億滋國際 (MDLZ) 2003 Q1 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Kraft Foods first quarter 2003 earnings conference call. My name is Holly, and I'm your conference call operator. Today's call is scheduled to last about one hour, including remarks by Kraft Foods in the question and answer session. In order to ask a question, please press one followed by four on your touch-tone phone. I'll now turn the meeting over to your host, Mr. Mark Magnesen. Please go ahead, sir.

Thank you. Good afternoon and thanks for joining us for Kraft Foods first quarter 2003 conference call. I'm here today with James Dollive, CFO, and Marla Gottschalk, Senior Vice President of Finance. Earlier today, we issued our first quarter earnings release, which is available at www.kraft.com. I remind you that our remarks today contain predictions of future results and are made only as of today's date. Please refer to our safe harbor statement at the end of our release for a review of some of the factors that could cause actual results to differ from our projections.

I'll open with a few remarks on our reporting format, then Marla will take you through the details of our first quarter results. We will keep our comments brief to leave the majority of the hour for your questions. Those of you listening on our Web site and media representatives are in a listen-only mode. As indicated in our earnings call advisory, we will not be discussing our financial results on a pro forma basis. Only volume, which is not a financial measure, will be discussed excluding the impact of businesses divested in 2002, to provide a consistent year to year comparison versus our earlier guidance. These changes are being made to comply with regulation G, which was recently issued by the SEC.

By now you have probably noticed that our press release financial statements and supplemental schedules use a new format. This format provides you with more details on our reported results. Also beginning this quarter, we made a minor shift between reporting segments with the Canadian biscuit business moving from the biscuits, snacks and confection segment to the cheese, meals and enhancers segment with the rest of our Canadian business. A reconciliation of the volume, revenue and OCI impact of the shift is included in the press release.

One final point. We understand will you have questions related to the litigation involving Philip Morris U.S.A. and potential ramifications for L3 (ph) Group and Kraft. It would certainly not be appropriate for us to comment directly on the case itself, so we will not be addressing the specifics of the litigation. We are, however, open to questions on the potential impact of the case on Kraft and our credit rating. As you may know, Altria a will be holding its quarterly conference call tomorrow morning at 9:00 A.M. eastern time and it is accessible through Altria.com (ph). With that, I'll now turn it over to Marla for a discussion of results.

Thanks, Mark, and welcome, everyone. Overall, the first quarter unfolded pretty much as we expected. The shift of Easter to the second quarter this year and the national strike in Venezuela slowed our volume growth. While trade inventory reductions were more than expected in the first quarter, our results were still in line with expectations, and we're on track to deliver our full year projections. Here are the highlights for the quarter.

Net earnings of $848 million and diluted earnings per share of 49cents were both up more than 22 percent versus prior year. Operating company's income, or OCI, was up 13.6 percent, with a year to year comparison benefiting significantly from separation costs and integration charges we incurred in 2002. Net revenues were up three percent. Discretionary (ph) cash flow was $95 million, up $74 million versus prior year, and volume was up .1 percent on a reported basis, and up .9 percent excluded businesses divested in 2002. Together, we estimate the combination of the Easter shift, trade inventory reductions and results in Venezuela reduced our volume growth by nearly two points.

Looking more closely at these results, our 22.4 percent growth in net earnings was driven by OCI gains as well as lower interest expense resulting from debt refinancing and lower short-term rates. Our first quarter tax rate was 35.1 percent, down slightly from 35.5 percent in 2002. We expect our tax rate to hold at 35.1 percent for the remainder of the year. Our OCI growth of 13.6 percent was driven by several components. The largest, as I indicated, was the absence of the separation costs and integration charges that were in our 2002 results. Together, these items totaled $169 million in the prior year, accounting for12.5 percentage points of this quarter's OCI growth.

OCI was negatively impacted by several items we've talked about before, including higher benefit costs, primarily related to pensions, and the difficult conditions in Latin America. We expect the Latin America Asia-Pacific segment OCI to be down again in the second quarter with improved results projected in the second half. Our productivity and synergies programs remain on track. We continue to project 140 to $150 million in incremental synergy this year, which will largely be used to offset higher costs and for select reinvestment in the business. OCI results also reflect higher selling prices net of cost increases, and a net currency benefit of $6 million. Most commodities moved higher in the quarter, including coffee, cocoa and grains, though U.S. very dairy costs remain low, driven by continued growth in milk supplies.

Turning to our top line, revenues were up three percent. As we indicated when we gave our initial guidance in 2003, revenues are likely to grow faster than volume throughout the year. This quarter, revenue growth was almost three points higher than volume due to two factors. First, the net currency impact was favorable, providing 1.1 points of benefit as the strength of the euro and other currencies against the dollar was only partially offset by weakness in Latin American currencies. And second, we began to realize the impact of pricing actions we took to offset higher commodity costs and currency devaluations. Over the past six months, we've taken pricing on coffee, chocolate, biscuits, cereal and meats, partially offset by lower net pricing on cheese.

Which brings us to volume growth. As a reminder, reported volume growth was up .1 percent, and volume excluding the impact of businesses divested in2002 was up .9 percent. The schedules in our press release reconcile the impact of the divested businesses by segment. For better comparability, we'll focus the remainder of our volume discussion on the growth rates excluding divestitures. Our overall .9 percent growth was driven by a 1.4 percent growth in North America, partly offset by a .3 percent decline internationally. New products continue to play a key role in driving growth across our businesses. On the quarter, tack-on acquisition represented one-tenth of a point of growth.

In North America, the 1.4 percent increase in volume was supported by solid consumer take-away. Pound consumption for the 12 weeks ended March 22nd and our top 25 U.S. categories including Wal-Mart was up over two and a half percent according to Nielsen data. Nielsen data. The key businesses driving growth in North America were beverages, cereal, pizza, meat, and food service. Beverages drove strong 5.1 percent growth for the beverage, desserts and cereals segment as we successfully launched Capri Sun sport while maintaining momentum on Kool-Aid Jammers and base Capri Sun. Also on this segment, cereal had a solid quarter despite a tough competitive environment.

Pizza had a very good quarter, commanding strong volume and revenue growth with continued share gains. Pizza share was up more than a point in the quarter, building off of our 1.2 point gain for the full year 2002. DiGiorno's deep dish pizza is now distributed nationally and was a key driver of our volume gain. Oscar Mayer posted a good quarter behind the launch of new Lunchables fun fuel, and growth in bacon, hot dogs, and Boca meat alternatives. Together, these businesses drove Oscar Mayer and pizza segment volume growth of 2.3 percent, and revenue growth of 4.5 percent.

We also had a good quarter in biscuits with solid revenue growth. As expected, volume was down due to trade inventory reductions and a planned shift to lighter weight new products with higher revenues per pound. For example, double delight Oreos and go pack (ph) product lines are generating higher revenue realization versus their base product lines. Cracker consumption growth was solid on the quarter, behind our Triscuits, Wheat Thins and Kraft Cheese Nips product lines. Also, our core biscuit trade marks, Oreo and Chips Ahoy all achieved new all-time high market shares this quarter.

In confections like in biscuits, revenue growth also outperformed volume growth. Here again, new products are focused on higher revenue per pound items. The most notable example being Altoid Strips. For both confections and biscuits, we expect a favorable mix shift to continue for the remainder of the year. Our share results in non-chocolate confectionary were very strong on the quarter, up over two points behind the momentum of new products Altoid Sours and Creamsavers soft candy. In addition, our domestic food service business delivered strong results led by growth in national accounts, despite a difficult operating environment for the food service industry.

Turning to our international business, within EMEA, we saw continued strength in central and eastern Europe, Middle East and Africa for CEMA (ph). CEMA (ph) had strong growth in beverages, both coffee and refreshment beverages, as we continue to leverage our infrastructure in this fast-growing region while expanding our product offerings. The integration of the Kar Gida snack business in Turkey is on track, and we continue to see strong growth from Stollwerick (ph) Confectionary in Russia and Poland. We also saw solid gains in Asia-Pacific behind cheese pros (ph) in Japan and biscuit gains in Australia, China and southeast Asia.

The progress we made on volume across most of our businesses was partly offset by three factors. The first and largest was the shift of Easter from the first to the second quarter. While it's difficult to be precise in calculating the impact of the Easter shift, we estimate that it was over one percentage point of volume growth. This shift affected many of our businesses with the biggest impacts being on the Cheese, Meals and Enhancers segment, which has many all-family ingredient and meal products and our international confectionary business, given its seasonal products. Importantly, we expect to see this reverse in the second quarter.

The second factor was trade inventory reductions, including the impact of customer bankruptcy filings. As you would expect, in these tough economic times, many retailers and distributors continue to aggressively manage inventory levels down. Specifically, for Kmart and Fleming, lower inventories, store closings and more restrictive credit terms during Q1 all impacted volume. Fleming and Kmart are both valued customers for us. We continue to work very closely with them through their bankruptcy processes and continue to ship product to them under appropriate credit terms.

Importantly, we believe our exposure on receivables is limited and manageable within our existing reserves. With regard to trade inventory reductions overall, we believe we have them appropriately planned for the full year, but our plan had them occurring more evenly throughout the year versus the skew we experienced in the first quarter. We will continue to monitor the situation on customer inventories closely as we manage through the year.

The third major factor we faced in Q1 was a difficult operating environment in some international geographies. Most notable was Venezuela, where the economy virtually stopped for an extended time due to a national strike. We also experienced volume softness in other Latin American countries due to our pricing actions last year to offset higher cost from currency devaluations. These issues coupled with the Easter shift drove a 2.3 percent decline in volume excluding divestitures for the last segment.

Beyond these macro factors, me briefly address results for our U.S. cheese business. First quarter cheese volume was down versus prior year, as growth was significantly impacted by both a shift in Easter and trade inventory reductions. However, we are beginning to regain momentum. Merchandising was stronger, our price gaps are on target and construction trends improved in several key categories. Several new products, including natural cheese cracker crusts (ph) and new flavors are getting good distribution and performing well. While we are still not where we need to be on cheese, the first quarter was clearly a step in the right direction.

So to summarize our volume results, the quarter was essentially in line with our expectations despite the combined impact of several macro factors that made for a challenging environment. While some of these factors such as the Easter shift are timing-related, others, such as customer inventory reductions, could have an impact on the second quarter as well. Given the situation, we expect first half growth of two to three percent and remain comfortable with our full-year projected growth of around three percent.

Let's now shift to first quarter cash flow results. I should point out that our first quarter is historically our lowest cash generation quarter because of the working capital seasonality of key businesses. I point this out because the first -the small first quarter base makes growth on a percentage basis less meaningful, so I'll talk cash flow in absolute dollars. In short, first quarter discretionary cash flow or operating cash flow less capital expenditures was $95 million, in line with our expectations and up $74 million from Q1 2002. Discretionary cash flow reflects $220 million in capital spending for the quarter. We continue to project 10 percent plus growth in discretionary cash flow for the year. Our use of discretionary cash during the year will continue to focus on debt reduction, acquisitions, and dividends subject, of course, to our board's approval.

I'll briefly review the status of each. In terms of debt, our overall debt marginally increased during the quarter by $.3 billion. Kraft's total outstanding debt balance as of March 31st was $14.7 billion comprised of $2.2 billion in short-term borrowings and @12.5 billion in long-term debt. Within these components, our debt with Altria was $2.8 billion, down $.6 billion versus the end of last year as we've refinanced the remaining portion of our seven percent note payable to Altria.

As you are aware, recently the three major credit rating agencies, Standard & Poor's, Moody's, and Fitch, lowered Kraft's rating, which remains on credit watch with negative implications. These actions were the result of similar actions on Altria due to a bonding requirement on Philip Morris USA involved with the tobacco class action lawsuit. Kraft is not a party to this litigation, and we believe our assets and cash flow have no exposure to its resolution.

As a result of these rating actions, Kraft is currently unable to access the commercial paper market. As of March 31st, our outstanding commercial paper balance was $2.6 billion, with maturities ranging from one day to 108 days. Because of the upcoming maturities, as well as normal working capital needs, we accessed our revolving credit facilities and, as of April 15th, we have drawn down $1 billion on our revolvers. Borrowing rates on our revolvers are approximately one percentage point higher than the commercial paper rates available to A1-P1 rated companies, our previous rating. Despite this increase in short-term borrowing costs, we remain comfortable with our previously communicated interest expense guidance, which is a mid single digit decline versus 2002.

Acquisitions are our second priority. While we did not complete any major transactions during the quarter, we did acquire the Family Nutrition Company, a leading producer of biscuits and snack cakes in Egypt, on April 8th. Family Nutrition has annual revenues of approximately $40 million and provides us substantially improved scale and distribution capabilities in Egypt. Here I'd also like to mention a divestiture we have in progress. On April 3rd, we announced a preliminary agreement to sell our retail rice business in Germany, Austria and Denmark which includes the Rice-Fit and Rice-Fix brands. The proposed sale of this business, which has annual revenues of approximately $27 million, reflects our ongoing strategy of focusing on our core brands.

Turning now to dividends, we declared a regular dividend of 15 cents per share in the quarter. As a matter of course, our board has established the third quarter as a time when it considers changes to our dividends. Our long-term objective is to increase dividends in line with our projected10 percent-plus growth in discretionary cash flows. Also during the quarter we repurchased 2.7 million shares at a cost of $83 million under the previously announced $500 million share buyback program. With total repurchases of $253 million, we now have completed just over half of this program. As a reminder, these buybacks primarily offset dilution from employee stock compensation programs.

While our priorities for the use of cash have also not changed, if the credit rating agency's actions continue to impact our access to the commercial paper market, we may target more of our discretionary cash flow to reduce the draw-down on our revolver. In conclusion, Kraft's first quarter results were in line with our expectations and keep us on track to deliver our full-year projections. We are reconfirming our full year EPS guidance of $2.10 to $2.15, a seven to 10 percent increase over2002. That completes our prepared comments. We'd now be happy to take your questions.

Thank you. As a reminder, the floor is open for questions. If you do have a question, you may press the numbers one followed by four on your touch-tone phone. Our first question will becoming from Eric Katzman of Deutsche Banc.

Hi, good morning ...

Good morning, Eric.

... or afternoon, I should say. I guess a few questions. Can you - Jim, can you walk through a little bit more in terms of the cash flow since we don't have it? Like what was depreciation and amortization, and if we - how do we kind of account for, I guess, excluding the - you know, the non-cash cost of the pension in your earnings to get to a truer cash flow number?

Well, let me go through the pieces of what's changing in the cash flow. As Marla indicated, our discretionary cash flow for the quarter was just under $100 million. Within that, the depreciation number, and this is depreciation and amortization, was 193. She also gave you the capital expense number at 220, or the capital commitment number at 220. Within that mix, what we've seen is good earnings-driven cash, but we also had an increase in our working capital requirements.

Specifically, our inventory levels were up on the quarter versus year-end. Some of that is seasonal-related, but a good piece of it is also related to some raw material purchases we've done, given we have some low cheese costs, we're taking advantage of that, as well as some of the increases in commodities such as cocoa, where we've seen those march up as well, and the other piece that affects the inventory, the finished good increased, and that's by a couple of things.

First, it's driven by the fact we have some facilities closing as part of the integration process and we need to build inventories in support of that. We also have some new items that we're building inventories for, but in aggregate, my own feeling is we're a little high in the inventory levels and we've got specific programs in the organization we're going after to bring that balance down. In aggregate, I feel very good about where our cash flow is. You know, we're up very nicely versus year ago, we're well on track for the objectives that we set for the organization, and there's throughout the organization a commitment and a focus on making sure we deliver the cash.

OK, and then another question is - just in terms of the top line, I appreciate all of the details that you gave, but just one kind of, I guess, factor is mix - you know, are you willing to kind of break down what price versus mix was?

Well, the key - mix was not a real big factor for us during the quarter. The big factors are the ones that we've identified on the difference between the volume growth and the revenue growth, and here we have to look at the reported numbers, the .1 versus the basically three percentage points. The currency piece is factored in that, and have you that in the press release. The other piece that was a big factor in there are the pricing initiatives that we took during the quarter, and those are primarily in support of some of the commodity increases we've seen, domestically and internationally.

And is the promotion which is now, you know, obviously on the top line, is the change in promotion year over year, was that a benefit, and is that farther of part of the price component?

It wouldn't normally be part of the price component. It was not a significant change in the Q1 performance numbers.

OK. All right. I'll leave it up to the rest. Thanks.

Take care, Eric.

Thank you. Our next question is coming from David Adelman of Morgan Stanley.

Good afternoon.

Hi, David.

Let me start with some financial questions. The absence of access to CP, is that correct because of the threat by one of the agencies that they may downgrade you to non-investment grade status?

Well, it's simply that right now, the investor community has chosen not to hold our commercial paper, and so really, as soon as the demand is there, it will get back into the commercial paper market, and it's the reflection on the fact that, you know, some agencies, in fact, all of the agencies have taken our credit down a notch and they continue to have us on negative watch.

The comment about using the discretionary cash flow to pay down revolving credit, is that would have gone to pay down the inter company loan, or is that cash flow that would have gone to other uses?

I think I'd be hard-pressed to say it's going to be one versus the other because we'll continue - our objective is to continue to use our cash in a way that's going to drive maximum shareholder value, maximum returns. We have to recognize that in the interim, we may have a need to bring down our revolver balance if we are going to be excluded for more than just a short period of time from the commercial paper markets. I am hopeful, though, that we do get back into the CP markets.

If you don't have access to CP, Jim, do you think the spread versus for bank credit facilities versus being A1P1 will widen from the 100 basis points it currently is?

No, I do not. I think we're pretty good at the100 basis points for the balance of the year in terms of a forecast.

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

Good evening.

Hi, David.

Just to start with, a clarification. Where you break outgrowth within OCI, I see 12 million coming from operations or about 1 percent growth. Does that include synergies?

Yes, it does.

Yes.

And you had about 140 to 150 of synergies for the year.

Right.

Do you break out how much of that was in this quarter?

Well, we haven't given a specific number on that. The number for the quarter - and I don't have a problem giving you the number for quarter in there - is about 30 million, and we still are pretty good with the 140 to 150 range. As I said earlier, you know, to a different question, we do have a major facility closure coming up, and that's going to help deliver the number on the year.

OK. Just to go to the credit rating issue, kind of bigger picture, given - I guess if you could comment, please, on how it may affect your access to debt markets, and maybe, therefore, your ability to grow via acquisition, which has been obviously a pretty important part of your business model.

Well, in terms of the tack-on acquisitions, which is what we've been doing for the last couple of years, I'm not - I don't think this will have much of an impact, if any, in terms of our being able to fund those tack-on acquisitions that have helped the business and have been quite good for us. You know, we've had some terrific results on some of the recent initiatives that we've done both with Stolework (ph) in Russia, Lanes (ph) in Australia, the Kar Gida business in Turkey and most recently the Family Nutrition business in Egypt. So all of those are off to a good start, and I think we'll be able to continue to fund those kind of initiatives.

But to grow, you know, the top line three to four percent, won't you need to do some bigger ones at some point?

No. With top line targeted Valium growth around three percent, what we've said is historically we've gotten about a half a point out of those tack-on acquisitions, and that's exactly what our forecast is based on, continuing to follow our business model to generate the productivity that allows us to reinvest back against the business, new product initiatives, and then the tack-on acquisitions a half a percentage point that gets us up to that around three percent.

If I could ask one last question, marketing and administrative costs were up to 20.1 percent of sales from 18.8 percent last year. Could you comment on the growth there?

Well, I'll start and ask Marla to jump in because she warned me this one was coming, pressure (ph). Well, some of that is going to be the international implications as the currency - as the dollar has weakened relative to the international markets, and that's a couple of points of change associated with that improvement. The pension and some of the benefit programs that we've talked about previously, a portion of that shows up in the variable cost line - or excuse me - in the cost of goods line. The balance of it shows up here in this line, and that's about a couple of points.

There has been some minor cost shift between the fixed lines and variable lines worth about three points, so that's not a very big deal. And I think that pretty much gives us the bulk of this. Marla, have I missed anything in there?

No, but maybe to directly come back to the marketing side of it too, marketing was essentially flat for us in that line.

Flat as a percent of sales or in absolute?

In absolute.

Great. Thank you very much.

Thanks, Dave.

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

Good evening, everybody. Happy tax day.

Hi, John,

This was a little less taxing than maybe I feared.

We'll take that as a compliment.

Well, it was meant as one. My only criticism, because I couldn't - we miss Jaine Mehring (ph) at these times. My only criticism, if you're going to talk about volumes excluding divestitures, you really have to publicly give volumes excluding acquisitions and divestitures. I know we're only talking about 0.9 going to 0.8, but that's - just a comment. It was just 10 basis points?

That's right.

The reasons for the lower tax rate, Jim? I didn't hear it.

We didn't really say specifically, but it really gets down into the mix of where we have our tax components between the international, the state components, how it all adds up so we're down four-tenths of a point versus the average we had last year. As Marla indicated, we do expect that to be the balance of our rate for the rest of the year.

I was thrilled to hear Marla cite enthusiasm for cheese getting better, and I don't want to just look at Nielsen numbers and pretend like I know everything that's going on, but I don't know, I continue to see private label gain, and if you could just kind of go on to more reasons why you were encouraged by first quarter cheese performance?

Let me start and I'll ask Marla to jump in as well during the course of the discussion. We are actually encouraged by some of the progress we're seeing in cheese. Most importantly the price gaps are in the ranges that we target them to be in, so that certainly puts us off on the right foot. The thing that has affected cheese in this quarter, I think, quite notably was the Easter shift, given how strong a holiday promotional period that is for us ...

But doesn't that hurt private label cheese too? As I kind of just sit here and look at your share trends in the accounts that I can monitor ...

Sure. I would argue that depending upon the strength and the emphasis of our promotional programs, because that is a heavily promoted holiday for us, that we get a little more of an impact than I think you'd see on the private label piece. And also the data that you're looking at I suspect includes some of the alternate channel components, which do have a fairly sizeable impact in changing the numbers. Typically it's two to 2.5 points of consumption growth between the data with and without that effect. Marla, did I miss anything in there?

No, I mean, the other thing, John, I would just add is, you know, some of our new pro products have gotten off to a nice start so we feel good about those and we think the trends are going in the right direction, but I think I did say - and I probably would just repeat that it's not exactly where we want it to be. I mean, we feel like we're making progress, but I wouldn't say by any stretch of the imagination that we feel we've gotten all the way there on the cheese business, and we're going to have to continue to work on that quarter by quarter to get the results back up to where we want them to be.

And I actually feel very good about the programs, John, that we've got targeted for the second quarter.

Great. Thanks a lot.

Thanks, John.

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

Good evening.

Hi, Andrew.

One thing that you didn't mention but I was curious about, did some of the higher pricing that you've put through in some of your categories also impact volume, maybe somewhat negatively in the first quarter? And if so, any way to quantify that, and do you see that starting to perhaps reverse as you've gotten into the second quarter?

Well ...

I know it's hard to quantify it but ...

It's hard to put a handle on that ...

... some of the data kind of suggests maybe like in cereal, that's the case.

I would say you could look at the categories for a couple of specifics. Probably in coffee is where you're more likely to see that effect where the category has had a pretty good decline with the price increase that was taken. Cereal, as you indicated, is another one, but we also took price increases on cold cuts, where we sue an impact, biscuits had a price increase, and all of these are price-justified based on the underlying commodities. Yes, there's been a little bit of an impact on the category consumption trends. But to your last comment of have we seen it come back, it's awfully hard to tell with the data right now because the Easter shift is in this early read on April, and I'm actually encouraged at least the first two weeks worth of trend that we're seeing to validate, in fact, there is a bit of an Easter shift.

I would just add in terms of internationally, the chocolate increases we took were so late in the quarter, it's just too early to tell there.

OK. And then I think Marla in her opening remarks mentioned - she talked about obviously inventory trade deloading, but did she also say it was fairly significant in the biscuit arena?

Well, biscuit is a direct store door delivery business for us so the impacts are not that significant. It varies by category. Some businesses actually had higher inventories, particularly those who had significant new product launches during the quarter.

I thought I had heard her say biscuits. That's why I didn't understand it.

No. Businesses like cheese and our enhancers businesses were ones that we saw some fairly sizable inventory declines on.

And then just lastly, a number of companies have started actually to talk about potential for significant rises in advertising costs year over year as we go into next year. I don't know if that's something that you've kind of contemplated yet or how that fits into sort of your plan at this point.

Are you talking about our 2004 indications?

Correct.

It's a little premature for us to be talking about 2004 right now. I think what we'd be doing is looking at what we need to do to support our businesses to drive the top line volume growth and to make sure we're supporting the franchises.

OK. Thanks very much.

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

Good evening.

Hi, Chris.

Hi. Just a couple follow-ons here. First as you talked about cheese, it was a good explanation. My question is, as I understand it, as commodity prices go up, your business should benefit from that over time as private label has to adjust their pricing accordingly as well. Is that a fair assumption?

I would say that's a reasonable assumption.

Is there an expectation for that, say, later in the year for this year?

I'm not going to get into a specific forecast on cheese, but historically, cheese prices have tended to move up with the sort of mid to latter summer period.

OK.

Now, I don't know if this year is going to follow that same pattern. I'd caution people to bank on that, but that has been the historical trend.

I'm just curious of the competitive conditions in biscuit. I think you addressed the price increase and the effect that's had on the business, but it looks like from the data that we see, that the - keep Keebler is having a little bit of trouble, what you see going on in the biscuit category today.

Well, I'm not going to talk about competitors in our call, but I feel very good about the progress that we've made on our business, you know, the new items that are out there, as Marla indicated, our core cookie businesses in particular are having another great year. The cracker category is doing quite nicely for us right now. And, you know, one of the things that has impacted our biscuit business to some degree, and this is sort of a follow-up to a question asked earlier, there have been some store closings, you know, with some of the customers that we have, and that has affected our inventory levels to some degree.

OK. And then just two other quick ones. In terms of your new product flow for this year, is it skewed, to say, the first half or second half, and do you have an estimated size of that for 2003?

It's a little bit skewed more toward the back half, but not that significantly. Just slightly skewed. And we feel great about our new product lineup. I think you know that.

I do. And you don't have - an expected size for it in terms of new products for the year?

Last year it was one point 1 billion in terms of the overall - I think what we said and I still stick to this, we expect to be about a billion dollars or so in terms of impact of new items. The way we measure that are those are items that have been in market for 12 months or less during the year.

OK. And then my final question was on interest expense for the year. You said a mid single digit decline. I'm guessing that's got to assume that rates are going up later in the year?

Well, as we indicated last time we had one of these discussions, we did, in fact, plan interest rates, short-term interest rates to start to ratchet up later in the year. You know, and right now, I'd stay with that forecast given where we are with our credit situation in terms of our access to the CP market. It just wasn't smart enough to know that we'd be the only one that would have the short-term interest rates going up.

OK. Well, I appreciate that. Thank you.

Thanks, Chris.

Thank you. Our next question is coming from Terry Bivens of Bear Stearns.

Hi, everybody.

Hi, Terry.

Just a couple of quick ones here. Just in terms of your commodity expense for the year, you mentioned we've taken some price increases, pretty much Coffeemate, I guess, cocoa. What are you looking at Jim, in terms of commodity expense being up or down for the year in terms of gross margin line?

Well, it's really going to - it's hard for me to give you a specific number on that, and I'm a little hesitant to give you any details on that. But what I will say s the key commodities for us, and let's go through these sort of one by one, just to make sure we tick them off, dairy is lower - much lower than it was last year. I think the barrel market right now is, I believe, like 1.06, whereas a year ago, it was like 1.22. So that's been down, and that should cause a net decline year over year in the U.S. dairy component.

Coffee, which is a global commodity for us, coffee started to move up, so there will be some increase in coffee prices assuming that the trend is up, although in the last week or so, it started to come down again on the New York C market and it's now worth under 60 cents. The other big commodity is cocoa, which has gotten a lot of media attention, and cocoa prices are up fairly substantially on the order of 25 percent versus year over year. So it really is going to vary by business, and that's the way we manage it. We manage it by business, and we adjust our pricing and our promotional programs accordingly.

As you look at the calculus of it, though, would you expect your pricing to be at least on par with the rate of increasing commodities?

That's typically what we do. We don't try to leverage commodity increases by a higher increase in pricing. That's not how we build margins. Our business model is to build our margins through our productivity initiatives and by driving volume.

OK. And for what it's worth, the cheese experts out in Wisconsin are still calling for, you know, pretty good increase in raw cheese prices in the second half, so I think that continues to bode pretty well. One last question. On the trade deloading, is it still then - I mean, I've always looked at Kraft as kind of a one percent a year sort of trade deload effect. Is that still what you're looking at that would imply, of course, less deload as we go through the next several quarters? Is that a reasonable way to look at it?

That's sort of a direction in which we planned. It's in that range. And as Marla indicated with some of the store closings with some specific events by customers, we've seen a little more of a push here in the first quarter, but we think on the year, it's appropriately covered.

OK. Great. Thank you very much.

Take care, Terry.

Thank you. Our next question is coming from Bill Leach from Bank of America Securities.

Good evening, everyone.

Hi, Bill.

I just wanted to clarify the benefit cost increase. Would that be roughly two cents a share in the quarter?

Well, what we said, and we're talking hereabout benefit costs primarily pension and some of the other post employment costs. What we said was in the year, there'd be seven cents of an impact. During the quarter what we saw was about a penny a share impact, and our expectation is one cent - one cent in quarter one and two (ph) cents (ph) in each of the remaining quarters.

And is that reported on a divisional basis? It's not in corporate, is it?

No, it actually gets reported where the employees are, so it spreads out globally not just in the U.S. business but some of the international businesses as well.

OK. Another question I had is based on your first half expectations, it sounds like you're expecting second quarter volume to be up three to four percent. Is that right?

What we said was the six months volume would be in the range of two to three.

Two to three.

Right, but since you're only up one in the first quarter, you'd obviously have to be up a lot more in the second quarter.

Yes. Some of that's the reversal of Easter, obviously.

Lastly, Latin America that be down almost 50 percent the last two quarters. Do you think it will be that bad in the second quarter too?

Well, thank you for asking. One of the big impacts that affected us in Latin America, and it was the largest impact, was the situation in Venezuela. And specifically, that's where the national strike closed down our operations and essentially our business for what amounted to the equivalent of about a month's worth of business. Venezuela is also a site that we use, they have a couple of large facilities in there, to supply product to other parts of Latin America, so the situation in Venezuela has improved rather significantly for us. We- our facility is back in operation. We do have some limits on raw material access so it's not 100 percent yet, but that piece I think is pretty much behind us.

So it will be down but not as much as the first quarter?

It will be down, yes, because of the devaluation implications and the resulting pricing actions that we were forced to take.

OK. Thank you.

Thanks, Bill.

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

Hi, everyone.

Hi Romitha.

OK, a couple questions. First on food service, you said volumes were up, and I'm just curious about given that everyone talks about weak food service volumes, I know you had easy comparisons, but can you just give me a little bit more color on what's going on there?

Well, Romitha, we had a really solid quarter, really driven by our national accounts. Businesses such as 7-11 and Exxon mobile where we had some very nice wins in that business and also our ingredients business had a very nice quarter as well, so we did have probably some easier comparisons as we've lapped out of some of the product pruning we did in this business, but we felt good about where our food service business ended up.

OK. So it's new business wins here?

Yes, and we do recognize that industry day data that we've seen would indicate that overall food eaten out of home is down on the order of one to two percent range.

Jim, question for you. The payment that you make to Altria for shared services, I think it was about 80 million last year. Give me what the number was this year?

Well, the number - I don't think that's exactly right in terms of the number that you're quoting because there are a multitude of shared services that go into it. Some are under - they're under different contracts because we draw data services from them that gets buried in the operating units. Year to year, the number is pretty much flat in terms of the overall aggregate service costs that we'll have from Altria.

OK. Because that 80 million is just a number I took from the 10-Q.

OK.

And then Marla, you talked about consumption for the top 25 categories being up more than two and a half percent.

Yes.

If you looked at the overall Kraft North America business, could you give me a number for consumption?

You know, I don't have that right here. We really looked at our top 25 categories that we track, and that's what I was quoting up over 2.5 percent including Wal-Mart. \

And that's about 60 percent of North American sales, right?

Yes, it's probably a little more than that.

OK. Thanks.

You're welcome.

Thank you. Our next question is coming from Jonathan Feeney of SunTrust.

Good evening. On the trade deload, is it fair to say that Kmart and Fleming together are the vast majority of what you're talking about when you say trade deload, or are there other retailers cutting back their inventory any meaningful way?

It really does vary customer by customer. And while Kmart was really not a factor in this, they were not a direct customer - they were an indirect customer other than for the biscuit business. Fleming is a direct customer, and certainly had some scale back, but we're seeing it more broadly than just those two.

And would Fleming itself be the majority, the biggest, or ...

We're not going to get into customer by customer.

I was going to add on that while Fleming and Kmart obviously with the store closings and some of their issues definitely had an impact. We continue to see many of our major retailers work to get more efficiencies within their system and reduce their trade inventory. So obviously it's been a trend, and we expect it to be a continuing trend.

Right, but the key here is we think we have it planned appropriately on the year.

Thanks. And Marla, you mentioned the competitive landscape in cereals being tough. Could you characterize that as more price discounting, marketing, or both equally?

Well, I think we probably are seeing some of both going on. As you know, we piped our cereal business as did some of our competitors, and I think you're seeing varying degrees of marketing spend back going back against that, but the cereal category is always competitive. I don't know that I would characterize it as being so much different in this quarter than it's been probably in the last 12, but it's always a very competitive category. So we felt very good about our business this quarter in cereal.

Great. Thanks very much.

Thank you.

Thank you. Our next question is coming from Ann Gurkin of Davenport & Company.

Hello?

Hi Ann.

Just little questions. Can you give me a volume number for your confectionary business?

We aren't splitting out the volume individually by divisions within the segments. However, I will tell you that I feel very good about the confectionary business. Without getting into the hard number, the volume itself was down slightly prior year. However, that's a function of the divested businesses as well as a discontinued businesses and absent them, the volume was actually up. More importantly the revenue on that business, because some of the mix shift that's been going on was up strongly, strong double digit increase in revenue. There's a phenomenal amount of new products coming out, all of which are looking like they're off to a terrific start.

OK. And then can you comment on the performance of your bite-sized products like bite-sized Oreos and Ritz crackers, how are those doing in the marketplace?

All of our mini products, you're talking about mini Oreos, mini Ritz?

Right.

Go-packs, all of those continue to do well. They're a nice grab and go option for consumers, so we continue to see those products do well and be enhancing to the business.

... and they're meeting the returns you're looking for?

Yes, they are.

They're part of the higher revenue per pound items that we referenced to in the script.

Right. And then what is your CAPEX outlook for2003? Any change out there?

No. Which And how about the sales going into dollar stores? Any update there?

Our business with Dollar Stores continue to do well. It's a growing segment out there, and we're continuing to work with them very closely, so we feel very good about our Dollar Store business.

Great. Thanks very much.

Thank you. Our last question is a follow-up coming from John McMillin of Prudential Securities.

Thank you. The dividend a year ago was raised at the annual meeting or at the first quarter, wasn't it?

No, John. It was declared in the third quarter, paid in the first week of the fourth quarter and it was actually - we first started paying a dividend two years ago, so you were using the anniversary cycle is when we do our dividend increase.

Can I just ask you to repeat what you said about operating cash flow? You said it was - in the quarter was 95 million?

That was operating cash flow after capital expenditures. We call it discretionary cash flow. CAPEX, we're at 315 million.

... and that's versus ...

Year ago, that same operating cash flow was 216,so from an operating cash flow perspective, we're100 million favorable.

OK. And just - I know with the IPO, you have been asked to address these issues with Altria and litigation issues, but you know obviously I've had to deal with it in the last week, and the issue that I'm faced with goes something like this. While the money that bought General Foods, Kraft and Nabisco may have been from a separate legal entity, this legal entity was funded or backed by, you know, tobacco money, so at least the seed money that started the food division in Kraft came from tobacco. Can you just in a minute or two, without being like a lawyer, just kind of give what your response would be to the reason why you don't think you are a party to these litigation issues?

And I'll try and keep this real simple without getting into all the legal aspects of this, but in essence, while the seed money - it was re - what really happened here, John, was some subsidiaries were create today do the actual acquisitions, and there were loans between those subsidiaries and the Altria companies, and it's those loans that we've been paying back and, you know, if you look it where we are today with the Nabisco deal, prior to the IPO, we were sitting with $23 billion of inter company loans. We're now down to three billion. Just under $3 billion.

I think the thing that people are really trying to get at with all of this, John, is what access is there to Kraft's cash in this process. And I think Marla mentioned that, that we think we're pretty much separate from that activity, and, you know, we don't think there's a channel to get at our cash or our assets.

Well, I agree. I just wanted to hear your description. I thought it might be better than mine. Thank you.

Thanks, John.

Hopefully it's not different than yours. Well, thank you. We appreciate your questions. Everybody have a good evening.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.

END

5