億滋國際 (MDLZ) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the Kraft Foods fourth-quarter 2004 and year-end earnings conference call. My name is Holly and I am your conference call operator. Today's call is scheduled to last about 1 hour, including remarks by Kraft Foods' management and the question-and-answer session. In order to ask a question, please press the star key followed by 1 on your touch-tone phone at any time. I will now turn the meeting over to Mr. Mark Magnesen, Vice President of Investor Relations for Kraft. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us for Kraft Foods’ fourth-quarter earnings conference call. On the call with me today are Kraft's Chief Executive Officer, Roger Deromedi, and Chief Financial Officer, Jim Dollive. Our prepared remarks today will refer to presentation slides that are available on our website at www.kraft.com. So if you have access to the web, you can follow along with the presentation.

About an hour ago, we issued a press release with our 2004 results and 2005 outlook, and this release is available on our website. Our release and comments today contain projections of future results and are made only as of today's date. Both the release and presentation contain our Safe Harbor statement which reviews some of the factors that could cause actual results to differ materially from projections. Additionally, we expect to file an 8-K with our complete and audited 2004 financial statements on or about February 2, 2005. So you can look for those on our website in the near future as well.

Our agenda this afternoon starts with comments from Roger on Kraft's 2004 progress against the Sustainable Growth Plan. I will take you through the details of our 2004 financial results. Jim will review our 2005 outlook and guidance. And then we will open it up for questions. For those of you listening in via webcast, you are in a listen-only mode. At this point I'll turn it over to Roger.

Thanks, Mark, and good afternoon, everyone. 2004 was an important transitional year for Kraft. It was one year ago when I first spoke to you about Kraft's strategic plan, which we referred to as our Sustainable Growth Plan. A lot has transpired in the past year. In the next few minutes I'd like to review our progress against this plan as well as discuss areas where we still have more work to do.

We started the year by creating a new global organization which we think improves our capabilities to execute our best of global, best of local approach, while allowing us to capture additional efficiencies. We established a new global marketing category development group that has driven growth ideas through our organization even faster. We organized it in 2 commercial units focused on executing with excellence on a geographic basis. And we reorganized key functions like procurement, research and development, and human resources to better leverage our scale and to drive best practices globally. Most important, we got the right people in the right position. As you would expect, a large number of people were impacted by our reorganization and I am very pleased that our executional capabilities strengthened as we progressed through the year.

After putting the new organization in place, we began developing and executing our 3 year cost restructuring program. This program funds our improved price gap management and our increased marketing spending. By the end of last year, we had announced the closure of 13 plants against our 3 year target of up to 20 plants. And had announced headcount reductions of about 3500 positions versus our 3 year target of 6,000. Importantly, we exceeded our plan -- we executed our plan very efficiently with our 2004 costs about $100 million below our initial estimates. For our savings of $127 million we are on track. Our implementation was also done in a way that we believe treated the affected employees with the respect and dignity they deserve.

With our cost savings plans under way we then began to address the brand value issues we had on some of our businesses. As you know, we were losing share in several key categories, in some cases, due to price gaps that were too wide and in others because our innovation or marketing was not as strong as it needed to be. The first step we took to fix our brand value equation was to realign price gaps and to reinvest in consumer marketing. On the year, we increased our total marketing spending by around $460 million, with approximately $70 million of that coming in the fourth quarter. It's important to remember that the 2004 fourth-quarter spending increase is on top of the stepped-up spending that started in the previous year. And I am very encouraged to see that our increased spending is working.

We finished the year with very strong fourth-quarter top-line results. Net revenues were up 7 percent, giving us 5.5 percent growth on the year. Ongoing constant currency revenue growth, which is our guidance measure, reflected the sequential improvement we expected to achieve during the year with 4.9 percent growth in the fourth quarter and on the year we delivered 3.2 percent growth, consistent with our 2004 guidance and long-term target of around 3 percent.

Our results in the marketplace continue to improve as well. In our top 25 U.S. categories, our fourth-quarter weighted average dollar share was up 0.2 percentage points, continuing to reverse a trend we saw in the first half of this year and all of last year. While some of this improvement was driven by improved price gaps, we also clearly benefited from better new product and marketing innovations in 2004. Our total new product revenues were up substantially on the year and we had a number of great new product successes. These include our Nabisco 100 Calorie Pack line of portion-control snacks, which gives consumers an easy way to limit their caloric intake.

This product line is on track to be about a $75 million business in 2005 and, more important, it represents a platform for future development. The latest addition to our Lunchables line, Chicken Dunks, has gotten off to a very strong start. After only about 6 months in the market, this item already is the fastest selling SKU in the entire Lunchables line and is tracking to be a $50 million business for us in 2005. DiGiorno Microwave Rising Crust Pizza, which is one of my favorites as a family, has made frozen pizza even more convenient. This product uses new dough technology we developed to bake a pizza in about 6 minutes in the microwave versus 25 minutes in a conventional oven. Together with our DiGiorno Thin Crispy Crust and Tombstone Brick Oven Style pizzas, this trio of new products has added around $100 million in revenues to our pizza business in 2004. And in France, retailer and consumer response has been excellent to our launch last fall of Tassimo, our coffee and hot beverage on-demand system. Initial consumer take away of both the machines and our T-Disc are exceeding our expectation. We are currently introducing Tassimo into the UK and will be expanding into additional geographies later in the year.

While each of these new products is a great example of innovation, the most encouraging aspect of our new product development program in 2004 was that collectively, our efforts were more incremental than in the past. This is one of the key focus areas we had as we began the year. This better new product incrementality along with our SKU pruning efforts were key drivers of our strong mix improvement in 2004.

As we moved through the year and our brand value investments began translating into improved results, we began to intensify our efforts on the longer-term task of transforming our portfolio. In a relatively short time we made excellent progress on this front by reaching agreements in the fourth quarter to divest 3 businesses, sugar confectionary, UK desserts and yogurt. These divestitures are consistent with our strategy to focus on businesses which Kraft has sustainable competitive advantage or that provide needed scale on a country or regional basis. We are pleased with our progress so far and we continue to review our portfolio for additional divestiture opportunities.

I'm also very pleased that our Veryfine acquisition, with its Fruit2O brand, is performing well on the marketplace and we will continue to look for other potential acquisitions that will best position Kraft for long-term pros.

Finally throughout 2004 and as we began 2005, we took several significant steps in the area of corporate responsibility and corporate governance. Earlier this month we announced we will add a Sensible Solutions flag on packages of products that meet dietary guidelines drawn by from the recommendations of public health authorities. We believe this will make it easier for consumers to identify the "better-for-you" products that we offer within particular food categories. We also announced a new approach to our TV, radio and print advertising seen primarily by younger children. We firmly believe in self-regulation and feel it is important to take meaningful steps to address public concerns. And we are pleased so far by the broadly positive reception our initiative has received. Finally, we have now added 2 new members to the Kraft Board who will not only provide us with valuable perspectives, but which also results in a Board comprised of a majority of independent directors.

However, one area where we didn't achieve all that we wanted to is in our International business. On the year, our International ongoing constant currency revenues were flat and they were down slightly in the fourth quarter. In 2004 we faced a tough environment in many parts of the world, but especially in several European markets. We have faced many of these challenges before and have now put in even stronger programs for 2005.

The situation in France is a good example. Hard discounters have aggressively expanded in France. Traditional retailers have responded with heavily firmed up promoting their own private label. And all of this has been complicated by governmental intervention. In the first 3 quarters of the year, our price gaps remained too wide in France and, not surprisingly, we lost share. By the fourth quarter, though, we had our price gaps more in line and began to see signs of share progress.

And as we look elsewhere around the world there are some important geographies with good results, particularly in some developing markets in regions like Central and Eastern Europe. However, overall, we recognize that our International business needs to perform better.

So in summary, I feel very good about what we've accomplished this past year. I view 2004 as a period in which we began to drive out costs, got many of our price gaps right, reinvigorated our new product pipeline, and began our product portfolio transformation, all of which will build a solid foundation for future growth. While I'm disappointed we came in below the earnings guidance we gave at the very beginning of last year, I felt we made the right strategic choices for the long-term in how we managed through the high commodity costs, in particular dairy.

As we look at 2005, we know the operating environment will continue to present challenges, both in the U.S. and abroad, but I am confident that we can sustain the top-line momentum we've built and that our continued focus on building our brands and our accelerated innovations will allow us to continue to deliver against our Sustainable Growth Plan and to fulfill our vision of helping people around the world eat and live better.

So, now let me turn it back over to Mark who will take you through our 2004 financial results.

Thanks, Roger. Before getting into the numbers, I will quickly review 2 changes in the way our financial results are presented this quarter. These changes were detailed in a press release and 8-K filing earlier this month along with restated quarterly data.

The first change is that the sugar confectionary business is being accounted for as discontinued operations. What this means is that the sugar confectionary P&L by line item has been removed from our total Company P&L and the net earnings impact from the business is included as a single line item. Results for segments that had sugar confectionary operations have all been adjusted to pull out the results.

The second reporting change is the realignment of our North American segment. Following the sugar confectionary divestiture, we reorganized our segments to provide better management focus on our businesses while at the same time providing better transparency by breaking up the large and diverse beverages and grocery segment into 2 segments. This segment was separated into the U.S. Beverages and U.S. grocery segments. And the cereals division was moved to a new U.S. snacks and cereal segment to more fully leverage the synergy opportunities among grain-based products. In addition to these moves, a few small brands shifted between segments as well.

Turning now to our results, and starting with revenue growth, as Roger indicated, our fourth-quarter revenues were strong. Reported net revenues were up 7 percent in the quarter, aided by 2.6 points of currency benefit, but negatively impacted by 0.5 points from divestitures. Ongoing constant currency revenues were up 4.9 percent, with volume growth, positive mix, pricing realization, and acquisitions all contributing to growth. On the year, reported net revenues were up 5.5 percent, including 2.7 points of currency benefit and 0.4 points negative impact from divestitures. For the year, we delivered 3.2 percent growth in ongoing constant currency revenues in line with our guidance of around 3 percent. Importantly, we made good progress on improving our product mix through several initiatives including higher net revenue new products, SKU rationalizations, and adjustments to sales force incentives.

On a segment basis, 6 of 7 segments generated good growth in both the quarter and the year with Europe, Middle East and Africa down slightly. The North American segments were obviously the key drivers of growth as new products performed well, momentum from increased marketing spending continued to build and price gaps remained in targeted ranges. We sustained the momentum on our cheese and meat businesses where we began to reinvest late last year while jump starting growth on our biscuit business. On the International side, our Latin and America and Asia Pacific businesses was up in both the quarter and the year. And we continue to build our presence in developing markets.

But Europe, Middle East and Africa was down. As Roger mentioned, the retail and competitive environment in Europe, and particularly this year in France, has been a challenge. In the fourth quarter, we reduced our price gaps further in several markets and there are some early signs of improving trends. We recognize, however, that the European markets will take longer to turn around. As we've said before, the key to winning in these markets long-term will be to leverage our large consumer brands and to innovate in ways that are difficult for price-oriented competitors to replicate.

Turning now to earnings, let's look at the changes in EPS in the quarter and on the year by key driver. First, restructuring and impairment charges represented 12 cents in the quarter and 32 cents for the year. Within this total, restructuring program charges represented 6 cents on the quarter and 24 cents on the year. We incurred an impairment charge from continuing businesses of 2 cents in the quarter as we wrote down our investment in a joint venture in Turkey. The 3-cent charge on the year reflects this fourth quarter charge plus the 1 cent goodwill impairment charge we took in the first quarter. Finally, we incurred impairment charges of 4 cents on the quarter and 5 cents on the year from the announced divestitures. We will talk more later about both the one-time impacts and the ongoing EPS implications of these divestitures for 2005.

Other key drivers of the change in our EPS on the quarter include 11 cents from higher commodities as dairy, coffee, meat, nuts, packaging and energy were all up; 3 cents from increased marketing spending; and 1 cent from higher post employment and restricted stock costs. These impacts were partially offset by 2-cent benefit from restructuring savings and 10 cents from all other operations. All other operations basically reflects the contributions from volume growth, pricing actions, and ongoing productivity gains. Thus, we delivered 37 cents EPS on the quarter, including 12 cents from restructuring and impairment charges.

The release and presentation detail the key drivers for the full year, so I won't go through those separately. But I do want to quickly reconcile our reported EPS to our last guidance.

In the third quarter, when we confirmed our EPS guidance of 1.56 to 1.60, it included an estimated 30 cents in restructuring and impairment charges but excluded any impacts from changes to our portfolio. Our actual EPS of $1.55 reflects 4 cents in impairment charges due to the divestiture agreements reached in Q4. Thus from an operational perspective, we finished the year much as we expected.

Operating margins for the year were 14.3 percent, down 4.9 percentage points from last year. The drivers of the reduction were the restructuring and impairment charges of 2.2 points, commodity cost net of pricing of 1.7 points, and marketing spending of 1.7 points. All other operations contributed 0.7 points positive impact.

As we look forward, over the long-term we would expect the impact from the increased marketing spending to remain in our margins as this was a permanent step up in our spending. However, we would not expect that the aggregate 3.9 point impact from restructuring charges and commodities would be an ongoing impact.

On cash flow, we finished the year very strong with full-year discretionary cash flow of $3.0 billion. This was equal to prior year, despite incurring approximately $150 million in cash spending for the restructuring program and increasing our pension contributions by over $100 million. These were offset by improvements in our working capital.

We made strong progress in improving our cash conversion cycle with inventory as the key driver. Our inventory was down about 2.5 days as we reaped benefits from initiatives like our consumption-based trade spending program in the US and our world wide efforts to reduce the number of SKUs.

Regarding cash usage in 2004, we acquired Veryfine in Q2. In Q3 we increased our dividend by 13.9 percent on an annualized basis. And by the end of the year, we had repurchased $700 million in stock. We also received authorization from our Board in December for a new 2 year $1.5 billion program. While debt reduction was a lower priority in 2004, we still lowered our debt by almost $1 billion.

That completes our remarks on 2004. I will now turn it over to Jim for our 2005 outlook.

Thanks, Mark, and hello, everyone. As we begin 2005, a number of positive factors will help us. We start the year with strong top-line momentum especially in North America behind increased marketing spending and improved incrementality from new products. We have already announced to our customers many new product introductions in Q1 including extensions of our successful Ritz Chips line, additional offerings in our Deli Shaved Meats, which should be nicely incremental, sugar-free ready-to-eat Jello Pudding following on the success of our sugar-free Jello gelatin line, a microwave version of our DiGiorno Thin Crust pizza, the broad launch in a variety of categories of our licensed South Beach Diet branded items and the expansion of our Tassimo hot beverage system. We're pleased with the trade's reaction to these items as well as our whole set of new products for 2005.

On the commodity side, U.S. dairy costs, which were at record highs in 2004 with barrel cheese averaging $1.60 per pound, more than 20 percent above long-term averages. Although we start 2005 with dairy costs remaining high, we expect dairy supply fundamentals to improve and cheese prices to decline from their current levels. As such, our dairy margins should improve versus last year. Spending on our restructuring program will be down versus 2004 while we generate incremental savings. Finally our 2005 fiscal year contains an additional shipping week. But there are also headwinds we will need to manage.

As has been the case in the past few years, we will incur a significant impact from post employment benefit costs particularly due to changes in our pension accounting assumptions. We face higher energy costs which for us has a significant impact on packaging costs. As mentioned earlier, we expect discounters in Europe to continue to expand, keeping the competitive landscape difficult in that region. This will require us to be as vigilant as ever both on our price gap management and on supporting our brands. And finally, price realization needs to be carefully managed.

While we expect dairy costs to moderate in 2005, several other key commodities are expected to be up. In response, we have taken, or will be taking, price increases or promotional spending reductions on certain businesses. These include increases late last year on coffee, nuts and cereal in the U.S. and coffee in Germany, as well as increased promoted price points on our ready-to-drink beverages in the U.S. The risk from these pricing actions is 2 fold. First, we need to maintain price gaps to key competitors including private label within appropriate ranges to sustain the consumption and share momentum we have built. Second, we have seen consumers become more value conscious in recent years, so we will closely monitor the impacts of pricing on our consumption in these categories. Net the risk from pricing is one we will watch closely and we will adjust our tactics so we move through the year to maintain our brand value momentum.

Turning to the specifics of our guidance, we project ongoing constant currency revenue growth of around 3 percent on a comparable 52 week basis or around 4.5 percent including the additional shipping week. This is consistent with our long-term target and will be driven by volume growth from new products, higher marketing spending, developing markets, and pricing actions. Fully diluted earnings per share are projected to increase to $1.60 to $1.65 on a reported basis. And when we exclude discontinued operations fully diluted EPS is forecasted at $1.75 to $1.80 on a continuing basis. Looking at our projection on a reported basis, our restructuring and impairment charges go from 32 cents in 2004 to an estimated 18 cents in '05. We also expect to incur 12 cents in one-time EPS impacts in 2005 from our announced divestitures.

Given our expected timing for closure of these divestitures, we expect to realize a 4 cents positive one-time impact in Q1 from the UK deserts and U.S. yogurt divestitures. And we expect to incur a 16 cents negative one-time impact in the second quarter from the sugar confectionary divestiture which will be captured within discontinued operations. In addition to the one-time impacts from these transactions, we will also be impacted by the loss of their ongoing earnings. Dilution from these divestitures net of the cash usage is estimated at 4 cents in 2005. This represents 4 cents from sugar confectionary and 1 cent from the combined desserts and yogurt businesses partially offset by a 1 cent benefit from lower interest expense. The full-year ongoing dilution from these divestitures is estimated at 5 cent so we will incur another 1 cent of dilution in 2006.

The next EPS driver is the combined impact from post employment benefits and restricted stock costs. Together these impact EPS by 11 cents with 8 cents primarily from pensions and 3 cents from restricted stock. The 8-cent pension increase is slightly higher than the 5 to 7 cent range we provided in our Q3 call as the changes to our pension accounting assumptions were larger than we initially anticipated. We expect incremental restructuring savings of approximately 120 to $140 million or about 5 cents per share. The earnings contribution from the additional shipping week is approximately $100 million or 4 cents per share. Together, these 2 benefits are the source for our increased consumer marketing spending next year of approximately 9 cents per share. In 2005, we expect to spend 200 to 250 million more in consumer marketing which reflects advertising and consumer promotion increases only. This increased spending will support key growth initiatives, it will help defend our brands in key categories and countries, most notably Europe, and it will build our businesses in developing markets.

We expect a tax rate of 33.4 percent in 2005 up just over 1 percentage point from 2004, resulting in a year-over-year EPS impact of 2 cents.

Finally, the net change from all other operations is 20 to 25 cents per share. This figure essentially reflects the impacts of volume growth, product mix, commodity cost net of pricing, and ongoing productivity savings. Also included in this figure is an estimated 7 cents benefit from improved year-over-year dairy margins. As we look at the remainder of our commodities, however, this forecast benefit on dairy cost is expected to be fully offset by other cost impacts.

I already mentioned higher energy and packing costs which, alone, are expected to increase almost $200 million or 7 cents per share next year. Looking at recent spot prices on other key commodities versus this same time last year, most tree nuts are up significantly with hazelnuts' cost more than double and almonds up 64 percent. When we use these nut varieties, we have taken steps to recover the cost increases. On coffee and lean hogs, where spot prices are up 40 and 36 percent respectively, we expect to recover much of these higher costs through pricing and promotional spending adjustments. And some commodities are down, most notably cocoa, wheat, and soybean oil. In aggregate, despite lower expected dairy costs next year our overall commodity costs net of pricing and hedging actions are expected to be neutral to our 2005 earnings.

Because of the timing of the impacts of some of these commodities in the first quarter, and only partial realization of the related pricing benefits, we are providing specific EPS guidance for Q1. We project EPS of 38 to 41 cents per share, including 5 cents negative impact from restructuring costs and 4 cents benefit from the one-time impact of divestitures. This compares to a prior year when our EPS was 33 cents, including 12 cents of restructuring and impairment charges.

2005 discretionary cash flow is projected at around $2.9 billion, down $100 million from 2004, due primarily to around $300 million in taxes that we'll pay on the divestiture of our sugar confectionary business. Our capital spending is projected to be between 1 and $1.1 billion but we continue to drive for improved working capital through reductions to our cash conversion cycle. In terms of cash usage, our priorities are the same, which are to fund acquisitions, to return cash to shareholders through dividends and share repurchases and lastly to reduce debt. In addition we also expect cash proceeds of $1.4 billion from the announced divestitures, excluding the tax impacts already captured in discretionary cash flow. Use of that cash will follow the same profile as our operational cash, acquisitions, return to shareholders and debt reduction.

In summary, we made solid progress against our Sustainable Growth Plan in 2004. Our top-line results sequentially improved throughout the year as we expected. We established a solid foundation for future growth through cost reduction initiatives and investments in our brands. While our International results were not where we needed them to be, we're taking more aggressive steps to improve them. There are clearly challenges to be managed in 2005 but we feel good about how we're exiting 2004 and look to build on that momentum in the coming year. Thank you. Now Roger, Mark and I would be pleased to take your questions.

[Operator Instructions] Our first question is coming from John McMillin of Prudential Equity.

Good afternoon, everybody. I want to first thank you for the tables in the press release which certainly were revealing. Also, thanks for the quarterly earnings guidance. Is that something you're just doing for the first quarter and that's not going to continue?

We are not planning to give quarterly guidance on every quarter but since we wanted to give a sense for what's happening with the higher cost coming through on commodities relative to when the price realization's coming through, we did want to provide it for quarter one. It's not our plan to do it every quarter but if there's something unique where we need to help you, we want to give that you information.

Thank you for broadening your Board as well.

Thank you.

So now after the nice stuff, I guess the -- compared to Sara Lee this morning there's really nothing that bad to say except it does look like your '05 guidance is a little bit below where the Street was looking for. You know, it's not groundhog day every year here, but this guidance is a little bit like last year and you do get the feeling if there's more spinoffs -- I mean if there's more divestitures and if there's costs absorbed if you're able to spinoff from Altria, you just have the potential to come here every January and talk about earnings of, you know, $2 or slightly less. You kind of understand that we measure you off EPS growth from operations and that we kind of expect it to grow.

John, I understand exactly what you are saying. As we look at the numbers, we'd be looking at a 3 to 6 percent growth next year as you do the numbers. But importantly one the things, I guess, that as you look at it, there's about 6 points of impact in our EPS coming from the pension and restricted stocks. And again, so you think about what we are having to drive operationally on the business, it's pretty strong growth in the EPS, and this is where the question is, when will some of those headwinds on pension and obviously when you get into 2006, the impact of restrictive won't be there anymore so we will now have gone to 3 years of the -- the 3 years vested restricted stock. But I think where we're trying to find that right balance of building the business for the long-term and at the same time be delivering growth in the near-term, and I think we've struck that right balance in terms of how we are addressing it. The headwinds that everyone has in the industry, but at the same time, I guess, where I feel very good is the momentum going in. And I tell you we as an organization will do everything we can to do even better than the guidance we are providing.

Just a quick follow-up and then I will turn it over. In terms of divestitures or going through your portfolio and making some changes, do you feel like you're in the first or second inning of the game or something kind of beyond that?

Yes, I think it's -- I'd say we're in -- I could not call it an inning, but I think we've started the initial phases. And I think I won't try to quantify it in terms of absolute size, but I think there's a number of smaller businesses that still have the opportunity to be divested. You know, our guiding principle on divestitures is where do we have sustainable competitive advantage and where do these businesses give us, I'll call it geographic leverage and the scale of benefits that we need. And there is just a lot of small businesses, I'll tell you, that don't meet that criteria. And so I think you'll probably see a number of businesses potentially for sale in the future, but I wouldn’t, say, necessarily quantify the size of those but I think there's going to be a lot of small ones.

Thanks a lot.

Thanks, John.

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

Good evening, David.

Good afternoon, everyone.

Hi, David.

A couple of things, Roger. First, the very strong sales growth in the U.S., was some of that due to the pacing of new products and trade loading? Is that contributing to the first quarter outlook being down?

No, actually it's not. In fact we didn't give guidance for the top-line in terms of we gave guidance for the full year in terms the top-line growth. No, we expect the top-line momentum to continue. Quarter 4, though, was very strong. To give you a perspective on that, our net revenue, constant currency revenue increase was 8 percentage point growth. About 4 of that came from what we've seen as the dollar consumption increase and that's the 20 of -- our top 25 categories including Wal-Mart that we get from the Diary (ph) Panel. So 4 points came from that. There was one point of trade inventory impact on volumes, but actually our trade inventories actually declined year-over-year from '03 to '04, but it was less of a decline than we had from '02 to '03. So, we benefited 1 point there. So, no, there was not -- absolute trade inventories were less at the end of '04 than they were in '03. We benefited about a point from good growth in club stores and convenience stores where we put an extra effort in terms of from our sales perspective to get into those other channels of distribution. We picked up about a point in terms of impact on revenue from actually lower liquidations on salables. One of the nice benefits, as you get your new product pipeline working the way you want, you have less unsalables in it. And that's helped us about a point. And then lastly within that, the foodservice business, could be about a point. So, if you add those up I think you get about 8 points. So that gives you some perspective. So, no, we are entering 2005 with inventories in very good position as we go forward.

Okay. 2 other quick things, Roger.

Yes.

The promotional spending you put into the market in the fourth quarter is less than you had envisioned going into the quarter and I'm curious, are you starting to see across the U.S. portfolio private label and regional brands taking prices up at a faster rate?

That's one way to think about it, yes. We've seen less of a need to put in trade promotional spending than we had expected. We started in quarter 4. So, yes, so we maintained all the price gaps that we wanted to and that's obviously reflected in our very strong top-line growth in quarter 4. But we had some left of that trade promotional spending in. We also saw some efficiencies come in with our consumer promotion spending as well and so we were just actually executed with a greater efficiency. Importantly, for the full year, our advertising number was up by over $100 million. So while, yes, the majority of the increase in our overall spending for the year, the $460 million, was in trade promotion, over $100 million came in advertising. But we are seeing that we are able to get more prices where we want them and seeing some actions by competitors as they give you that belief that they are getting it through as well.

Okay, and then in Western Europe, Roger, other than being more price promotional, is there any sort of realistic or elegant solution to the melees in those major markets?

In Western Europe.

In Western Europe?

Yes, in Western Europe.

No, the key is actually to get your price gaps right and it took a little bit longer in France, as I went through that example, than we would have wished. I will tell the Sarkozia [Ph] interventions have been complicating things considerably there. We're actually encouraged in terms of the German business, continues to do basically what we thought it would be. We've actually found ways and have had continued success in the soft discounters in Germany and so it's an interesting balance as we start applying some of those value -- as we call them value-retail strategies in markets. We are seeing some success there. And the key is making sure that you participate appropriately in soft discounters with the right brands and in some case doing exclusive brands with some of those companies. And at the same time, you know, ensuring you have the right SKUs of your branded products in. I think we are starting to get the formula right. And I think we have gotten through a lot of it. There's still a little bit more to do and some countries in the Nordic countries there's been some challenges, obviously, with some discounters going up there. But I think we now know the model, and as I commented in my opening remarks, I think we have the right programs going into 2005.

Okay, thank you.

All right, thanks, David

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

Hey guys. I have one question for Jim and one for Roger. Jim, you are mentioned the benefit -- potential benefit from dairy costs. What is the likelihood or I guess risk that this is offset as I guess it has been a couple of times in the past by some lower deli cheese prices that might impact your ability to price?

Well certainly the expectation is to manage the price gaps, because that is the common industry cost as the dairy -- as the cheese prices move. And that's pretty much built into our expectations because we do bring our prices down when we see the cost of the commodities come down. But if you remember last year, we never took our prices all the way up to the peak of that dairy curve and it's really that piece that we are getting back as the margin gain in '05.

So it's fair to say then you've modeled in some expectation of response by the industry?

Absolutely.

And just, Roger, I know it's our job and my job as analysts to decide what to include, you know, and what to exclude as we look to try to get a 5 year kind of earnings base for growth here at Kraft. But I mean, as I look at, you know, the numbers and these tables are extraordinary helpful, I just wanted your opinion on what number would you use in terms of, you know, base earnings for next year and thinking about, you know, as we build toward, you know, what kind of earnings growth we're going to have over the next 5 years? What would you include? What would you exclude?

Yes, I think we have laid it out fairly completely as you said. And it's like with all the different parts of the -- like the plants are going. But I think importantly you should look at continuing operations is, I think, the key thing going forward that I would, you know, focus you on in terms of -- as you think about the base going forward. And I think it reflects what we have done with the sugar confectionary business. At the same time, you can add back to that the things that you see that we in terms of the restructuring and so forth and get to it, what you would probably do with the number going forward. Obviously I can't add those numbers for you, but I think we gave you all the pieces. You can add back to that continuing operations number.

Okay, Roger. Thanks for playing analyst with me for a second. I appreciate it.

Have a good evening.

Thank you. Our next question is coming from David Driscoll of Citigroup Smith Barney.

Hi, good afternoon, everyone.

Hi, David.

Question on your marketing spending, Roger. The volume growth numbers, the organic volume, when I take out both acquisition and divestitures, certainly the fourth quarter was an improvement. And basically every quarter I talk about this. It looks to me like if I did my math right, it was organic volume growth in Q4 was about 1.3 percent. You know, what I'd like to hear from you is, you know, do you consider that number, you know, acceptable on a 4 quarter -- on a quarterly basis? And then how do you think about marketing spending? I mean you've increased marketing spending significantly in '04. You've got another increase in '05. Certainly this is what you need to have to drive consumption. And, you know, I am still not comfortable myself that you are at the right levels, but maybe you can shed some light on why we should be comfortable.

Okay. No, I think importantly as you back into what the -- some volume numbers and I think you have done your math fairly well. I think as you think about the revenue growth that we are driving, I think maybe if you take a step back in terms of why we're talking to you about revenue. No, we didn't come out with a catchy phrase and maybe other companies talk about, but we do have the Company and everyone within the Company very focused on driving revenue and not just pounds or volume as you would say. And importantly, within that, and what I feel very good about in quarter 4, was the strong mix improvement that we had. And I think it's, as you sort of model ourselves going forward, and think about what's being driven with our marketing spending, it's not just the sheer pounds that we are doing, but the, I'll call it incremental revenue that we are getting from new products and the mix improvement from that. Also, as you look at the tonnage number, what we also have in there is a huge reduction in the number of SKUs. I’ll tell you in 2004 we reduced about 10 percent of our SKUs. And so as you think about that, that can be in a lot of pounds coming out of the system. And so that's another important driver of that revenue improvement. So this is where, as we sort of model it going forward, I do feel that, you know, the step-up we had in our marketing spending in 2004, well, again, a lot of it directed getting the price gaps right. I guess, as we've done and learned so many things in marketing in our categories. You got to get the prices right and then as the consumer marketing kicks in. Importantly, I think, as you noticed in our guidance we gave and as Jim just ran through it, for our marketing spending in 2005, the 200 to 250 million, that is consumer marketing only. We very importantly want to make sure that you understand we sort of have moved through a lot of price gap stuff we did in 2004 and now we're very focused by the consumer marketing spending. Do we see it continue to increase in the future? Yes, we do, because we expect to have the revenue growth that gives you the formula to go do that. But I think you will see it starting to taper off more in line with the growth going forward. So, I guess, my net is, I feel good where we are, I feel good about the brand value equations that we are getting to. And I feel like the spending we have and the plan for 2005 is the right level that will deliver the growth that we have in the top-line. But importantly, don't just look at volume, look at that mix improvement as a key piece.

And, David, let me just add a new numbers here. The number we would get to is about 1.4 on a total Company basis so you are pretty much in the ballpark. And that's broken up between North America at over 3 percent, at 3.1 percent, and the International business was down about 2.4. So the other side of it is North America really did have solid volume growth in addition to revenue growth. And Roger referenced a lot of the issues with International.

The second, you know, question I think is just critical to the story is, you've made these divestitures. You are taking in or set to take in very significant cash. Your balance sheet is in great shape. You know, you've talked to us that you're going to redeploy this cash Internationally, and as I sit here and as clients talk to me about this, I'm fairly unclear as to where you're actually going to go with the cash. What your major markets are and what the timing is of -- of some of these acquisitions and whether or not they're very sizable or if there's just going to be a lot of very small acquisitions. Can you give us a glimpse as to what your vision is, Roger, about how you spend all this money?

Well, one, I will tell you I am pleased we have money to spend on value-enhancing acquisitions and we will do so when they are clearly shareholder enhancing. I think our focus will be, and we'll do a lot more about discussion at CAGNY, what we see as our global core categories. But in the areas of coffee, in the areas of biscuits, in the area of cheese, and as we call it specialty refreshment beverages are areas where we see the opportunities for acquisitions. In some cases they will be -- I'll call it geographic fill-ins. So if you want to do some strategic analysis, again, just look at a matrix in some of those categories I just rattled off and what countries we're in and what countries we're not in and think about what we could buy and not buy. I won't name anything, but that's the way to start thinking about it. And then also what could be acquisitions in some of those categories that can really step-up our level of participation in them. This is where in some markets in the world where we may want to have greater participation in biscuits. There are some things we may look at in some the geographies particularly in the developing markets. Another area that broadly across the entire portfolio is potential acquisitions in health and wellness. And this is where some of that actually may be buying of the technologies and things that we can leverage across our entire product range. So I give you that as some of the – I’ll call it some and global core categories and we'll be talking more about this at CAGNY. But those will be where I think you'll see some of the focus on where the acquisitions will be. Does that help, David?

Yes, can you give us any numbers though on timing? And then maybe the most important macro question, I think, for clients out there, is you've done these divestitures that were dilutive; would these acquisitions also potentially be dilutive?

We have consistently said, and it's still true going forward, while we may take some dilution on an acquisition, we don't want things to be -- we want them to be quickly accretive. We have found that given our ability to do integrations and bring businesses in, that we are able to generate synergies fairly quickly as we make these acquisitions. So I am not envisioning any massive dilutions, again, depending what we would acquire.

Thanks a lot for all the information and I will pass it on now. Thank you.

Thanks, David.

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

Good evening.

Hi, Andrew.

Hi, Andrew.

Just two quick things. One, if you could just elaborate a little bit more on your commentary around mix. You've made some changes, I guess, structurally with sales force compensation and such. And this is, I guess, maybe the second quarter in a row you've seen some positive mix. And are you still confident that this is a type of trend that we can see fairly consistently, even though it may be modest given, you know, product mix and channel mix and such in your portfolio. Is, you know, a positive mix even modest still the likely outcome over the next, you know, couple of years as you look forward which would be obviously a real difference from the, you know, the past couple of years?

And actually, you know, I have pointed out before, I do think mix improvement will be a driver of our revenue growth and, again, it may vary in any quarter or in a year per se. But back to some specifics that I think will continue to drive our mix improvement. You mentioned one, yes, we have now in the U.S. our sales forces incented based on revenue. And in other countries around the world we are incenting them the same way. And so that has sort of been rolled out across the world and will be finished off as we go through 2005. So that immediately gets people focused on the revenue side and improving the mix right there.

I mentioned the SKU rationalization. While I said we took over just over 10 percent this year. I think we can get another 10 percent in 2005. And --

That's net SKUs?

That's net. Some people quote numbers of -- you know, bigger numbers. But we do everything on a net basis. That includes the new products that we are adding and so this is where we really have a disciplined process if you're adding something, what are you taking out, and how do you still get down to a net reduction. It is amazing when you take out those slower moving items, what it does to improve the velocity of higher profitability because they're higher-velocity items for us, it improves the mix. So, you'll continue to see that.

Another thing that has helped us a lot on mix is some of the things we've done on our consumption-based merchandising and trade promotions which has been very effective in actually smoothing out our volumes, which allows us then to get to the right product where we need to get them.

The last piece, and I will come back to cash flow and the impact on all these things and cash flow too, but the key is as we've been doing our new products there is a very disciplined process we have implemented this year. I'm looking at the marginal contribution of the new products versus what we are currently selling and all of a sudden the level of incrementality, or how much cannibalization it'd be on the existing business. And the things that we are doing are higher margin as we do them. I will just -- some great examples, Rising Crust Microwave Pizza from DiGiorno is a better margin than the other DiGiornos because it's a value added and consumers are happy to pay for it. And that's the way it will work over time and even if you scale up some of these things that we may -- we know we can get to those better margins over time. And that's true for a Tassimo.

All of those things together are driving the mix. I think as we've talked before, though, there's always this balancing act of the geographic mix that you have and between-category mix you'll have. And importantly, that's why I'm saying, depending on how we may do in developing markets versus developed markets, it can have either a negative impact or positive impact on mix. But I think within each -- whether within a country and within categories we are driving hard to improve the mix on the things I talked about.

Got it. And then one just quick follow-up on with respect to restructuring charges. I think you've said publicly, you know, before that there's really only so much change you can kind of enforce on an organization at one time and kind of keep things moving forward and really affecting the kind of change you want. And given some of the industry-wide headwinds, as I'll think about them, that face this industry, it just seems to me that to sustain, you know, kind of the margin structure and support the kind of innovation that all of these companies want, Kraft included, you're going to need to be -- continue, obviously, to be very aggressive on your cost structure. One, do you agree with that? And should we think about the ongoing, you know, outlook as continuing to perhaps need more one-off type of projects beyond what you've laid out to continue to sort of take down the cost base?

Andrew, to your first part, I do agree that there is a need in our industry to continue to drive out cost and drive out inefficiencies. I think we all recognize that. I guess what I have seen this year as we've started with the 3 year restructuring program we have, and I guess as -- and how the organization has responded so well to that, I think there continues to be much more opportunity to get cost out. Many people say it hard to do. I guess as we keep looking at it, we see more opportunities to take cost out. But interestingly, where we're going to be driving a lot of costs out, and it may be more factories, it may be things like that. But importantly what we really focused on and now I've actually appointed someone working directly for me who is in charge of business process simplification, one, the biggest cost things within our Kraft organization is the complexity that we have in simplifying our business processes, harmonizing our business processes. We are seeing a huge opportunity that will come from that. So I think there'll be savings coming in the future in some ways different than maybe you've seen in the past that actually will make us move faster and respond to consumers but also save a lot of money as well.

Thanks very much.

Thanks, Andrew.

Thank you. Our next question is coming from Pablo Zuanic of JP Morgan.

Good afternoon, everyone.

Hi, Pablo.

Just looking here at the broad category of volume growth, can't you just expand a little bit in those of the top 25 categories? Which are the ones that you would highlight where there's still room for more work to be done; where you're not happy with market share or not happy with price gaps? The numbers, for example, in snacks and cereal, like for like gross of 5 percent for the quarter was much better than we were expecting and great for that. But can you just expand a little bit in terms of the areas where you don't see as much improvement as you'd like in the U.S. business first?

Okay, sure, let me start with the U.S. business. We would like to see more progress in coffee. This is where I'm encouraged on some of the things we're starting to do and some quality improvements we've done, but I'll tell you we need better marketing in what we do with our coffee business here. We need to bring in some more innovations to what we do in our coffee business. And I think we are starting to see some of those things starting to be transferred over as we're leveraging more the global marketing and category development group we put together, because I think, as you know, in Europe and across where we do a lot of very innovative things in coffee and I think you're going to start seeing in 2005 and going forward some transfer of some of those great ideas into our U.S. coffee business as well. But that would be one that I think we can do a better job of being more competitive in.

Another area, I think, we can do better in is some of our dry packaged desserts, where I think -- this is the Jellos and so forth -- where you heard Jim talk about some of the new products we're doing there and I think that will start picking up our performance in those markets.

And then we have some opportunities to do better in some categories like in the dinners area, where for the full-year we did better but a little bit weaker in quarter 4. But I think that's just the flow of the marketing that we do.

But the biggest one would be in the coffee area and then some opportunities we have in Lunchables, too, where I'm very pleased, as I said, with the Chicken Dunks, that it's really improving.

On the flip side, I guess it would be seen when we do get that brand value equation right, we really get strong performance, and, again, despite the run-up in cheese, our share performance in cheese was terrific. I guess the thing that -- as I started the year and if you thought about a category we're worried about was biscuits, because if you recall where we were in 2003 in biscuits, cookies and crackers, very concerned and the momentum that that group has built is, I just think, wonderful. And as we go into 2005 the pipeline of ideas that they have and what they are coming out with, again, like that 100 Calorie Pack is just phenomenal. The Ritz Chips are doing well and we mentioned some new flavors there. And as I look at the pipeline that we have for 2005, that's going to be great. And then the whole meat group has done a great job on cold cuts and the deli shaved and the new items we are doing there. So I think we know how to get the brand value equations right. We know how to bring the innovations, but the one I'd highlight is more work is on coffee.

Great. And just one more question. When you hear companies like Smithfield and Tyson talk about further processed products moving from pork bellies into bacon into hams, building factories for greater capacity for ham, what does that mean for Oscar Mayer? Is that an issue or do those companies just don't have enough distribution to challenge Oscar Mayer?

I think obviously it creates more competition for us when some of those folks vertically integrate up into some more consumer goods. But the onus on us to find greater innovations even in greater value added and that's where our deli shaved has just been so phenomenal for us in terms of the success we've had with that. We've added even some additional flavors on top of the ham that we've had and the turkey that we've had. So I think you’re going to see more forms of interesting convenient packaging coming and new ways to take our products that will take longer for any of those competitors to catch up with.

Right, thank you very much.

Thanks, Pablo.

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

Good evening.

Hi, Chris.

Just a question for you. Sort of a follow-up before on one of Andrew's questions. Regarding product mix, I don't recall if you mentioned this, but if you look at the basket of new products you have out there, which is a much larger number in the fourth quarter and entering '05, is that enhancing to your mix overall? Is that a requirement for all these new products?

Yes, it is. Maybe, Chris, I wasn't clear about that. That's clearly what I mean about incrementality, ensuring that the margin itself are better and also then it's being incremental to what we do. We look at both the margin and its incrementality.

And then relative to all those new products out there do you anticipate some incremental investment as well in the business, marketing wise. I know you talked about a number for the year, but in my model sort of earmarked a lot of that incremental marketing to the international division. Well, are we going see more in North America, for example, and maybe more. Could you talk about the breakdown between advertising promotion for incremental marketing in '05?

Well, just again that 200 to $250 million number we gave you, much of that is directed against the new product initiatives, along with increases on the base business. And to give you some perspective on that 200 and 250 million, that's in the low double-digit increase of our, as we call, consumer marketing spending. Consumer marketing spending is the advertising within the, I'll call it the advertising part of promotions. You know, the accounting is done on coupons or up in the net revenue line.

Sure.

And so it's -- it's a good increase because we have so many good new initiatives we need to support. One that I am actually very excited on is our South Beach diet products that we've announced. We have gotten terrific trade reception to those. Maybe as a biased person I started the South Beach diet 4 weeks ago and lost 11 pounds, and so I think that the products themselves are phenomenal. And so, for instance, we'll have a lot of money ear marked against that. As we roll out Tassimo into more countries in Europe, there's a lot more money ear marked for those. So actually, as we spend our money we're very focused against the big ideas that we have along with the strong advertising campaigns that we have. So this is where, as you sort of think about where the money goes, it is supporting those new product initiatives.

I'm curious in relative to your International division if you believe that, you know, what will help turn that business around. See what I am trying to get to? Is it incremental marketing or do you try the new product ideas meant to accomplish that? Or is it going to be difficult conditions because of the trade and that's the way it goes for the year?

Again, as you look at the markets, and, again, as you look at the overall performance and I'll just maybe specific on quarter 4 where we're down slightly on cost and currency revenues. We actually, for instance, in central and East Europe had good mid single digit revenue growth. We're basically flat in Latin America. But we were actually up almost high single digits in Asia Pacific. Where we had the challenges were in western Europe and in Germany in particular where we were down about 7 percent from a year ago. But then in France and the rest of western Europe. So it gets back to the question it asked before on what's it take to really compete against the hard discounters and yet some of it is in price. But much of it is being smarter about the brands that we lever and the SKUs we lever within soft discounters and actually leveraging that portfolio a little bit better. And I think -- again our portfolio that we have we get some idea of the items we have coming. In western Europe in particular I am very excited about in 2005, whether it be in the areas of chocolate or in the area of coffee.

And then would you say that the new organizational structure that is meant to better accomplish these new products, getting them out across the world, will we see a benefit of that in 2005? Will that mostly come Internationally?

Actually it is going both ways. I won't name the product for you because it's a snack-type product, but it shows how the organization is working very well because we have one person in charge of -- that's the wholly organization in global marketing category development, who oversees snacks globally which includes biscuits and chocolate and we're able then to combine together ideas on chocolate and biscuits together. That person then has a counterpart in our global supply chain group who -- we're going to be able to source some things from Eastern Europe into the United States and change manufacturing in New Mexico. We just now have the ability to leverage our capabilities on a broad base. So it goes both ways. It's not just U.S. things going over there, it's actually things from Europe coming here and vice versa. So I am very pleased on how it's really starting to come together. As I mentioned in my opening remarks, as each quarter goes by, our executional capabilities continue to improve and our ability to execute even faster on ideas is getting better.

Okay, thank you.

Thanks, Chris.

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

Good evening, everyone.

Hi, Terry.

Just a couple of things at this point. Roger, I guess western Europe being so key to the results over there. It sounds like your plans are very much progressing. I guess the question would be, what kind of cooperation are you getting from Carfore and some of the other retailers. It seems like they have been very slow to respond here and clearly that is key to you. What are you seeing there just in terms of what sort of cooperation you're getting?

Again, you know, as I said, we work with all the trade factors, whether they're the discounters or the large groups like Carfore. But this is where we are working with them to find innovative ways to bring shoppers into their stores. One thing that we've been doing actually in Carfore, as an example, is we call it the "snacking world." A whole new aisle reinvention of how you market chocolate and biscuits within their stores. And they see it more appealing and more interesting. Because again as they're trying to complete with, I'll call it limited assortment of hard discounters and soft discounters, creating a shopping experience that is more exciting for them is one way for them to improve their performance. And as I said, we've actually, and we'll talk more about this when we get to CAGNY, but as a Company we've actually added a new strategy. We have a saying that we have been talking about for the last year as we started the Sustainable Growth Plan. We have actually added a seventh strategy, which is to drive shopper demand through superior customer collaboration. That really is getting ourselves more focused on how we work with the retailers and bringing them the innovative ideas, as I mentioned with the aisle reinvention, to drive shoppers into their stores. Because the onus is on us to help the retailers, whether it's the Carfore in Europe or even retailers in the United States to work, whether it be the center of the stores or where we are in the dairy case, the meat case to bring those innovations. And so we've actually made a strategic priority in one of our 7 global key strategies to focus even more efforts there.

Okay. I was a little bit surprised to hear you say, and I think I was correct in hearing you speak, you took some pricing on coffee in Germany.

We did do that.

Okay.

Obviously green crops are up and it is a cost justified move that we've done within that marketplace. Other competitors have taken similar price increases given the cost pressure they've been under as well.

Okay. Is that one of the few markets over there-- we heard Sara Lee talk about how difficult it was in the Netherlands to get any kind of pricing through. Do you think Germany was somewhat atypical in that regard?

Every market has its own -- and what's interesting about the European coffee market is each country has a somewhat different competitive sets. Most of our competitors in the German market are German-based companies, Chebo, Dalmar, and Maleta. And, well, in the Netherlands, it's a market we actually have little if no participation in. So it really varies by market and what the competitive set is in the different marketplaces in Germany -- in Europe.

Okay, just a quick question on coffee which is one of those items you mentioned that you would like to do better on domestically. Does that statement kind of presage the fact that perhaps Tassimo comes over into the domestic market a little more quickly than you might have thought about otherwise?

Well, I won't be telling you the exact rollout plans for Tassimo and we're now expanding the U. K.. You can expect to see Tassimo give the success you've seen in the French market, being expanded as rapidly as we can into more countries.

Okay, very good. Thank you.

Thanks, Terry.

Thank you. Our next question is coming from Christine McCracken of Midwest Research.

Good afternoon.

Hi, Christine.

Just a follow-up on Pablo's earlier question regarding the competitiveness of these commodity processors. Assuming that these processors were supplying Oscar Mayer with product prior to their move into kind of a more branded product, what difficulties does that present to Oscar Mayer, and why wouldn't you possibly look at a supply agreement with one of these less branded suppliers in -- in this type of environment?

Well, again, I can't comment specific suppliers or anyone in particular, but we do have agreements with, obviously, the people who supply us with our raw meat. As we are not -- we buy it as you are commenting from those who do the slaughtering and so forth. We do a limited amount in some of the types of meats that we use. But we do have agreements with folks in what we are going to use. And we are comfortable on our supply going forward.

Fair enough. I guess just then looking at the recent comments relative to your shift in promotional strategies tied to the concerns of relative to childhood obesity. Obviously you've taken a strategic -- or made a strategic decision to de-emphasize, you know, more fattening foods or less healthy as it were products to kids. But a lot of those brands are your highest -- you know fastest-growing brands. To what extent, you know, do you see this impairing growth in those products? Or do you see it being driven by, you know, mothers' decisions. You know is it a different market that you are trying to penetrate with those advertising? Or maybe if you can just address that, how you might expect that.

Sure. Let me talk a little bit, Christine, of how we think about it. Again, as I said in my remarks, we are very much believers in self-regulation and we do an awful lot of work with consumers and understand consumers because in the end our shareholder value comes from how well we delight consumers. As we listen to them and what their concerns are, we realize that there's a need for us to take some meaningful action in terms of what we do, in terms of how we market our products. As we made our announcement in terms of limiting and stopping the advertising specifically on television and print to, you know, kids under 12, unless the product meets what we are calling our Sensible Solution nutrition criteria. You will find that, for instance, on a Kool-Aid brand, for instance, you say how are you going to do that. We're going to still be advertising a sugar-free version of Kool-Aid. We're going to make sure it's very clear that we are talking about the sugar-free version of that, because it actually meets the criteria. And it is a great way to get hydrated and a great way to do it without getting any sugar. Same thing true across so many of our categories. So what you're going to see is a lot of shifting of our spending to, I will call it those who meet the Sensible Solution criteria. It also is a very interesting motivation within our Company, because if you are in a marketing group and a product category, a brand manager, and if you know you can't market to kids under 12, some base brand, if there is a way to reformulate your product and meet the Sensible Solutions criteria, then you can market it. I can tell you it's a very much a motivating force for people to develop more products that meet that health and wellness Sensible Solution definition. So I think it's a -- and yes, we are going to continue to market our products to, you know, in a sense an all family venues and adult venues. But as we looked at people's concerns about and it is -- and obesity is a major issue that we in the industry need to play our part on, we think taking this step it will allow us to not only motivate folks within our Company to do the right things in terms of products but allow us also to make sure we are addressing consumer needs as well.

Good stuff. Thanks.

Thanks, Christine.

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

Good afternoon.

Hi, David.

Hi, David.

Like to go back to an earlier comment about the earnings base. You talked about -- Roger, I think it was, talking about continuing operations. He'd talk about a range for '05 of $1.75 to $1.80. Should we connect that $1.75 to $1.80 to that 6 percent to 9 percent earnings growth you've talked about?

Well, you shouldn't do that, and, obviously, as you look at continuing operations in '04 and '05, that would be actually a 13 to 16 percent before you -- on base basis before you add other things in. Maybe, Jim, you want to tumble through those numbers a little bit more.

Well, David, the question really you are asking is whether or not this starts the process of qualifying for the long-term guidance we have given of 6 to 9 percent.

Right.

And certainly it's making progress in that direction. We really can't get into an underlying basis on this, but we feel pretty good about the direction we are headed in terms of the top-line momentum with the volume being 3 percent on a 52 week basis. Excuse me, the revenue being 3 percent on a 52 week basis, 4.5 percent on a 53 week basis. And that's the kind of momentum we need longer term to sustain the kind of progress we want to see on the EPS basis.

Did we answer your question, David? I want to make sure we are answering --

If you take out some of the nonrecurring stuff I get $1.94 to $1.99. I'm wondering -- in order to come up with an estimate of fair current value, do I think about the base 405 as that $1.94 to $1.99 or $1.75 to $1.80. And I am still not sure.

Yeah, I mean, I think, David, again, we can't really talk in your terms, but if you think about the $1.94 and $1.99, there is still income from your sort of confections in that number effectively. So I guess if you were sort of doing the math you'd probably pull the 4 cents out of that from that number to get to a number that's more comparable to sort of your world. Ex sort of confections.

Okay, all right, thank you.

Thanks, David.

Thanks, David.

Thank you. Our next question is coming from Leonard Teitelbaum of Merrill Lynch.

Go on to someone else. I've got more numbers than the phone book here.

Oh, Lenny, you can handle it.

I will loan you some at the end of the day. David, I think, hit the right question here, because we are going to be asked to -- to obviously put multiples on it. The one question that I would have, however, is that, you know, you made a comment here that you are going to address some of these situations with either a price increases or advertising decreases. And without getting too much in depth here, I know this is going to be a product line by product line situation, but where do you feel in general the concept behind, I'd even cut the advertising and maintain your margins.

[Inaudible] I don't think we said advertising cuts. In fact here we're taking our spending up over -- we actually said consumer promotion spending. So, in other words --

Hey, sorry.

So it's really -- what it is is less couponing as a way to raise that average effective price to the consumer.

I gotcha.

So it's not advertising at all. Advertising's going up.

I gotcha. Thank you very much for clearing that up. Go on to the next fella, please. Thank you.

Thanks.

Thank you. Our next question is coming from Eric Katzman of Deutsche Bank.

Hey, everybody.

Hi, Eric.

I didn't know there were this many food analysts left.

Or awake for that matter.

It's been so long since McMillin asked his question he's already written his note and is on his way home.

Well, I know you're going to have another busy day tomorrow.

But he'll miss your insight if he did that.

Okay. I guess one question on cash flow. You know you guys clearly with the dispositions and just operations are going to have a lot of cash flow, can you tell shareholders or give us some comfort that if Philip Morris was to spin it off that they will not take some of that cash flow before a spin occurs and that that will remain with Kraft?

That is Kraft cash and the only way that money goes to our shareholders, of which Altria has 85 percent of the economic interest in Kraft, is through dividends. So that's the way the cash moves and so this is where, again, dividends that we approve and any increases in dividends are approved by our Board of Directors which as we heard today is now composed of more independent directors than "inside" Directors. So, no, this is where -- we are running Kraft for Kraft.

Okay. And then I just wanted to kind of beat this up, but, you know, all this spending that you've done and I realize there is some momentum in the business, but your market share I think you said was up 20 basis points in the fourth quarter? I mean, that's -- that's not a tremendous amount of improvement. That's kind of stabilizing, not really improving, giving all the spending you have done and all the new products and all of the work. I mean it doesn't seem to me that that's necessarily something to kind of pound your chest about, 20 basis points.

I don't think we're pounding our chests, I think we are trying to -- where we were -- to give you some perspective in history on that metric. We've been running down about a half a point every quarter versus the prior year. To give you that perspective. And in quarter 3, we were up a 0.1 and in quarter 4 up 0,2. Again, think about the base of which that share's been calculated, that is a huge, huge base. And at 0.2 of a share gain on such a huge base can -- leads to a -- in terms of the revenue base. But, again, 0.2 -- again, if you always do the math on 0.2 of a PP change on the absolute share actually leads to pretty good revenue growth and volume growth.

Okay. And then last, Jim, just what -- in -- in terms of the outlook for '05, just interest expense, net, what are you kind of assuming and shares outstanding, diluted, what are you assuming?

First starting with the interest expense. We were flat in '04 to '03. And as we look to '05 right now, we'd be pretty much in that same range. And what we are talking about there is an expectation of continued increase in short-term rates, which, you know, started in the middle part of '04 moving up, we see them continuing to rise. We also do have the 53rd week built into that expectation as well. And obviously there is some debt reduction that'll come given the kind of cash we are talking about. So that will all factor in together to give us pretty much a flat profile year-to-year. And I forgot --

Shares outstand.

Shares outstanding. Obviously with the buyback program that we have over 2 years that will certainly have an impact on the number of shares we have outstanding so we'll be continuing to execute against that board authority.

Okay, so net even with the restricted stock down?

Yes.

All right. Thank you, good night.

Thanks.

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

Well, just one question left. Returning to the obesity discussion, what is your -- what is the feedback from retailers. What do you have to do for the retailers to offset inventories or change promotional spending. Can you comment on that.

From the obesity initiative, actually the feedback from many retail has been very positive, because they view it as the right steps in terms of getting aligned with where consumers and their shoppers are thinking how we ought to be doing some of our marketing. But, no, there's not been any major swings on what we are doing on inventories or anything else. Again, I think you will find that it's the changes that we make and what we're going to focus on will be happening over time and does not mean anything dramatic in terms of what you're seeing in inventories.

Okay. Thanks very much.

Super, Anne.

Thanks, Anne

Thank you. Our final question will be coming from Filippe Goossens of Credit Suisse First Boston.

Yes, good afternoon, gentlemen.

Good afternoon, Filippe.

2 quick questions. First, with the treasury having basically refined the guidelines for the Homeland Investment Act, can you just comment again one more time in terms of what you [Inaudible-audio bad ] repatriate any earnings from overseas this year?

We are certainly looking at the implications of the Job Creation Act and essentially that's an opportunity to bring back cash. We as a Company do not have large cash pools Internationally in low tax jurisdictions where we can take advantage of some the benefits associated with that reduction in -- in the repatriation of cash. So it's not as big an overall opportunity for us but certainly we are looking at how we can take advantage of that. But that Act also has other implications in terms of the tax benefits associated with domestic manufacturing which we will take advantage of and that is factored into our forecast in terms of the tax guidance that we gave for '05.

Okay. Thank you, Jim. And then my second and final question. Obviously, the Euro has been rather -- or the dollar has been rather volatile over the last couple of months here. What is baked in your numbers in terms of your view for the dollar Euro relationship?

Well, Filippe, we won't give you specific guidance on that, what we've built in, but we usually tend to be close to where the spot rates are or where they've been in the last few months. We don't assume major appreciation or depreciation either way. I could tell you we're not smart enough to know, so we tend to just assume base it around where it has been in the last couple of months.

So additionally unlike what you do with commodities with your currencies you are not all that active in terms of hedging the flows?

In terms of -- again, as we have said in the past, we don't hedge at all to bringing back to the profits overseas in terms of the translation impact. We will do some hedging of our cash needs, as specifically against, you know, as we're buying commodity, is a good example, being on coffee which is traded in dollars worldwide. As we bring that into Europe, we may do some hedging there just to -- and, again, if you want know [Inaudible] are averaging as we go through the year with some forward coverage. But in terms of doing any hedging of our actual translation, we don't do that.

Okay. Great, thanks so much, gentlemen.

Thanks, Filippe.

I would like to turn the floor back over to management for any closing comments.

Thank you all for participating with us this evening. We know it has been a long day for you. We look forward to seeing you all in a few weeks at CAGNY and 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. Thank you.