億滋國際 (MDLZ) 2003 Q4 法說會逐字稿

Good afternoon and thank you for joining us today. I am Mark Magnesen, Vice President of Investor Relations for Kraft Foods. We're pleased to welcome all of you with us here in New York as well as those of you listening in by webcast. Earlier today we issued a press release containing our fourth quarter and full year 2003 results, 2004 guidance and some details on our sustainable growth plan. A copy of the release and today's presentation should have been on your chair and is available on our website for those of you on the webcast.

I am pleased to be joined today by Roger Deromedi, Kraft CEO, and Jim Dollive, Kraft CFO. After our presentation, which will last about 45 minutes, Roger and Jim will take your questions. Before turning it over to Roger I remind you that our comments today contain projections and forward-looking statements. Please refer to the Safe Harbor statement at the end of our release today for a review of the factors that could cause actual results to differ materially from projections. With those details behind us I am pleased to introduce Kraft Food Chief Executive Officer Roger Deromedi.

Thank you, Mark and thanks to all of you here and on the webcast for joining us. Today I'm going to tell you about a different Kraft and how I intend to lead it. A Kraft that moves faster and is more decisive. It comes into you to more externally focused and consumer centric for the more global perspective. A business that's leaner and more efficient. But most of all I want to tell you about a Kraft that is committed to delivering sustainable growth. Realistic sustainable growth on the top line, on the bottom line and in the value regenerate for investors. That commitment to set realistic achievable expectations and do everything in our power to meet or exceed them, will be a defining characteristic of this company. Every decision we make, whether it's how to organized, who is on the team, what businesses we are in or how or where we compete, must answer a critical watershed question, will it help us deliver sustainable growth?

It's now just over 40 days since I assumed my new role as CEO. In that time I've tried to move quickly. I've reassessed the challenges we face. Most important I thought long and hard about how we were responding to these challenges and what we needed to do differently. The first think I concluded was that our organization needed to evolve. We had to become more global and more efficient. If we did, we could improve our ability to deliver sustainable growth. Next was the plan for delivering that growth. The actions you will hear about today have been under development for past few months. And then, together with my new executive team, we put the finishing touches on this integrated sustainable growth plan. And finally, with the plan in place, we set realistic targets for the level of growth we can deliver. And that is what I want to cover with you today. I will take you through our 2003 results and the realities we face as we exited the year. Next I'll talk just briefly on our new global organization and the benefits that I see. I'll spend most of my time going through the details of our 4 point sustainable growth plan and then also with our guidance for 2004 and our long-term financial outlook.

2003 was clearly a disappointing year for Kraft. Our results were below what you expected and what we projected. Total volume for the year was up 0.7% or 1.6% excluding divestitures. However, we did begin to regain some momentum in the fourth quarter with volume up 1.1% or 1.9% excluding divestitures. And this was with a very strong year ago period and despite the retail strikes on the west coast. Volume for the year increased in 5 of our 6 segments led by beverages, desserts and cereal segment, which was up 5.3%. The weak results in the biscuits, snacks and confectionery segment were driven primarily by biscuits, which I will talk about in a few minutes. Fourth quarter volume was also up in the same 5 of 6 segments, led by solid gains in the Latin America/Asian Pacific and beverages, desserts and cereal segments. In particular we are pleased that our Latin America business improved in the second half of the year as we expected it would.

As you recall, in September we initiated a significant reinvestment program to address declines in several categories. The results are encouraging. Our sales and marketing organizations did an excellent job on execution and as a result Kraft consumption and share trends improved in four of the five categories. We saw better results across all key segments of the cheese category and in coffee, cold cuts and crackers, but our cookie business remains a challenge.

Let's look at the consumption trans excluding Wal-Mart through the first 8 months of 2003 for the five focus categories. As you can see year-to-date consumption growth through August was very weak, which is why we responded with the reinvestment program. In the September to December period, you can see the turn around beginning with the return to growth in three of the five categories while coffee consumption is still below a year ago for the four months, our spending really didn't kick in until October. And in the last three months of the year our coffee consumption was actually up about half a point. So overall, when you look at our progress on a sequential basis, September to December versus August year-to-date, the improvement is fairly solid with the important exception of cookies.

The share trends also improved. Through August, as you can see, our shares were declining across all five categories. In the last four months we turn positive in two categories, cheese and crackers, and we're nearly flat in another two, cold cuts and coffee. And then cheese share improvements were delivered across all key segments, so we continue to lose share in cookies. On sequential basis we saw fairly strong trend reversal with cookies again the exception. We feel good about coffee sequential share improvement, which was achieved against a significant competitive spending on a major new packaging change. And with ongoing reinvestment in 2004, we expect the trend improvements in these categories to continue.

So cookies is clearly the outlier in what were otherwise fairly strong and encouraging results. As we've discussed before, there are multiple drivers of our weak cookie results, higher pricing, less successful new products and a variety of health and wellness concerns. We address the first of these, pricing, in the fourth quarter by returning to more optimal price points. However, this is only one element of the catagory issue. What will ultimately turn around both the category and our share are new products, stronger marketing and better and more integrated solutions for addressing health and wellness concerns. As you'll see later in our growth plan, healthier snacks are a top priority. I believe we have the right technology resources working on the right health and wellness solutions. In the first quarter we'll launch the first in a series of healthy alternatives, including Newton Bars with yogurt, which are low in fat and a good source of calcium, and several extensions of our Snack Well sugar free line. A number of bigger ideas will be ready in the second half of the year and in 2005.

So as such we don't expect significant improvement in our cookie trends in the first half but do expect momentum to build through the year. If we look at our share trends more broadly across our top 25 categories in the U.S., for the first three quarters of 2003 we were up in categories that represent only 23% of the top 25 operating companies income or OCIs. But like the focus categories, in the last quarter of the year, we saw improved results. Share was up in 14 of the top 25 categories, representing 53% of the OCI. While this is an improvement we're clearly not satisfied with these results and we intend to do better. On the international side, volume was up in 28 of 50 key geographies and these markets represented 59% of the OCI. Key markets showing growth in 2003 included Russia, Brazil, Argentina and China, while key declines were in Germany and France. Turning now to revenues. Full year growth was 4.3% with better performance in the fourth quarter when revenues increased 6.2%.

The impact of currency favorability on the revenue growth was 2.4 points on the year and 3.9 points on the quarter. Operating income was down 1.7% on the year and 9% on the quarter with 4 percentage points of (inaudible) decline resulting from a gain on sale in the prior year. These are disappointing results. While we face strong headwinds in 2003, we did not manager through them as effectively as we could have. And the lower operating income obviously impacted earnings growth with fully diluted EPS up 2.6% on the year and down 7.4% on the quarter, driven in part by our stepped up spending behind the focus categories. More specifically on EPS the year-over-year comparisons are effected by few significant items, including the absence of integration related and separation charges and a net impact of divested businesses in each year.

Higher benefit costs, primarily related to pensions and restricted stocks, impacted our results by 3 cents for the quarter and 8 cents for the year. Our investment in the focus categories represented 5 cents per share in the fourth quarter and 7 cents for the September through December period. On the plus side we benefited in the quarter and on the year from currency, interest expense and taxes with an aggregate favorability of 4 cents on the quarter and 13 cents on the year. The remaining net change in EPS from all other operations was 3 cents on the quarter, an improvement from our results earlier in the year. The net result of all these items was a decline in EPS at 4 cents to 50 cents on the quarter and growth of 5 cents to $2.01 on the year.

Despite the lower than expected earnings growth we delivered a 20% increase in discretionary cash flow, which we define as net cash provided from operating activities less capital expenditures. During the year we intensified our efforts to improve our working capital position, especially on inventories, and shifted our capital spending to the lower end of our initial guidance. These efforts delivered over $3 billion in discretionary cash flow in 2003 building up a healthy 14% increase in 2002. Further, these cash flow results include a year-over-year increase in contributions to our pension plans of over $300 million. While 2003 was clearly a challenging year for Kraft, more important is what we are doing now in response to the realities we face. First and foremost is the critical importance of value. For both consumer and retailer value has become a defining principle and not just in the US but across the world.

While the weak global economy in the years past certainly contributed, there has been a more fundamental shift. Consumers have clearly become more price conscious helped along by more value retailers, some mass merchandisers and some hard discounters for whom price is the very essence of their business model. And also by wider distribution and improved quality of private labels along with private label's reluctance to price even in the face of rising costs. When we took pricing actions early last year in response to rising costs, we misjudged the magnitude of the value trend and it took us too long to react with more competitive pricing. A second reality we face is rapidly changing consumer needs in customer channel dynamics. On the consumer side, the growing importance of health and wellness has altered buying patterns to the degree I have not seen before in the food industry. Low carb diets, like Atkins and South Beach, that focus on transfats, concerns about obesity and increased demand for organic and natural products are requiring a shift in how we market and what we market. And just as important as lifestyles change, the need for convenience continues to grow.

There is also a shift in our customer base. Alternate channels of distribution and away from home eating continue to grow faster than other segments and this shift has increased the economic challenges facing traditional grocers. And the population, especially in the U.S., is increasingly multicultural and that is particularly important for us. Over the next ten years most of the growth in households with children, where Kraft views the highest, will come from Hispanic and African-Americans. While our programs last year addressed these trends, there is far more we can do, and must do, with even faster pace. A third reality is that our penetration internationally, particularly in developing markets, remains a tremendous opportunity. Developing markets are important because of their faster population and income growth, are driving increased demand for branded consumer goods. And while we have seen solid gains in developing markets we have to accelerate that growth.

And a fourth reality is the rising cost environment we operate in and the likelihood that it will continue. In particular, people related cost including pensions and medical and non-commodity input costs such as packaging and energy have continued to rise. While we anticipate some of these higher costs last year, we did not have sufficient contingencies in place to offset them. With these realities in mind it was clear that we needed to do things differently to better leverage the enormous strength and unique advantages that Kraft possesses. The first step was a new global organization we announced an January 8th. This structure links three key dimensions of our organization. The first is categories, where our new global marketing and category development group will lead Kraft worldwide growth agenda with global category strategies, new product growth platforms and world class marketing excellence. All of it aligned to our five global sectors.

The second to mention is geographies, where our commercial units will ensure we stay close to the local customers and consumers, drive local sales and marketing execution and have primary responsibility for the P&L. This group will work closely with global marketing to develop our global strategies while pursuing the specific marketing plan that address local market needs. These two groups will be supported by global functions that will implement best practices around the world and fully leverage our global scale, including technology efforts, global sourcing and employee development. The power of this new organization lies in its ability to accelerate the flow of innovation from market to market, create true worldwide category and functional expertise, ensure superior local execution and develop our management strength all at a faster pace than ever before.

It will also be more efficient. It eliminates duplication within functions and provides the opportunity to further consolidate facilities. In a phrase, our new organization structure gives us the best of global and the best of local. We can be more effective at growing and leveraging scale without losing the local expertise that is fundamental to our success. Of course an organization structure is nothing more than lines and boxes on a page without the people who bring it alive. I believe we have the strongest and most experienced leadership team in the industry, starting with Betsy Holden, who I am delighted will be leading our global marketing and category development group. And Dave Johnson and Hugh Roberts, two of our most seasoned and successful managers we have, will lead North America and international commercial units. These category and commercial units are supported by 8 highly experienced professionals who will lead our functional group, including global supply chain and global technology and quality team.

By moving fast to put the new organization in place we are now better positioned to succeed in the global environment I described before. This brings me to our four point sustainable growth plan. I talked about the importance of value. Our highest priority, the thing we must do first, quickest and best, is to reinvest in brand value. We have to fix the value equations on our brands where it's out of balance and continue to build brand value across our portfolio. We have an exceptional portfolio of brands to work with. Everyone of our top 50 brands exceeds $100 million in revenues and four top a billion. This is important as a focus portfolio for the top 50 brands representing 73% of our revenue. Our No. 1 job is to make sure they continue to thrive by delivering superior brand value. Many of you have heard talk before about the brand value equation. It's a very simple concept but it's a way to keep our organization focused, there is power in simplicity. If we expect consumers to choose our products, we must deliver more benefits for the price paid than our competitors, particularly versus a stronger private label.

When the benefits delivered are not enough to justify the price, as we saw in some of our categories last year, our business loses momentum and share. Each of our brands offer unique bundle of benefits. It might include superior taste or valid-added packaging and we know where we stand with consumers on these measures because we ask them, constantly. Benefits may also come in the form of new product innovations or line extensions that provide variety. Availability is another benefit, simply making sure a brand is available everywhere consumers want to buy it. Sometimes the service that supports the brand is a key benefit. But most importantly a brand's image is a benefit as effective marketing creates a brand's own distinct personality.

Let's take a look at some of the ways we'll be building brand value in 2004. In the area of taste, we constantly test our products to insure we compare favorably versus competition. We continue to improve many of our most important brands, such as Philadelphia Cream Cheese, which delivers superiority versus competition in taste tests. Here you see how we've leveraged that product taste and quality advantage in our advertising.

Convenient value-added packaging has become a more important element for the benefit bundle. For example, we have been improving the packaging of many of our European chocolate tablet brands, such as Fry and Norway, to make it resealable. We will continue to extend this improvement into other geographies while making similar improvements on many of our other multiserve packages. We'll be innovating our new products with introductions like Capri Sun Fruit Waves, a great tasting new drink with 100% fruit juice that parents can feel good about choosing for their kids. And we will be increasing the availability of our Capri Sun Island Refresher, a unique bottle can package that was originally designed for convenience stores. This product has been so successful that we're expanding distribution in 2004 to grocery stores as as well. And we'll be complimenting many of our brands with more service..

This is an area where we'll use our scale to our advantage in ways that our competitors would find hard to match. Our consumer relationship marketing or CRM program, in North America is a great example of this. Through customized communications and easy access to useful information on our website and through our 800 consumer response number, we are building a closer relationship with our consumers, one at a time. To better illustrate the power and potential of our CRM program, let me give you a few facts on our food and family magazine, which each of you here should have a copy of on your seat. Despite the fact we want to launch this national in the US in 2003, this quarterly publication now has the third largest circulation in the U.S. And think about that. In one year our circulation is ahead of titles like Time, Newsweek and People. It's mailed directly to targeted households and by integrating it's communication with other information sources like our website, we are continuously building a one to one relationship with our consumers.

But great ideas must be supported by the right level of marketing spending and the right prices. In 2004 we are targeting to increase our marketing spending by $500 to $600 million versus 2003 for both consumer marketing and price management. The amount of spending was determined based on a category by category, country by country build up of what is necessary to get the marketing levels and price gaps right. This spending is spread across both our North American and international portfolios.

The second component of our sustainable growth plan is the transformation of our portfolio in line with changing consumer, customer and population trends. We have to accelerate the shift in our portfolio to satisfy the growing demand for health and wellness and convenience. We have to develop more products and packages that fit the fastest growing channels and we have to deepen our connection with multicultural households with more products and services tailored to their needs. As we address these trends our product innovations will extend across our 5 global consumer sectors. Snacks with $9.2 billion in 2003 revenue, Beverages with 6.1 billion, Cheese and Dairy at 5.6, Grocery at 5,2 and Convenient Meals at 4.9. Let me give you a few highlights of what we'll be doing to transform this broad portfolio of products, first as we align with leading consumer trends. In the area of health and wellness, as I mentioned, we've seen significant shifts in buying patterns, caused not by one single need or change in attitude but instead by several new needs and beliefs. Which ones are fads and which ones are lasting, only time will tell. But it's clear we need to respond with a range of new products and marketing initiatives.

Some consumers are looking for the absence of perceived negatives, illustrated by the demand for low carb and reduced fat products and the increased interest in sugar free products. Others are seeking the presence of positive, such as the desire for adding calcium and other nutritional fortifications, as well as the rapid growth of natural and organic foods. Starting with the significant trend toward low carb and high protein diets, we'll be leveraging our lower carb foods, such as Kraft cheeses with portfolio wide advertising and packaging changes that you see here. And we'll be doing the same on our Oscar Meyer meats, where we'll be flagging our carb counts on packages and promotional materials across the portfolio. Nuts are another food that are lower in carbs and we'll be leveraging an integrated marketing campaign on our Planter's brand including advertising, promotions and packaging changes to reinforce this message with consumers. And we have a program to reduce transfats across our portfolio. Shown here is our new zero brand transfat Triscuts which is being introduced this quarter. You will see a continuous rollout of zero gram and reduced transfat cookies and crackers throughout the remainder of 2004 and into 2005.

In response to consumer demand for reduced sugar and reduced calorie products, we're introducing this quarter our new Kool-Aid Jammers, 20 calorie, ready to drink beverage. This product appeals especially to those parents who're watching their children's sugar and caloric intake. And for adults who are watching their own caloric intake, particularly at breakfast, we're introducing Crystal Light SunRise, a sugar free 5 calorie beverage that provides 100% of the daily requirement of Vitamin C and is a good source of calcium. We'll also be adding new flavors to our rapidly growing zero carb sugar free Jell-O desert, that are popular for those on low carb diets. Shifting to the trend toward positive nutritional alternates, we'll take advantage of the growing trend toward natural and organic food by expanding our recently acquired Back to Nature trademark into a variety of new categories during the first half of 2004.

We're excited about the growth potential for this brand and this segment. We'll also continue to build on our club social brand in Latin America which we extended with a multi-grain high fiber cracker that has been very well received by consumers. In 2003 we successfully launched Capri Sun Sport , the first sports beverage formulated specifically for kids. In 2004 we'll keep this line fresh with additional fun flavors. In terms of fortification, our Kraft singles business continues to benefit from it's strong health message and double the calcium product. We'll continue to leverage this unique benefit in 2004 with even stronger marketing support. And finally we'll continue to expand Tang Plus fortified powder beverages into new geographies. The Tang is one of the first brands I worked on at Kraft. What often surprises people is that Tang is 0.5 billion revenue brand worldwide and volume has grown 10% per year since 2000. With specific fortifications and flavors tailored to each market, Tang is one of our top examples of what best of global and best of local can deliver. The consumer need for convenience has always been a driving factor in the food industry, but as the pace of life quickens, consumer expectations continue to rise, whether it's for ease of preparation, greater portability or the convenience of single serve packages. In our European coffee business we continue to be successful in expanding the range of convenient coffees we offer, including single serve, instant coffee sticks, coffee mixes, filter pods for one cup prep and ready to drink ice coffee.

We are particularly excited about a new proprietary on demand home coffee system that we have developed and we'll be launching in a European market shortly with plans to expand this premium coffee system to other countries around the world. We'll be telling you more about this big idea for future revenue and profit growth at CAGNYnext month. In convenient meals last year we extended our Lunchables brand with a nutritionally balanced alternative called Fun Fuel. Two initial varieties of Fun Fuel performed well in 2003 and we'll be doubling the lines offering in 2004. We'll also make meals more simple and convenient for consumers by providing them multiple recipe options for the same basic ingredients. The backs of many of our dinner packages, such as the one you see here, will feature our three in one meal ideas program. Initial response from consumers has been very positive.

And in the frozen pizza category, in the first quarter we are launching DiGiorno Thin Crust, which aims it toward volume for yet another segment of a large carry out home delivery pizza market. And finally across Europe we continue to make Philadelphia Cream Cheese more convenient with single serve and smaller portions that consumers can take with them or use individually to ensure freshness.

We'll also focus on transforming our portfolio in line with changing customer trends. We are all aware of the shift to alternative channels of distribution in recent years with the fastest growth concentrated in SuperCenters, mass merchandisers, drug and club stores. To capitalize on these channel shifts we'll continue to customize our products to meet the unique needs of each channel we serve. In club stores, for example, we customize product sizes, as well as promotions to meet the needs of club store shoppers. We'll also continue to focus on building our brands in the away from home channel. In France, for example, our coffee is distributed at McDonald's giving us the opportunity for massive numbers of brand impression each day. And we're expanding this relationship across Europe.

Similarly in the U.S. we recently secured distribution of our Oscar Meyer branded hot dogs in Wal-Mart's instore restaurants. These are both great examples of how we use away from home consumption not only to grow volume but also build our brands. And we recently expanded an alliance that will make many of our most popular products more readily available through a unique hot vending system. Soon we'll have Tombstone pizza, Kraft Macaroni and Cheese, Kraft Real Cheese sandwiches and Oscar Meyer hot dogs available on demand in more convenient stores, colleges, hospitals and businesses around the country.

The third area where we're transforming our portfolio is to meet the needs of faster growing multicultural population segments. The most obvious example is the growth of Hispanics in the U.S. In 1990 Hispanics represented about 9% of the U.S. population. By 2010 they are projected to grow to 15%. And for food companies Hispanics are particularly attractive consumer segment, as their weekly shopping spending rate is a 135 index to the U.S. average. We have already begun to take advantage of this opportunity through local Hispanic marketing executed by dedicated teams in six major metro areas which covers 75% of the Hispanic population in the U.S. These teams develop customized integrated marketing plans for Kraft products that suit local preferences, local culture and local community needs. And we'll be expanding the availability of our Hispanic products and use of bilingual packaging. We feel very good about txhe Hispanic efforts today and we'll be spending more aggressively behind them.

While our portfolio transformation will be driven primarily by internal development we'll also continue to utilize both acquisitions and divestitures. Our criteria for acquisitions has not changed. We want to invest in growth categories and valuable brands that improve our scale, generate double digit financial returns and are quickly accretive. And we'll continue to look to divest businesses that are non-core or underperforming, have limited growth potential and where the selling price enhances shareholder value. Our efforts to transform our portfolio have shown considerable progress. In 1990 only 20% of our business was in the higher growth snack and beverage sectors. By 2003 these sectors have grown to half of our business. But we need to do more in transforming our portfolio. Now more than ever we need to focus on the right consumer, customer and population trend.

We need to leverage our world class research and development resources and do so more quickly. And we need to create revolutionary opportunities beyond our current categories. And I'm confident we are on the right path to make this a reality. The third component of our sustainable growth plan is expanding our global scale. We have to grow bigger internationally with a focus on developing markets. Developing market accounts for 84% of the world's population, 30% of it's packaged food consumption and 23% of it's GDP. Yet they account for only 11% of Kraft's revenues. So while we have been growing and developing markets, there still remains tremendous opportunities. The large markets of China, Russia, Brazil and Mexico are particularly attractive. Their size gives not only for potential for growth but also the opportunity to build scale and efficiency. We perform well in these countries in 2003 and look to build on that success going forward.

We have three strategies for expanding our scale in developing markets. First, we will capture the growth ops potential of our core categories in their existing markets. For example, in China we're building our existing biscuit category with introductions such as our specific seaweed flavor crackers which leverage our global technologies but deliver a local taste. Second, we'll expand our core categories in a new market. For example, we launched Philadelphia Cream Cheese in Brazil last year and after only four months in San Paulo, we became the number 1 cream cheese. This demonstrates the power of combining our global brand and our global infrastructure with strong local marketing execution. And third, we'll build infrastructure in new geographies. Our acquisition in Russia of the Stollwerck confectionery business is a good example of what we can do with a step-up in our scale. In 2003 in addition to growing the confectionery business we acquired we expanded our offerings of coffee and overall were able to drive 15% volume growth.

Similarly to the sectorship that I discussed earlier, we have also seen a geographic shift of our portfolio over time. As we have captured more of the growth potential of international markets, we've gone from 23% of our total business in international markets in 1990 to 31% in 2003. And within this, developing markets have gone from 2% to 11% of our total business. As I said, while we have made good progress in building our international business and like our portfolio shifts, we need to do more. And our new global organization is designed to do that by leveraging our brands, scale and ideas as across international markets more than ever before.

The last component of our sustainable growth plan is driving out costs and assets. The goal is not only to achieve an improved cost structure and better asset utilization but also provide a source of funds to support our growth initiatives. As we looked at our business and the opportunity to drive further efficiency, our manufacturing infrastructure of 197 plant facilities around the world is an area that we have been exploring over the past year. We have also been looking at the cost-savings opportunities within our overhead structure and our organization redesign provided even further opportunities for cost reduction. The dual structures of what were formerly Kraft Foods North America and Kraft Foods International gave us the opportunity to create one Kraft with one senior leadership team, a global sector management group and global functions that could integrate processes and leverage their practices. Within these opportunities in front of us we have embarked on a two-prong cost reduction effort, including a new three-year restructuring program and our ongoing productivity effort. The restructuring program has three objects.

To leverage our global scale, realign and lower our cost structure and optimize our capacity utilization. It's key benefits are a stream line business system and strong financial returns on our investment. With this restructuring program, we anticipate closing or exiting up to 20 plants over the next three years. We also expect to eliminate about 6,000 positions across all levels of the organization or about 6% of our worldwide employee base over the same time frame. It's never easy to decide to close a plant or eliminate a job because of the obvious impact it has on the people who have worked hard to make this company successful. However difficult, these actions have been developed with great thought and are in the best interest of the company as a whole. We will reduce our cost, help us grow and in the long run make us stronger. To implement the program over the next three years we expect to incur pretax charges of up to $1.2 billion primarily reflecting asset writeoffs, severance and implementation costs. Importantly, about 50% of these costs are expected to be non-cash. In addition, we expect to spend about $140 million in capital over the next three years to implement the program.

In 2004 specifically we anticipate pretax charges of $750 to $800 million, the equivalent of about 30 cents per share. Ongoing annual savings from the restructuring program are significant and are expected to approach $400 million pretax by 2006. In 2004 we expect to save between $120 and $140 million or 5 cents per share. Overall the program financial's profile and returns are strong. With annual ongoing savings expected to represent more than 50% of the cash outlays required to implement it. In addition to the restructuring program, we'll continue our other ongoing productivity efforts, which have been a hallmark of Kraft. While productivity comes from many sources, going forward we see two areas that offer particular opportunity. The first is supply chain initiative, where we'll be further leveraging our procurement scale on a global basis and rationalizing SKUs for production and distribution efficiencies.

The second source is technological advances as we continue to automate our plants and distribution centers, formulate our product in lower cost ways that improve or maintain our quality and seek out alternate lower cost packaging materials. So to summarize our sustainable growth plan has four elements -- reinvest in brand value, transform the portfolio, expand global scale and drive out cost and assets. We are confident we have the ideas, the funding and the organizational commitment to make it succeed. With that let's turn to our guidance for 2004 and the longer term outlook. Starting with the top line. We expect 2004 constant currency revenue growth to be around 3%, including tack-on acquisition and excluding divestitures. You'll notice the shift to revenue base guidance going forward as we believe this better reflects our plans to focus the organization more than ever on profitable volume. Our projected revenue growth will be driven by volume growth of 2-3% resulting from higher market spending, contributions from new products, growth in developing markets and tack-on acquisitions.

We also expect inflationary pricing in some developing markets to contribute modestly to revenue growth partially offset by increased promotional spending required for price management. We project fully diluted earnings per share in 2004 of $1.63 to $1.70 including about 30 cents per share for the charges associated with the restructuring program. Let me bridge for you our expected year-over-year change in EPS. First, our EPS in 2003 of $2.01 included a penny from gains on sales of businesses. And in 2004 about 30 cents for the restructuring program. Our operational change in EPS is down 7 cents to flat getting you to our $1.63 to $1.70 guidance. The elements of the down 7 cents to flat range in operational change includes benefit costs and restricted stock compensation which will impact us by about 7 cents per share combined. This projection is in line with estimates we previously gave. It now reflects a negative 2 cent impact from a reduction in our discount rate and from higher retiring medical costs. This impact is fully offset by 2 cents of benefit from our higher 2003 benefit pension asset return and from our 2003 pension contributions.

Next our restructuring savings translate into a 5 cents per share benefit. Our planned marketing increase of 500 to $600 million represents 19 to 23 cents per share which leaves remaining growth of 18-21 cents per share driven largely by volume. The anticipated impact of higher interest expense is expected to be offset by slightly lower tax rate and fewer and fewer shares outstanding. In terms of our quarterly outlook, we expect 2004 earnings to be skewed to the third and fourth quarter for two reasons. First, our volume momentum will build during the year behind txhe full year of increased marketing spending. And second, we'll not realize the majority of the 2004 restructuring savings until the second half. First quarter EPS will be particularly impacted by these factors and, although we usually only provide annual guidance, we are providing specific earnings guidance for the first quarter of 32 to 35 cents per share including an estimated 10 cents in restructuring related charges. Turning now to cash.We project discretionary cash flow of $2.8 billion in 2004, which is reduced by approximately $200 million in cash outlays associated with the restructuring program. Built into this cash flow projection are projected capital expenditures of 1.1 to $1.2 billion, including $50 million required for the restructuring.

We continue to have the same priorities for the use of our cash. First is to transform our portfolio through acquisitions in growing categories and markets. Of course, our cash usage for acquisitions is dependent on the availability of desirable targets at appropriate prices. The second priority is dividends and dividend growth. My perspective is that dividend increases signal confidence in our ability to grow cash flow going forward. Long-term our objective is to consistently grow dividends at least in line with our long term growth in earnings. The next priority is share repurchases, which we'll continue to do to offset the delusion that occurs from stock-based compensation programs. In the fourth quarter of 2003 we completed our previously authorized $500 million buyback program and began buying shares against a newly authorized $700 million program and finally we'll utilize remaining cash to reduce our debt.

Moving from our 2004 guidance to our longer term outlook we believe we can grow constant currency revenues, including tack-on acquisitions and excluding divestitures in the 3% range. This is supported by volume growth of 2-3% which is consistent with txhe category and geographic composition and the growth opportunities we'll capture. The difference between the revenue and volume growth rates reflects the impact of pricing in developing markets. We believe we can deliver long-term EPS growth of 6 - 9% per year driven by revenue growth, our continued focus on cost reduction and the financial leverage from our significant cash flow. While this EPS growth is lower than what we have communicated in the past, I believe it's realistic in today's operating environment. In some years we may do better, especially when economic conditions provide tail winds or we reap center resavings from acquisitions, but I want to set expectations that we can consistently deliver because I believe that consistent earnings growth together with an increasing dividend provides an compelling reason to buy our stock and hold it for the long-term.

Let me now close with two thoughts before we take your questions. First as we exit 2003 we recognize and understand the realities we have to deal with and we're taking the right actions to get the business back on track. Second and more important, with the global organization we have created, the growth plan I've highlighted for you today and the realistic targets we have set, I am confident that Kraft is on the road delivering sustainable growth and building value for our investors. Thank you very much and now Jim will join me on stage and I would be happy to answer your questions. I ask that you raise your hand and we'll come around with microphones so that everybody can hear and also when you ask your question, please state your name and the company you are with for those listening on webcast.

You are asking your organization to run faster and run smarter with 6,000 fewer people and 20 fewer plants, are you going to try to change the management incentive system to do that? What do you need to do to restore morale to do that and how confident can you be in a back half weighted year that your marketing is really going to click?

Let me tell you about the moral at Kraft and obviously, when you have changes such as this, obviously it has an impact on how people are feeling, but I will tell you that people feel very good about our global organization, they feel it's the right organization going forward, and the right organization to drive our growth going forward. So while there is significant change, I think people feel very good about our organization and about our plan too, to grow the business going forward. In terms of our compensation system we continue to have a strong results oriented compensation system both in short-term, long-term and with restricted stock. And as we align everyone around the company with a line goals as we put those programs together. So we have strong alignment to the objectives that we have. And then in terms of how can we run and move faster where we're taking out the people and what we're doing, we've studied hard our global infrastructure, as I mentioned, both on a manufacturing and an overhead basis and while I think overall we are fairly well-run company, there is opportunity to find more cost and something we have always done within Kraft. And what we're doing here is we're accelerating many of the things you could think we could do over the next few years into a faster program as we go forward. Thanks David,

Derrick. I guess the first question for 2004, you kind of offset the restructuring with, I guess, operating changes that you highlighted of roughly 20 cents a share and you said that that was mostly tied to volume growth and I am kind of wondering, at least in the fourth quarter, you spent so much on marketing, the volume growth didn't really translate into operating profit growth. So I am kind of wondering how that works out especially in such an inflation cost environment in '04

As you point out, the other operations of the 18 to 21 cents that we referred to was the spending of 19 to 23 cents. Guys if we looked at the momentum that came out of our return and what we invested in quarter four, we feel very good on the volume lift that we got from those both on consumption and share basis and as we model it through and looked across our category by category basis and around the world we feel very confident in the volume growth we'll get for the investment we are putting in, based on what we learned in quarter four. So we think the return on what we're doing on our investment is very strong and we'll deliver that volume growth. We'll go to the back a little bit and we'll come back up front.

Question about the debt reduction. I am inferring from your presentation, you really only talked about debt reduction till the very end and you said something very brief about it. Given the fact that if you take away the goodwill and the intangible assets from your balance sheet you effectively have negative equity. And also the long term debt increased from $10 billion to $11 billion. Are you comfortable with those sorts of levels of long term debt or do have any specific targets for that debt to reduce it to?

I will start by saying we are comfortable with the levels we're at and we have excellent coverage of our debt, but maybe, Jim, you want to talk a little bit about our capitalization and how we think about that.

As Roger said we feel very good about where we are in txhe debt position and we have made pretty good strides, I think, in bringing down txhe debt levels. In the last year $1 billion has gone into bringing down our debt. We'll continue to use some of our surplus cash to bring down our debt, but since we have gone public, we've pretty much termed out all of the higher coupon callable debt that we had available. So right now we are feeling very good about txhe debt structure. We're feeling that we can start looking for other opportunities for our use of cash, as well. Obviously want to use cash in the most productive way possible.

Hello. Thank you it's David Driscoll, Smith Barney. I'd like to go back to something one of the other fellows was asking, that in the fourth quarter it looks like foreign exchange was a positive benefit of 4 cents and so my first question's going to start of with the fourth quarter, that just comes out in line with where the street was expecting. In addition, we see that $200 million spending over the final four months, of course some of it was in September. The question becomes that when you look at it, I think it was 1.9% volume growth in the quarter , 6% due to acquisitions, back that out 1.3% volume growth due to the organic within the company, the marketing spending doesn't look like it really did enough here to then take us into 2004 to expect a 2-3% volume lift which is critical in order to make the $1.93 to $2.00 range, excluding that 30 cent restructuring charge.

Let me give you some perspective about quarter four, also in terms of as you look at the volume growth and what our consumption growth was, in the fourth quarter if you take the Neilsons, and including Wal-Mart, our consumption is up (inaudible) cents so we feel good about our consumption. What we did have, and as we had expected, we did have a negative impact from continuing crate inventory reduction of almost a point impact on our volume growth and also some declines in some non-measured channels which gets you down to that 1.6. So as we look at the underlying consumption we feel very good about what we delivered in quarter four and across the portfolio in terms of the share improvement that we saw. So that why I went specifically through what we delivered in the focus categories and again versus all the focus categories, first our expectations on consumption, share and on volume, we achieved what we had expected except for the cookie category.

Two quick detail questions. You mentioned that you wanted to grow dividends at the same rate as earning, so if we're going to see a down year does that imply then no dividend increase in 2004? Second question would be directed on the financial side -- interest expense. There is no mention on interest expense here, what it's going to do next year and then lastly just comment on commodity cost, again no mention in the press release.

We'll start with dividends. Again I say we want to grow our dividend in line with our long term earnings growth and again it will be our board deciding that and we'll target August our normal time to make decision. But our belief, given our strong cash flow, we can grow that dividend in line with txhe long-term earnings growth, even in 2004. Relative to interest expense, Jim do you want to talk a little bit about that?

We do anticipate some increase in our (inaudible) expense in '04. Part of that is driven by the fact that we did term out some of our short-term debt at the end of the third quarter and you can kind of go through the arithmetic on that. We do expect some short-term interest rate increase as the year progresses. So both of those are built into our expectations for the year.

And finally to your question on commodities. It really varies by commodity, some increases that we've anticipated. I will start with some of our major commodities. Coffee right now is actually run up some, it's been in the low 60s for quite a while but really driven by speculators in the market place. As we look at the long tern fundamentals we see coffee prices remaining fairly low. Another key commodity for us is cocoa and cocoa has come down very nicely given the better crops coming out of west Africa and again, all this depends on the political situation on the Ivory Coast. But at this point it seems to be fairly quiet. When you get to dairy, obviously a very important one for us, dairy. The average dairy cost for us on cheese, for barrel cheese is $1.37 in quarter four. Right now the price is $1.26 and pretty much getting in with milk supply and demand, fairly in balance. One of the things, there's a comment there we are watching, obviously is Monsanto just announced that they're going to be cutting their supply of BFC by 50% and we'll have to see what impact that has on the milk supply. At the same time you have mad cow happening, which may have people holding cows longer. So this is where pretty much we you look at dairy, we are doing pretty good where we are in the dairy market. The ones that are getting some upward pressure right now are wheat and soy oil, components for us. But again, across all of our commodities we obviously do take positions in what we think our right positions going forward and smooth over some of these cracks that we have going forward.

John from J.P. Morgan. Just a question, when I think of your $200 million spending program for 2003. The way I interpret that is that you need to adopt your pricing by $600 million on an annualized basis. So I would have been looking for $600 million in cost savings in North America. (inaudible) you're saying you'll have to reach 400. Am I interpreting the trade spending program (inaudible) right or am I missing something? And then related to that if I see the private label trends in Europe, I would have also included in my cost assumptions savings in Europe. So No. 1 how does the cost savings distributed by region, especially North America and Europe and No. 2 are the 400 million really enough to be competitive

Let's start with your first question on the $200 million we spent in September through December of this year on reinvestment against our focus category. Again what we said about 70% of that was on what we call price management and about 30% on consumer marketing. So with some increase in consumer marketing as well. And as we look forward in terms of the effect that we got and what we're doing on our spending of the 5-$600 million, just about half of that spending is on the focus categories, the rest is across the portfolio as I said. Both within North America and internationally. So to give you some perspective on the spending and where it's being spent. Relative to the question of the savings that we're going to be getting. The 400 million that we're going to be generating from the restructuring program is on top of what we have been doing on an ongoing productivity. And so our ongoing productivity is also a generator of funds for us going forward. So it's a step-up in the sense that $400 million on top of what we have typically been delivering in productivity. In terms at this point we're not giving any specific guidance on how much is in North America and how much in international. Because at this point, while we have some preliminary plans, we have to analyze plant by plant exactly what facilities we're going to be closing and until we finalize that we won't be actually giving the exact spending by geography.

Quick followup. In your $100 million share repurchase program, if I think about it, it must be restricted stock (inaudible) hitting the P&L in '04 and '05. Is that included in the guidance, the EPS guidance?

Yes, it is.

Thanks, .

Thank you, John.

Just a comment and then a question. Just my comment is the best use of cash might be to repurchase more shares than just offset by options, particularly if the share price declines. I don't know to what extent your ownership by Altria impacts that, but I would certainly encourage. I know you used to have a mission statement to be the undisputed leader and that applies acquisitions. But I think kind of to help shareholders, my comment would be to look more at that. You know my question just deals with the allocation of marketing. Most of the increase in marketing this year was tied to promotion. Can you just give us a rough idea how that $500 to $600 million is going to be spent next year and what is price gaps versus media spend?

If you take the 5 - $600 million, the rough split is about half and half, (inaudible) so roughly half and half, which is a more balanced profile going forward in terms of investment and consumer marketing.

Can I just ask Jim about the fourth quarter tax rate. It appeared to come down. What is the tax rate we're looking at for '04?

First of all the fourth quarter, most of that was driven by the mix of domestic/international package, it effected the rate. We ended the year with an aggregate rate of 34.9% for '04 we should be down about a half a point relative to that rate.

And if I could just make one followup question. The international earnings in the quarter were lower than at least I was expecting it. It does look like some of your actions to lower price gaps might even be more aggressive in areas like Germany than they are here. To what extent are you doing those kind of things internationally because domestic got most of the publicity

John your observation is correct. We are taking similar actions in our international markets when you look at the developed markets. As I mentioned in my presentation Germany and France have been two challenging market in terms of increased price competition particularly in the coffee category and we started actions in quarter four and more actions in quarter one to address those price gaps in those markets. So the developing markets of Europe, similar sort of situations as we have in the U.S. in some of our categories and some of our countries. So we are addressing those as we go into 2004 even more aggressively and that is why we are spending the $500 - $600 million. That is correct.

Roger, just as you look at your long term algorithm here, the operating part seems to be missing, and given the fact that you seem to be spending a little but more in marketing than maybe some of us expected, where would you expect the operating line to be in this whole algorithm? Do you expect that up down or sideways.

Jim, you want to go through the specifics there?

Obviously it's going to be driven in large measure by the volume growth on the top line. Ultimately we need to have that volume growth to sustain any kind of longer term momentum. We are spending more back against the business to help drive that, but we do also expect the productivity program to be margin enhancive over time once we have that spending in place. We've put all that together and we've been looking for something in the mid-single digit range in terms of the operating company's income growth.

Would you expect a down year --

Excuse me, could you turn on the microphone again, please.

And just one quick followup, would you expect a down operating margin this year, '04 and then one that gradually tracks upward, is that a fair way to look it? Okay thank you.

One in the back. Leonard Teitelbaum, Merrill Lynch. Could you breakdown your sales year over year delta by new products and existing products and how the allocation of advertising is going against it because I'm starting to get the feeling that if we don't move the needle on the new products there's is no way we can get to 2-3%. And depending on how you answer that I have a followup.

In terms of new products as we look at our absolute new product revenues that we did in 2003 it was slightly over $1 billion from new products in 2003. And so while we've talked before about some of the issues we had in some of the categories, for instance in cookies and crackers, overall we feel very good about the new products success we had in 2003, roughly $1 billion in revenue. In terms of the exact split on advertising and promotions, that is not something that we have given before, you will see that in our 10-Km you'll see that it was basically flat in terms of advertising in 2003 in terms of advertising line. And what we expect to do in 2004 is to be increasing that number and that is a key focus to what we are doing as we go into 2004.

Just so I understand, Roger, you are saying that we should look for $1 billion in new products in '04 or more than that in '04?

We are actually focused in one of the key things we're doing now in txhe new product program is try and make sure we are doing the right things, what we call in terms of core and core line extension, but also looking more for those breakout and break through ideas that are more incremental. So we should be around that $1billion, but we may be slightly below it in 2004 and be focused on more ideas that are more incremental.

In that case, I have no followup.

Thank you.

Yes, (inaudible) Fixed Income Research. One question for Roger and one for Jim. Roger, with traditional retailers having to reinvest more of their gross margins dollars to boost the top line are you seeing more requests from retailers to help them out in terms of vendor support?

We continue to, with all of our retailer channels, work with them in terms of what they want to do in terms of managing their business, but I would say the continued negotiations we have in terms of the what the right price points are and we work very hard with them on category management programs to ensure what we are doing are at the right price points relative to txhe competitive set. So I would not say it's dramatically different, it's more how we work with them and how we try to ensure the right price points for our products versus competitors.

And then for Jim, if I look at your balance sheet you have about 1.9 billion in short-term debt right now. Given where interest rates are should we assume that you're going to term that out or you're planning to basically stay in the commercial paper market?

Well, I don't want to get into too many specifics and details, we are comfortable with the current mix we have in terms of our floating and fixed rate debt. So don't look for any radical changes

And your back completely into commercial paper market. Correct?

Yes.

Andrew Lehman Brothers. You talked about more of a focus on profitable volume growth when we were focused on revenue growth. Can you first talk about some of the impediment to that that are specific to your portfolio, just given the growth you are seeing in some areas that may have a mixed component that works against you and how you manage that and how big a part -- you mentioned SKU rationalization in there, is that more just ongoing or if that's going to be a bigger part of what will be driving the mix and then just one follow-up.

Let me start with your question on revenue mix and what we see happening. What we have is you have revenue mix and profit mix within a category, you then have mix between categories and also you have geographic mix as well. And in some cases some of those mix factors are going against us as we grow faster in developing markets, obviously, there's lower revenue and profits per pound sold in those markets. So that is a natural geographic mix that goes against us. What we're doing then is working hard to insure we're improving the mix within categories and very importantly insuring that as we do new products that their revenue and margin enhancing as we do those new products and so that is really the focus of the organization. But then actually gets to the second part of your question and a real focus and it is an accelerated activity, Andrew, in terms of our SKU rationalization is to pull out a significant number of our SKUs, as we've analyzed it, that don't contribute much to the profit line but it contributes a lot in terms of complexities of the organization. It's one of our enablers, too, as we simplify txhe organization.

Do you have to put any numbers around sort of percentage of SKUs that will be taken out or anything preliminary on that front?

Not to quote a number yet, but we're working through that program the details of that program and give you some greater guidance on that going forward.

And then just the last thing. In all of that restructuring that you are talking about is any of that part of your sales force structure at all? Because you and maybe P&G are sort of the last two that kind of do all the selling both in store and at headquarters really on your own and I don't know if that is something you are wed to long-term or maybe going towards more of a hybrid structure?

As you look at the job eliminations that we're looking at, and very few of it is impacting our sales force, we feel very good about the quality of our sales force and what they're doing. There is some reorganizations in our sales organization, have to get more organized around customers as they become more national in your scope and after we align ourselves even tighter to how they are organized and getting more senior points of contact with those bigger customers. David,

Two questions. Roger, one was on the 500 - $600 million incremental marketing and promotional spending for next year to drive a business model and that is essentially just annualizing what you've spent in the fourth quarter and that didn't fix cookies and it didn't address a substantial, the reminder of the portfolio, which I am sure you would like to perform broadly better than it is so why should we have confidence that that is a sufficient spending level?

As I mentioned before, actually what we saw differed by category in terms of the effect, we feel very, very good on what happened in the cheese category, terrific results on cheese in terms of both our consumption and our share improvement. So the effect of those dollars were actually very good and so if you think about what we need to spend in 2004, you just don't annualize what you spend in cheese, cause it worked very well. To your very point on the flip side, cookies did not work as well. But one of the underlying issues of cookies is not so much (inaudible) pricing and spending but actually new products that we need to do to align with consumer health and wellness concerns. So the fix in cookies, I'll call less of a marketing spend issue and more of what we have in terms of new products that will be coming out. So as I mentioned about half of the spending is targeted against the focus categories that we spend against in 2003. And we feel across our portfolio that we have the right spending levels and the right amount to support the price points that we need more broadly against the portfolio with the 5-600 million.

And secondly on the issue of health and wellness, there is obviously tremendous flux that's going on really at the moment. Atkins, low carb, the speed with which consumers are changing is quite rapid and a lot of categories that would have been perceived, that you and others would perceive even a year ago as being health and wellness oriented may not be today. In otherwards they could be a low fat category that has a lot of carbohydrates. So with all that flux going on how do you address that broadly?

The key there is having a range of offerings and part of what we showed was the Snack Well having sugar fee varieties there and yes they still have carbohydrates in them. But then having a range of low carb products address those needs and so I think what we have found (inaudible) have a broader range as a healthy alternatives within your brand as consumers are switching between the column fads, call them whatever the trends are in health and wellness.

Just wondering, I choose to address David's question. How much of that improvement that you saw in terms of consumption trans detail is actually tied to the increase promotion in advertising or reduction in price points and how much of that was actually commodity based. We saw a big rise in cheese prices through the fall, they've since dropped off and I guess I would be more interested in knowing if, in fact, that was commodity based what your expectation are now that dairy costs are down?

Well you're right and actually as we had explained the program we had planned our price points with the expectation that private label would rise as commodity cost rose as well and obviously now with cheese costs coming down that creates affordability for us to move our price points commiserate with that lower commodity cost, just as we expect then private label prices to move. So it moved exactly how we thought in terms of when private label moved up because of the higher commodity cost and we could expect is as commodity costs come down, it will move down some and we'll adjust our pricing accordingly.

And just a second question, wondering on cookies specifically, do you feel like you have to actual stabilize this business and grow this business or is this a business that you could lose modest share maybe on a quarterly basis if you could just stabilize it rather than grow it given the environment that we're in until you get in a better consumption trend.

Two comments. One is what is the category doing and then what is our share doing and the key is we need to make sure our share is stabilized and then doing thing to address the category. And again, I think it will take some time before we can do that and it's not going to be within the first half of this next year that we'll see it stabilize the category. I think there is enough consumer concerns on carbs and so forth. I think you will see continued negative trends in the category but I think you will see a stream of new products that will address that over time. To the question of gee, should we just let the category continue to decline? We have found in the past if you address consumer need appropriately, you can fix a category and get it moving in the right direction and we have seen that across categories. Any in the back? Thank you. Eric Katzman from Deutsche Bank. This is a longer term question. You have given us a 6 - 9% EPS growth target. Many of the investors I talked to wonder what Altria's intentions are longer term with the company and assuming that Altria does spin out the shares is it fair to assume that there would be added cost to Kraft as a stand alone company? For example, I think you get a tax shield from the holding company structure of Altria that lowered your tax rate by 10 percentage points or so and then you have the shared service agreement of $250, $300 million. Is it fair to assume that that goes up? Again, to your question, if we do this to standard growth plan it's targeted to deliver success for us as Kraft. Any question on what Altria's going to spin or not you'll have to address that to Altria. In terms of the benefits of our association with Altria, you are correct we do have a tax sharing agreement that we get a benefit from. So, again, that has been designed and saves us the money because of our relationship with Altria and our availability to consolidate the results together. Obviously if we were a stand alone company we would probably do different things in terms of how we would organize ourselves and what we do on a tax structure point of view. So at this point to say that that all would go away, is probably not a correct statement. In terms of the services we buy from Altria, and again we get very fair value from what we get from them, what we would be as a stand along company we would have to put some of those corporate services, would it be treasury or other functions into our own organization. But again, in doing that we think that is very doable and wouldn't dramatically change cost structure. David.

Getting into somewhat random questions now. Two questions, one, Jim maybe you could give CapEx expectations for the next two years and then on lowering transfats, how is that you are accomplishing that technologically?

Well, let me start with the capital piece. As I am sure you have seen we spent just under $1.1 billion in '03, the outlook for '04 is between 1.1 and 1.2 and that includes about 50 million associated with restructuring program. As we look to '05 I would expect that number to stay pretty much in that same ballpark. While you didn't ask I will tell you that on the depreciation side we had about 800 million this year, we're looking for that to increase about 25 million or so in '04.

David, your question on reduction of fatty acids. Here again, at different reformations occurring in different products, in some cases it's substituting other oils and one of the key things that you substitute for hydrogenous oil is to make sure that you have the right stability. And that was one of the challenges, particularly within cookies, is that you have the stability and that texture and mouth feel was maintained. Just substituting any oil for that, makes it a challenge and that is why within quarter one we're not going to have all the products done. It will take some time. In other products we substitute other ingredients, but primarily different fats as a substitute for the transfatty acid.

David, have you seen some of the same trends regarding foods in other markets, in Europe and the expanding markets, the trends in terms of low carb, the concerns regarding fats?

I guess the markets where I'd have to say are most similar are the USA and the UK, where we have seen in the UK similar interest in low carb diets, high protein diets and similar concerns on obesity and so forth. Again the obesity concern is a global issue, something we were addressing around the world, but again manifests itself very differently in different markets. Clearly the developing markets have very different challenges and I will tell you there is not a lot of concern and interest in low carb diet in the developing markets. There's a need for more caloric intake in most of those markets. So again, I would say the U.S. and UK most similar, continental Europe different in that regard and in their view and about how they view health and wellness and their approach to it.

Just going back to Terry's question, working on the assumption that your merchandise spend in '04 is going to be more than what was originally expected. I'm just trying to understand how it'sa being framed? Is that because the returns are good or their better than you're expecting so you're ramping it up, or your position, you feel you need to just spend more to defend yourself. That's the first question. The second question is for Jim, which is is the long term EPS target does that apply to '05?

I will answer both of those for you. Your question on the spending and again we saw good response against the focus categories excepting cookies where it's a more fundamental consumer issue to deal with on health and wellness and so what we are doing in 2005 is actually able to spend across a broader range of categories. So it's across the portfolio both domestically and internationally. So as you think of the and 5 - 600 million, roughly about half of that is against the focus categories where you say if I just annualized what you spent in '03 you would be spending a lot more than that. We have found it works very well for us across both the categories and so we're able to spend at that level. And then do similar types of approaches across more of our categories to ensure the brand value equations are right, where we don't think it is currently right or to continue build it in other cases. In terms of 2005, I would certainly hope we're in our long-term guidance range and it's too early to provide any 2005 guidance per se, obviously need to see how our spending goes but I would certainly hope, and I'm optimistic about our programs, that we could be in that range of (inaudible) long from guidance.

Eric Miller from Lehman Brothers. You spoke a little bit about your willingness or your priorities for free cash flow and your comfort around the capital structure, should the right acquisition present itself for growth, would you be willing to meaningfully add to your debt leverage and potentially take your credit ratings down?

Obviously depends on the acquisition. If it really is something that will strategically help us in terms of give us attractive categories and brands that we think can grow, very attractive financial returns for us as a company and very importantly is quickly accretive, we would consider taking on some debt to make such an acquisition and we have, obviously, the cash flow and capacity.

What is your optimal capital structure maybe in terms of a debt to capital.

Again as Roger mentioned, I wouldn't really want to lock ourselves into a fixed structure because if the opportunity is there for the right program we'll be flexible in that capital structure.

Any other questions? With that I thank you all for coming and I know those in New York are waiting for a snow storm here and thank you all for listening in on the webcast and again I look forward to seeing you at CAGNY were we'll talk more about the elements of sustainable growth plan and we hope to see you there. Thank you again for coming.