'll ask Roger and Betsy to join in as we go along. The answer is yes, and what happens is the pension calculation is, as your asset returns change -- as the return on assets differ from your assumption, those tend to get averaged in over in period of time. The accounting rules allow you to smooth it over five years. We actually smooth over four years, so we recognize it a little bit sooner. But given the last three years of returns, those will continue to average into the asset base for the next couple of years.

Did you look at opportunities in the portfolio to raise pricing to offset this cost? You know, because, clearly, it's an issue that your public competitors have.

Well, I think, as Marla said in the call, we want to make sure that we're managing the brands for the long-term and we don't want to do something short term that's going to impact us negatively for the long term.

More cash in internal investment opportunities, what exactly are you referring to there?

Well, that includes not only looking at what some of our internal opportunities are, but also external opportunities and how best we can use the cash to drive shareholder return.

Will you disclose what your fourth quarter -- you said the $100m in '02 was the full-year negative variance on pension and other benefit. What was it in the fourth quarter, Jim?

I don't know if I have that number right at the tip of my hands, but it was skewed more towards the fourth quarter.

And it was several points of growth in American Q4.

Let me ask you one last question: On the 3% volume growth, Kraft generated, you know, 2.5% volume growth prior to buying Nabisco, you spent $19b hurt the returns in the short term to make that acquisition, to enhance, you know the growth profile of the company because it's in faster growing faster. Do you think you're getting the value of that acquisition if you think in '02 and '03 you're going to be at 3% including the benefit of the smaller acquisitions.

David, this is Roger. Yes we do believe we're getting the benefit. If you look historically it includes half a point of growth from acquisitions. And the guidance given on 3% this year, the amount of acquisitions and tacks on will vary year to year. We can't count on the acquisitions in that 3% number.

I'll let other people ask questions. Thank you.

Thanks David.

Thank you. Our next question is coming from John McMillin of Prudential Securities.

I won't say good evening, but hello.

Hi, John.

To some extent this came out of left field. A lot of us knew you had some higher costs, but I think there was a feeling you could navigate.

And I take real exception, Marla, to this feeling that you've accomplished everything that you anticipated from the IPO. I mean, that 15% growth rate for the first three years was a key goal. And to kind of pound your chest with this kind of guidance is a little bit insulting. I guess that's a comment to start us off.

But I'm more interested in what changed. Didn't Louis just say in the conference call that the revisions made in October, he said that the only revisions made were to tobacco and there were no food changes.

Did I hear something I don't wrong?

What's changed in the last couple of months since he said that?

Wasn't he talking about the tobacco guidance and we really didn't change our guidance on food during 2002.

But I think he was giving 2003 guidance. Maybe we should leave this for tomorrow morning, but I thought he was giving some '03 guidance where food numbers were not being materially changed.

Again, I don't know what comments he made related to tobacco. John just to step back. I don't think anyone is trying to pound their chest. I think when we set out with the IPO, we said 3 to 4% volume and 14 to 16. No one anticipated at that point the pension impacts, the retiree medical impacts, restricted stock.

And if you take those into account over the three years, that's over 3 percentage points of growth and we clearly delivered on the 14 to 16, and we did for the first two years.

But again those were external factors outside our control, and we don't want to do anything that's going to hurt the long-term business.

Yeah, I see your point if you see mine.

Well, John, frankly, the way these things play out, discount rates, market returns, those things move and change as the year goes on. Everyone has not had medical costs up in the last year. This year as we've gone on we've seen a significant increase in medical costs.

It just it seems like, you know, Kellogg is given guidance, and they're able to kind of get through it. They have much more exposure to Latin America which suddenly did not turn negative, and maybe because they're selling bullion cubes and you're selling, you know, biscuits, their business gets hurt less. But I think the idea that everybody is getting [inaudible] down. I mean, we've got to see how the next week goes through, but this is largely a North American company. And I guess again as a comment the idea that some of these things are brand new in Latin America, I just kind of wonder what's changed in a couple of months that we couldn't have had a third-quarter conference call that went more into some of these issues.

John, I guess regarding Latin America and the quarter three call, we talked very explicitly about Latin America and what the value driven cost increases were impacting us on.

Okay. I mean, I'm not recommending the stock. I'll let other people that are. But I wonder what happened to the $550m of cost saves tied to Nabisco? Is this -- you know, wasn't that the target in 2003? And how much of it was supposed to be incremental and what's happening to that money?

Well in terms of the total that we had set on synergies, we said cumulative synergies of $300m by the end of '02 and $475m by the end of '03. And we feel terrific about where we are relative to that program, but as Marla indicated in her comments, not all of those have dropped to the bottom line. We have put some of those back against the business to help drive the volume performance.

And why wouldn't we see, with the 4% volume growth in the fourth quarter -- and this will be my last question -- but to the extent you're getting big volume growth in the fourth quarter, why wouldn't we see margins kind of pick up more from efficiencies or so forth? It leads me to believe that you kind of bought some of these volumes.

Well, certainly some of the cost profiles have changed for us during that period as well. We are starting to see some of the commodity numbers pick up. And as we indicated, pension was skewed more towards the fourth quarter in terms of its impact. And I think the issues in Latin America and some of the challenges we face with the currency problem down there really are starting to roost a little bit.

Okay. Well, thanks for listening to all that.

Thanks John.

OPERATOR Thank you. Our next question is coming from Andrew Lazar of Lehman Brothers.

Andrew.

OPERATOR We'll move on to the next question which is coming from Bill Leach of Banc of America Securities.

Good evening.

Hi Bill.

What did you say about the first quarter, Marla? Did I hear about it's going to be a down quarter or the rate of growth being below average.

I was talking about two different aspects of the first quarter of 2003. One, with respect to volume, there's a shift in Easter timing. And Easter is actually a big holiday for a number of our categories. So that will impact our volume growth in the first quarter. It's really a shift between the first and second quarter. Along with Latin America is going to be depressed a little bit in the first half of the year, given some of the things going on in Venezuela and some of the other Latin American countries.

And we quantify that to be about 1.5 to 2 points of growth which will shift from the first to the second quarter, but in the first half we will be on line with the full year guidance we are providing.

If you are saying the full year is up 6, then the first quarter is going to be up 4?

I think I said the full year 3% on volume.

Earnings per share.

With respect to earnings, the impact really in the first half of the year is more to do with Latin America as we really still are facing significant margin pressures in Latin America.

We're going to see some depression of the OCI growth and earnings growth in the first quarter as we're going to continue to take on the lower margins as those continue to be impacted but we can work through that as we continue through the year.

You see up the first quarter, just at a slower rate than the rest of the year?

Yes.

Thank you.

Your welcome.

OPERATOR The next question is from Leonard Teitelbaum from Merrill Lynch.

Good evening, most of mine have been asked. Can you be a little more specific on some of the below the line items in '03? I think you said interest is going to be down to single digits --?

Mid single digits in terms of the interest decline. And more of that as Marla we wanted through the webcast captured some of the refinancing activities we pursued during the course of the year.

Tax rate assumptions, D&A, etc. Can you help us with that?

Sure, on the tax rate we exited this year with an average 35 1/2%. For next year we'll be in that same range. We could be down as much as a half a percentage point off of that but there's not going to be any kind of increase in the tax rate. As far as, what other pieces were you specifically interested in Lenny?

Well, CAPEX?

CAPEX this year ended with 1184. So $1,848,000,000 on capital, and we'll spend about that next year about $1.2b. Both last year and this year have about $100m of integration related capital in the number and the running rate of $1.1b should be more an ongoing number for us longer-term. Depreciation ended the year with 709 on depreciation. For next year somewhere in the 750, maybe 760 range on depreciation.

I know you continue want to talk about long-term, but, you know, I sort of get the feeling here we're kind of reverting to the norm of a lot of the other food companies that are out there, you know, with revenue growth and earnings per share estimates. Are we looking for a one-time step down due to pension costs, et cetera? And then to pick up a growth rate that might be closer to, you know, the double digit or solid double digit going beyond the '03 level, or are we looking for a lower growth rate than might have been implied at the time of the IPO? I guess it's John's question again.

As Marla mentioned we certainly are impacted by the pension and stock comp programs this year, and those impacts will continue to have an effect on us on an incremental basis going forward. Because as I mentioned earlier, we do have to smooth that asset change into the calculation and the restricted stock program, assuming we continue that program in the future at the same level, we'll escalate over the three-year vesting period.

So it's not a one-time step down? It's' really a step down in the growth rate for the next couple of years.

But when let's talk about what's driving that because it's those specific events that's having the effect. We tried to get across how we feel good about how the business is performing. The volume growth at 3% is a critical factor in determing how you think about the business and what we're doing and those are the pieces we feel very good about in terms of the delivery and expectation.

Thank you very much.

OPERATOR Thank you. Our next question is coming from David Nelson of Credit Suisse First Boston.

Good evening.

Hi.

Let's get into interest expense and that's an area where you've had better than could have been predicted benefits. And, Jim, you mentioned first of all that you expect a mid-single digit decline next year, but if you annualized just the fourth quarter, it would be double digit. Is interest expense going up here?

Well, there is -- the general outlook, David, on short-term rates which does effect the outlook is for an increase in the second half of the year. Now, to the degree that doesn't happen, there may be more favorability in the interest outlook, but I wouldn't want to try and guess where the short-term rates are going because there's an awful lot of factors that are going to, you know, specifically impact that outlook.

All right. Well, I guess I was looking at, you know, 5 to 6 cents from lower interest expense. If you did annualized that. Maybe a nickel from Nabisco synergies. And if you go through this math for your growth Projection for next year, there's really no growth excluding that. If you do consider the pension one time, I get underlying OCI growth next year of, you know, perhaps 2%. Maybe I'm doing this math wrong, but it seems to imply a dramatic, you know, increase in your cost of growing your top line when you're not paying down debt. So the math seems to imply you're throwing -- you're reinvesting your money into a low internal projects instead of paying down debt.

I'm not sure I entirely agree with that. Be careful on what you're assuming in terms of the year to-year change in some of the impacts associated with the synergy program. We're doing exceptionally well on that. And we do, in fact, anticipate, as Marla indicated, that the financing costs will come down, and it is going to be a benefit for us in next year.

Okay. Thank you very much.

Thanks our next question is coming from Eric Katzman from Deutsche Banc.

Hello everybody.

Hello.

I guess I have a few questions. So far we've kind of focused a lot on reported earnings, but I guess you mentioned that this pension issue, at least in 2003, is not going to be a cash contribution. Is that true for the out years where you're saying it's going to be incrementally higher? And, therefore, Jim, can you run through what kind of free cash flow growth you're expecting in the business from 2002, however you want to define it, going into 2003? And then, you know, then I'll follow up.

Yeah. Let me make sure I touch all the pieces here. In terms of the pension implication, the way the program works, we don't have and really can't make a contribution to pensions without incurring a penalty because our program, from a funding perspective, is above the minimum thresholds, we actually incur a 10% penalty -- excise tax penalty on making a cash contribution, and we would not have any tax deduction for the contributions we make. So that's not a real attractive proposition.

And given the level of funding that we currently have in those plans, where essentially the qualified plans are the ones that have the assets that back them, they're essentially fully-funded right now. We would have to see a fairly dramatic decline in the overall pension portfolio in '03 for us to have to make a contribution in '04. And while I won't want to forecast that kind of pessimistic outlook, it is very much dependent on what happens with the returns.

So it's unlikely that -- we certainly won't make a contribution in '03. It's unlikely we're see a contribution in '04.

In terms of the cash profile, what we are expecting is our cash in '03, this is operating cash, to increase at a pace that is consistent with our earnings delivery excluding the impacts of the pension and the restricted stock components.

Okay. But -- so if I kind of run through just kind of the rough numbers, right, you have 3 1/2b or so in net. You have about 800 million of D&A, 500m of deferred taxes. You said 1.1b in CAPED, and you have about another billion in dividends. That's kind of like your base for 2002?

Those are directionally correct, yes. But just to give you the specific numbers, it's $3.7b of operating cash, and Marla gave you the $2 1/2 and the $1.6 in discretionary and free cash.

The next question is for Roger. Roger, you know, a lot of us are comfortable or know companies that have large international exposures whether it's Colgate or others, and it seems most of the time when emerging markets blow up like they've done, it takes several years, often, for the dollar, kind of, reported profits to recover. And we're left as dollar-based shareholders to look at volumes.

So I guess, one, can you touch on where do you think Latin America is going in terms of dollar profits based on your experience in the past, how long it takes to recover? And then second, where are you in terms of volumes out of that business? You know, and what kind of recovery time do you see in that?

Okay. Let me start with the volume piece and I'll come back to the earnings side. And you're right, when you deal with regions like Latin America, you have several years of I'm call it improvement, then we governor a lot back as we've seen in this past year in Latin America. We've looked at the data in our business in Latin America over the vast many years, and if you put a trend line to that we're still happy we're there in terms of volume and earnings growth, even though we have setbacks when we have the economic crisis. As you look at the long-term volumes in America, they have been 5% over the last five years or so. And so, we're encouraged by that. And even this year, the crisis, we had some markets do very well in Latin America. On the earnings side, this is where, as we look, as you saw, with our quarter 4 earnings down 43%, obviously, the big contributor of that was, obviously, Latin America.

And I guess as the key -- you know, as the key will be in Argentina to see how that settles out now that the pay so has been fairly stable versus the prior year, and the real wildcard for us actually now is in Venezuela where, basically, as Marla said the first two months of the year, we've basically been shut down. So, you know, I think long-term, we've seen that they do come back and how quickly they come back varies on the economic policy of the company. Brazil impacted in the late '90's and we're already back to where we were before.

Thank you. The last question for Betsy. Betsy, obviously, you know, one of the businesses that you've had a lot of difficulty with in 2002 has been the cheese operation. And you, I think a few months ago announced you were going to try to rejigger pay for performance in terms of slotting fees and other promotional items. Is that kind of directly targeted towards businesses like cheese where there's a fair amount of private label? And what kind of benefits do you think you're going to see or have you seen any since you've implemented that program?

Well, the program you're referencing was really related to new products, so it wasn't related to the cheese business. It was a pay for performance to help get products on the shelf quicker so that both the retailer and we could benefit from new product revenues sooner. So the pay for performance has to do with speed to shelf and how quickly someone gets a product onto the shelf. And we've just instituted it in Q1, and so far we're seeing some pretty good results.

Okay. Thank you.

Thank you.

OPERATOR Thank you. Our next question is coming from Terry Givins of Bear, Stearns.

Good afternoon everyone.

Good afternoon.

In terms, this year, obviously, we experienced a negative spread between volumes and revenues, and as I understand it, some of that is due to foreign exchange. Other is due to commodity, principally dairy. As you look at your three big commodities, dairy, meat, coffee, do you see increases in those? Is that one reason you feel that the spread becomes positive as we move through '03?

I guess I'm asking you to kind of allot that between currency and price increases in those three big commodities.

Well, we have taken pricing on coffee. We are taking pricing on some of our meat items that are being impacted. In terms of dairy costs, they have not gone up yet. They're still low in the first quarter. But in terms of coffee and in terms of meat, we have moved some of our prices up. We have also moved a few items, our cookies and crackers, have been impacted by wheat and cocoa.

And I'll really comment on cocoa which for the full year is up 60% and right now we're sitting at almost new highs with the revolt in the Ivory Coast and so in Europe we have taken pricing on the chocolate brands as well.

As you look at the cheese division for next year, shouldn't we rather significant new funds available to us? I mean, I'm assuming that your cost for cheese '03 are going to be down on a decent level from 02. Is that a reasonable assumption?

No. In that '02 is very row. And if you look at the average price of cheese is more of the 125 to 128 range. We have not had back to back very low years that we can find in the last ten years. So while we don't know what the future will hold in the first quarter is low, our expectation is the cheese prices would rise as the year goes on.

We would expect cheese prices to be higher this year.

For Kraft or for the -- or spot Pricing?

Spot pricing.

Okay. But your cost year on year, '03 over '02, should be down, should they not?

No. Again, I can't -- I don't know what the full year is going to be so it's hard for me to comment on that, but that would not be my expectation.

I guess this one's for Jim. I'll have to brush up on my pension accounting here, but just quickly, we have seen other pier companies put in a cash contribution to mitigate the damage on the pension side.

This penalty you're talking about, does that apply to the contribution itself?

Yes, it does. And essentially if you're in an overfunded position for the calculation that's done for funding purposes, any incremental contribution, you not only lose the tax deduction, but you pay a 10% excise penalty, not just initially when you make the contribution, but every year that you have the excess contribution in play.

All right.

So it's a fairly onerous penalty.

Enough so that it offsets any possible benefit to the P & L, I guess.

And then some, yes.

Okay. That's it for me. Thank you very much.

Thank you.

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

Unlike the prescient Mr. McMillan, I would be one of recommending the snooks recommending the stocks sitting here.

I want to go through a couple of things. Let's drill down on Latin America a little bit and can you give us some basic numbers here of your total Latin American-asia-Pacific OCI, you know, excluding everything, you know, just an operating number? What was Latin America for '02?

We don't have specific absolute earnings by region. I think as you saw, you know the earnings in for the full year were down 13.4% for the last segment.

Let's get real here because this is like this critical missing link in your earnings for next year. I mean, pension, we all knew there was going to be something, your expensing options, that's a couple of pennies, but consensus was 225 going into this. There’s something unaccounted for and you're laying it off on Latin America. So let's get a little more specific, shall we?

Again if you look at that minus 13%, we had good double digit earnings growth in Asia-Pacific, and obviously in the above 20% decline in Latin America.

20% year-over-year? So let's move forward to '03. The magnitude of the shortfall, you have two things going on. You have currency which is I think $16m in Latin America negative for the quarter, right?

For the last segment.

I'm just trying to isolate for, like, should I anualyze -- should I use it for a run rate next year per year quarter?

Again, I think, as you do -- as you look at -- you have to look at exchange rates and when they change by quarter, and that's why Marla said in the first half there will be a greater impact because, again, while the are general Argentine peso devalued earlier in the year [inaudible].

When she said larger in the first half, does she mean that the impact will be I bigger in the fourth quarter or second half?

In the first half relative to the second half.

Right, but would it be -- I mean, we're obviously already into the quarter already. So is that deval -- I mean, I can look at what the currencies are, but I don't know how you hedge and I don't know -- you know.

And this is, where, again, as you look at, you know, the impacts in where we are right now the current spot rate on the peso is 333 and versus one quarter it was down 65% the real is 64 down 53% versus quarter a year ago.

I can look at those. I don't know exactly what your strategy is internally in terms of if you hedge.

Again, we do hedge currencies for transaction purposes, but again as we said before, we do not hedge our translation effects on currencies. So this is any profits as we translate them back would not be hedged.

And in addition to that, you've got this issue where, like, cocoa and a couple of things are in dollars so you have a margin squeeze, right?

We refer it to devaluation in cost increases. [inaudible] They're going up along with the devaluation.

This question came up before, I feel like you're too much on the issue of volume and for some reason not balancing it enough with profits. Because a lot of companies will say, all right, you know, we'll give you to the market share or we'll give up the volumes, and we just want to generate a certain amount of profit. I mean, Kraft always struck me as a company that's so good of being ahead of these commodity things. This is one of your key strengths during, you know, the IPO and everything we've talked about. And yet it feels like you've lost sight of that I don't understand the thinking of not trying to -- because I mean everyone who buys cocoa is buying in dollars. It's not just you.

The primary cocoa we buy in Europe is actually in sterling.

I'm sorry, but everybody is buying cocoa on the same basis, right? That's a world market.

That's right.

So why wouldn't you try and cover those costs?

As we said before, we do take positions on commodities. But, again, it would be a dramatic impact we've seen in cocoa costs and how long it's been you up. This is where the costs start flowing but P&O.

It just seems like there is 10 cents or so missing from Latin Americ and it seems big related to the size of Latin America in your portfolio. I know it's a crisis, I know you couldn’t have predicted it.

And this is one of the factors for where we are.

Can we go back to this $100m you talked about being just sort of negative swing in and what did you say? Did you say pension expense or all benefit expense?

We typically would refer to benefit expenses. Those are post employment expenses, and the dominant factor in there is, in fact the pension plan.

Now, again, I know accounting for pensions are arcane and I tried to do some work on it. I thought the expense you had in the year you're in, it's more a function of your assumptions than the actual returns on those assets. For instance, if you look at general mills, they book an income for pension that relates to their assumptions, but the actuality return, of course, is much lower.

So this $100m negative swing, most of which was in the fourth quarter, I understand it going forward when you reset your assumptions.

Well, the -- be careful we're not mixing things here because when we talk about the 7 cents implication, we're really talking about a look forward into 03, rather than an implication of what we saw in in '02.

So the 7 cents is clear to me. I understand the concept of when you change your assumptions. [inaudible]. I'm talking about what happened in '03, all of a sudden I'm sort of hearing there's this negative --

Sure, well --

In '02. Pardon me.

What happened in '02 is you had some -- you had some of the prior year negative returns starting to average through the asset base. It's called a market-related value of assets, but I don't want to get into the specifics in detail. But as I said earlier, we amount advertise those market changes over four years into the asset base, and it's that amortized asset base that's used to drive the pension calculation in terms of the asset times your assumption. Remember, we didn't change our return I assumptions in '03.

In '02.

In '02 or '03, we're still using the same 9% return on assets. What we have changed, though, in each of the last couple of years is the discount rate.

Okay.

That's gone from 7 3/4, down to 7% last year, it’s going to go to 6.5% as we go into '03.

You're telling us you made a change in your discount rate in to '02?

Yes.

I didn’t know that. I'm sorry.

We said 6.5% is the discount rate we use as we exit '02.

When you say exit ‘02, I thought you meant that's what you were using for '03. I guess I missed somewhere along the line you in '02 dropped your -- okay. Just on the quarter, this decline in corporate expense, I mean, it was a big decline year-over-year.

Corporate experience was sort of by low its run rate because that's part of how you made --

Well, that's not a uniform spending line for us with a little more skewed toward top first half of the year, and there are a lot of factors to go into that in terms of when we have corporate expenses. The fourth quarter saw a little true-up in terms of the full-year basis, and it's slightly -- it's down versus some of the other quarters. That's just truing up the full-year numbers.

What's our number for the next year?

Next year that number is expected to increase with inflation. It might go up a little bit more as we build some more -- we've made some changes organizationally at Kraft, but we've added some corporate resources, and we announce those separately with HR and with strategy, and those are expenses we'll absorb at the corporate level, basically a shift out of the operating units into corporate. So that number will go up a little bit in terms of an aggregate number for next year.

And a last point, I'm sorry to no monopolize, but this is our only shot at your right now. Roger, Betsy, do you really feel as good as Marla's chipper reading of this script? I mean, because, based on the e-mails I'm getting from your shareholders while this call is going on, I'll tell you, not a lot of people out here feel really great about this outlook. And again, we totally understand, you know, Latin America pension and stuff like that, but when it comes down to it your OCI growth in the quarter was extremely poor. Your volumes are still good for next year. You've got incremental synergies, but, I mean, it really doesn't play that great to the rest of us. And, I mean, do you get that? To be blunt.

Yes, I mean, I think we feel good about the fundamentals of the business, we delivered 3% volume, we delivered 15% EPS. If you look at the fundamentals of the business that we're projecting for 2003, it's 3% volume, and very challenging economics -- I mean, if you look at other food companies, they're averaging -- not beverage, but food companies are averaging 1% volume growth.

I'm aware of that but --

In challenging times, if you look at the 4 1/2% impact on what we're projecting, you're looking at, you know, 8 1/2 to 10 without those uncontrollable factors.

We are in a different pension situation than some of our peers. A number of them are unfunded, and we do feel good about our cash situation.

Okay, I guess.

OPERATOR Thank you. Our next question is coming from Christopher Growe of AG Edwards.

First question is on the pension. As I understand relative market value correctly, you know, the next three years could be very difficult given your absolute return in the past three years. But we knew that at the start of '02; is that correct?

Well, we knew some of that at the start of '02.

We certainly didn't have that assumption built in or for the asset returns we saw in '02.

Okay. And also unamortized loss.

And also the discount rate changed.

That's what I'm saying. Okay. Based on your return for '03, I know this can vary, but you may be forced to make a contribution in '03. Is that correct?

No. Right now, we are overfunded from that basis, and we will -- it's highly unlikely --

Okay.

-- we'll have to make any cash contribution in '03, and it's remote that we'll have to make a cash contribution in '04. But again, that's going to be dependent on how the market performance during '03.

Right. And then, a question I guess for Roger in Latin America, would you consider your business, let's say, at a greater disadvantage to your competitors in any way due to how you source your inputs.

No, I think, again, as you compare it versus our competitors, since we're in chocolate and biscuits, obviously in powdered beverages, many of those are in commodities that are dollar-based, or dollar or sterling-based, for instance, on cocoa or on the wheat. And, so, again, I think versus any competitor, it depends on the mix of the product that they're selling and you see more or less impact in Latin America depending on the categories you're in.

So I guess to answer your question, we are in categories that have many nonlocal based costs in them.

But you're saying as well that a lot of your competitors are in the same situation, correct?

Yes, I do.

Okay. And I guess this is more to Betsy. Do you have volume expectations for the categories or the products in which you raise prices, such as Nabisco, such as coffee in 2003?

Well, we don't give out specific categories, but we have tried to incorporate what we believe the volume impact of pricing will be in the projections that we've just given you.

Directionally, would you say that for those categories either up and down in which you've raced prices?

We would expect a little bit of volume impact in the categories where we've raced prices. We've also tried to keep your marketing strong and to accellerate our new product innovation to help offset any pricing impact.

These costs are common to industry costs, so we are seeing other competitors raise their prices reflecting those same costs.

Sure. And if you could just remind me how much marketing was up the fourth quarter in the full year? Did you give those numbers in the prepared comments?

Our full-year total marketing was up in the mid single digits.

And how much for the fourth quarter?

We didn't actually provide a fourth' quarter number.

Can you?

It was up as well.

And then just my last question would be on the commodity front, an I know you've taken some price increases as we just talked about, but would you say your outlook for 2003 from commodities from say gross margin impact at least accounted for in some of these price increases or do you anticipate continued declines in your gross margin? Or say pressure in your gross margin?

We think we've captured where our forecast is on the pricing and the activities but that depends on where top commodities go. They're coming off of some relatively low positions in '02 on some of the key commodities, like dairy here in the U.S, and coffee on a global basis. Cocoa actually ran during the course of the year. And in the case of wheat, it did go up in the fourth quarter but started to moderate some of its increases late into December and into January.

We can account for of course is your hedging programs. I'm trying to get what toll expect for the year based on sort of as you see it today?

Well, we don't give out any information on our overall hedging position or whether or not we've covered a --

I mean, but our strategy is to manage our margins.

But on the commodities that are more volatile such as coffee and cheese and meat, we tend to flex either our pricing or marketing spending or trade spending to help accommodate the ups and downs of the commodity.

Thanks very much.

OPERATOR Thank you. Our next question is coming from Johnathan Feeny of Sun Trust.

Hey everybody.

Hello.

Of about the 3% volume guidance next year, how much of that -- baked into that is potential acquisitions, and how do you use the acquisition pipeline look this time this year versus this time last year?

We have not built in any future acquisitions into that number.

So we're to understand that about 3% volume guidance does not include any tack-on acquisitions at all?

In terms of new acquisitions, no.

But there is some carry-overimplications.

Obviously, in Cardita that we bought in end of quarter 3, there would be some carry over impact for those acquisitions in terms of new acquisitions that's correct.

OPERATOR Thank you. Our final question is coming from James Morris of Utendahl Capital Partners.

Good evening.

Good evening.

Roger, I was wondering if getting away from the macro environment, if you could talk a little bit how the competition has changed in the international markets and how you are responding to those changes if at all?

Again, our competitors have category by category, obviously in the world its coffee, on a global basis its, Sara Lee Nestea and ourselves. You will find all of us continue to compete very aggressively and continue drive our businesses on a global bases. So I don't see any major changes to continue to do what we're doing obviously in the world of chocolate, we're very strong in Europe and Latin America.

Again, competitive set and everyone focused on driving innovations in that category.

Obviously in biscuits, this is where, again, where we've seen tremendous growth outside the United States with biscuits in the developing market and again, because it's a market where there's just a lot of opportunity from, I'll call it a local brand that we can source it and drive it into our premium brands, and I think that's true for us and our international competitors.

So no major shifts competitively across the key category.

And Betsy could you give us some color on the confectionary business.

The confectionary business in 2002 was one of our challenge business.

We particularly in breath freshening and in some of our hard candy have Had some aggressive competition. We feel good about the lineup of products for 2003. We did see in th Q4 Altoids rejuvenated with Altoids Sours and Spearmint. We have Altoid strips coming this year. We have a terrific product coming up this year. We have mini life savers in a neat plastic package shaped like a life saver.

We have got Jell-O pudding bites coming which are a dairy snack.

A pouch snack which are similar to Fruit Snacks that will be great snacks for kids.

So we feel good about the lineups of new items we had in 2003.

Thank you very much.

Okay. That's all the time we have for questions today. Thank you for your participation with us this afternoon. We look forward seeing many of you at the CAGNY conference we'll present on February 19th in the afternoon. Thanks everyone and have a good evening.

OPERATOR Thank you. This does conclude the teleconference. You may disconnect your lines at this time and have a great day.