億滋國際 (MDLZ) 2008 Q2 法說會逐字稿

Good day, and welcome to Kraft Foods' second quarter 2008 earnings conference call. Today's call is scheduled to last about one hour, including remarks by Kraft Management, and the question and answer session. (OPERATOR INSTRUCTIONS).

I'd now like to turn the call over to Mr. Chris Jakubik, Vice President, Investor Relations for Kraft. Please go ahead, sir.

Good morning, and thanks for joining us on our conference call. I'm Chris Jakubik, Vice President of Investor Relations. With me are Irene Rosenfeld, our Chairman and CEO and Tim McLevish, our Chief Financial Officer. Our earnings release was sent out earlier today and is available on our website, Kraft.Com. Also available on our website are slides that we will refer to during our opening comments.

As you know, during this call we may make forward-looking statements about the company's performance. These statements are based on how we see things today so they contain an element of uncertainty. Actual results may differ materially due to risks and uncertainties, so please refer to the cautionary statements and risk factors contained in the companies 10-K and 10-Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements. Some of today's prepared comments will exclude those items that affect comparability. These excluded items are captured in the GAAP to non-GAAP reconciliations within our news release, they are also available on our website. We'll begin the call today with Irene providing her perspective on our second quarter and our outlook for 2008 and then Tim will highlight our financials and review the results for each of our business segments and after that we'll take your questions.

With that I'll hand it off to Irene.

Thanks, Chris. Good morning, everyone. As most of you have already seen, we just reported strong second quarter revenue and earnings growth. There are a few puts and takes in the numbers that Tim will review in a minute, but even excluding those factors, we delivered very strong financial performance. More importantly, we're demonstrating that despite very challenging economic conditions, we can and we will cover input cost inflation while building our brand equities and delivering improved financial results.

In terms of input costs, our new decentralized structure is effectively dealing with an environment of escalating costs, while protecting investments for long term growth. This is coming through in two ways: First, our business leaders are reacting faster to changes in the marketplace. This means quickly taking the lead on cost-driven price increases, and as we enter Q3, we had to take additional pricing to offset continued increases in input costs, especially grain and dairy. It also means taking decisive actions, like cutting inefficient trade spending or giving up unprofitable volume. Although some of these actions may result in near term share loss, they are the right thing to do for the long term health of our business.

Second, our decentralized structure is also delivering cost savings. Our Managers are generating significant manufacturing productivity, and they're hit hading their targets for restructuring savings and cash flow. They fully understand that these savings are the key to their ability to continue to make the necessary investments in building their brands while delivering profitable growth. More specifically, in terms of building our brand equities, our investments in product quality, marketing and innovation continue to pay off. We're seeing it in several categories including these: Salad dressings, where despite a slow start in April, our reinvention of this business has lead to share gains in each of the last two months; mainstream coffee, where our restaging of Maxwell House drove over one point of share gain this quarter; Cakesters, which is on its way to $100 million in revenue this year driven by the recent launch of Nilla Cakesters; European chocolate, where new products and significantly higher marketing spending behind Milka and Toblerone drove another quarter of double-digit growth, and in developing markets, where Jacob's Coffee is the number one coffee in Ukraine.

In this difficult economic environment, our reframing efforts across the portfolio have further demonstrated the value proposition of our brands. For instance, Mac and Cheese, our icon of value-oriented meal solutions, grew nearly 20% in the quarter and it delivered its fourth consecutive quarter of market share gains, fueled by our investments in quality and innovation. Oscar Meyer Deli Fresh Cold Cuts remain on fire, positioned against more expensive deli counter meats, they just delivered their 21st consecutive quarter of share and volume growth. Consumers are also finding that our Oscar Meyer Deli Creation Sandwiches represent a significant value, compared with takeout sandwiches. They're highly incremental to our base cold cuts business, and are on their way to reaching the $100 million mark. In pizza, where we've reframed against pizzeria offerings, we're growing volume in the mid single digits and our share is up over a point. We've also reframed our marketing of Jell-O dry package desserts and Kool-Aid and Country Time powdered soft drinks. We've done this by emphasizing their value-oriented positions versus higher cost per serving alternatives. As a result, we're seeing renewed growth in these high margin businesses.

Having said that, during the quarter, our market shares were under pressure for two reasons. First as I mentioned, we took out inefficient trade spending to improve the return on our trade investments. We expected this to have a short-term share impact, particularly in ready to drink beverages and snacks, and second, while we've acted decisively with cost-driven pricing actions, a number of competitors lagged us. As a result, we saw some temporary dislocation that affected both our 13 week and our 52 week market shares. Going forward, we'll continue to invest in our brand equities and in the value positioning of key brands. We'll benefit further from product news in core categories like crackers, pourable salad dressings, single serve pizza and cheese, and as a result, we expect to see our market shares rebound in the back half of the year.

Which brings me to our financial results. Our business continues to strengthen and performance is exceeding our expectations. In fact, organic revenue and operating income grew in all segments for the first time in many years. On the revenue front, our Q2 volume held up well, even in the face of our unprecedented pricing actions. As a result of our underlying momentum, and the expectation of additional pricing, we've raised our guidance for 2008 organic revenue growth to at least 6% from at least 5%. Below the revenue line, during the second quarter, we booked some gains from hedging activities; however, even excluding these gains, we are exceeding our expectations while continuing to invest for future growth. For the full year, we expect our operating momentum to continue, and so we've raised our EPS guidance to at least $1.92 from at least $1.90.

In sum, our second quarter results were strong. In fact even stronger than we expected, and a significant indication that our business continues to gain momentum. Our results despite very challenging economic conditions show that we can and we are covering input cost inflation while building our brand equities and delivering improved financial results.

Now, I'll turn the call over to Tim.

Thanks, Irene, and good morning. Please keep in mind that unless otherwise noted, my comments will exclude the items affecting comparability that were highlighted in our press release.

Now let's look at Q2 results, starting with revenues. Our Q2 net revenues increased almost 7% on an organic basis. As expected, net pricing was the key contributor, as we increased prices to cover higher input costs. It was up 7.2 percentage points versus about four points in Q1, and less than two points in all of 2007. Despite significant pricing, we're encouraged by our overall volume and mix performance. It held up better than expected, reflecting the benefits of our investments in quality, marketing and innovation; however as anticipated, our second quarter volume comparison were down in some categories. This is especially true in ready to drink beverages, cheese, and our spoonable dressings and enhancers businesses. In all of them, we took significant cost-driven price increases. Near term, pricing will remain the primary driver of revenue growth, as input costs continue to escalate, and volume comparisons will remain difficult. However, we'll continue to invest behind a strong pipeline of innovations. We expect them to drive solid volume and mix performance in the second half of the year and to set the stage for 2009.

Turning to margin performance our gross margin was up 40 basis points versus Q2 last year; however, this included approximately $150 million of realized and unrealized gains from hedging activities related to requirements for future quarters. Excluding these gains, gross margins would have been approximately 35%. We've called out these gains because we see them as a timing issue, effectively pulling cost protection benefit we would have had in the second half into the second quarter. Earlier recognition of these gains will result in higher reported cost of goods sold in the second half of the year.

While this means our gross margins would have been down 80 basis points year-over-year, it was up 130 basis points over Q1, as the effect of improved price realization began to come through. I'd like to spend a few minutes on input costs and a magnitude of increases we're facing in 2008. This chart shows prices by year versus the 10 year average for each of our 11 key commodity inputs. Compared to numbers as recently as April, you can see that the prices of many commodities have increased. To put this in context for Kraft, in Q2, our input costs were up about $400 million over last year, and through the first six months, our input costs were up about $800 million. For the full year, we now expect them to be up about $2 billion or about 13% over 2007. That's higher than we anticipated in January or even in April. It means that more than half of the increase will come in the back half of this year.

Because of these significant cost pressures, we've taken additional pricing actions in Q3. Lower pricing to cover costs and grow profits in dollar terms, is proving difficult in this environment to grow margin percentages; however, this pricing, together with the further productivity savings and overhead leverage, will still deliver our expected earnings dollars. Despite the challenging cost environment, we'll continue to invest in our growth and we'll deliver ahead of our previous expectations. We've raised our guidance accordingly.

Turning to Q2 earnings per share, the strong contribution from operations just discussed was partially offset by a few factors below the line. Higher interest expense was a $0.07 headwind versus the prior year and we currently expect interest expense for the year to be roughly $1.3 billion. In addition, our higher year-over-year tax rate was a $0.03 headwind. Our effective tax rate, excluding items, was 36.1% in the second quarter. This was higher than our full year forecast due to the timing of several discrete items; however, we continue to expect an average rate of 33.5% for all of 2008, with some variation quarter to quarter depending upon when the anticipated discrete items fall. Finally, the interest in tax headwinds were partially offset by $0.03 from lower shares outstanding and I'd note here that between our usual blackout for earnings and a blackout related to the Post transaction, we were prevented from repurchasing any shares during the quarter; however, we still expect to complete our share repurchase authorization before it expires in March of 2009.

I'll take a few minutes now to share some highlights of our business segment results. I'll start with US beverages, where organic revenues grew at 3.4%. Ready to drink beverages, powdered beverages, and coffee all contributed to growth in the quarter. The ready to drink, a big factor was our successful effort to reduce inefficient trade spending on Capri Sun. In Q2, revenue was up in the mid single digit range and profitability improved significantly. At the same time, volume was down. As we discussed last quarter, the heavy nature of ready to drink beverages weighed on the volume performance of our entire US beverage business. This quarter, it was a nine percentage point drag on volume. Excluding ready to drink, our beverage segment volume was up 4.6%.

In coffee, our investments to restage the business are paying off. We posted double digit growth in both Maxwell House and Tassimo. Maxwell House drove a market share gain in the mainstream segment for the second quarter in a row, and our Starbucks-branded tea discs produced revenue growth of more than 30% in our premium On Demand Tassimo platform. During the quarter, powdered beverages also delivered solid growth. This is driven by double digit volume gains in Kool-Aid and Country Time, as we have improved our marketing and as consumers seek lower cost alternatives to soft drinks. At the profit line, beverages' operating income grew 6% and margin increased 100 basis points. Here the benefits from cost driven price increases, especially from ready to drink beverages, more than offset higher input costs.

In the US cheese, organic net revenues were up 10%. This was due entirely to price increases in response to higher dairy costs. Compared to a year ago, those prices were up 6% to 33% across our cheese categories, with the largest in natural cheese. Overall, volume mix in cheese was down about 5% versus the prior year. Innovations such as Bagel-Fuls, Single Select and Live Active continued to deliver solid benefits in both volume and mix; however this was offset by volume weakness, particularly in natural cheese and cultured products as consumers continue to adjust to higher absolute price points. We also chose not to chase unprofitable volume as private label ran some deep discounts during the quarter. During Q2, we announced further pricing actions covering 90% of the portfolio. We expect this pricing pressure volume comparison in the near term; however as we continue to invest in innovation, we'll see further growth for Bagel-Fuls, which is running well ahead of trial and repeat expectations and we'll complete the launch of our 2% milk RBST-free cheese products in the second half of the year and so going forward, we expect solid revenue growth to continue.

Turning to operating income, it was up 7.3% versus Q2 2007. Pricing and lower overhead expenses more than offset the impact of higher input costs and lower volume. And consistent with our guidance, our cheese margin was up again sequentially from the prior quarter, 13.6% versus 12.9% in Q1. As gains from innovation and price realization continue, we expect further sequential improvement in operating margins.

Moving on to US convenient meals, our team delivered another quarter of strong performance. Our investments in quality, base marketing, and new products drove 7.6% organic revenue growth with 5.1 points due to volume and mix gains. In Oscar Meyer, the strength of our Deli Fresh cold cuts platform continued, with strong double-digit revenue growth and about 2 points of share gain in the overall cold cuts category. Our Deli Creation Sandwiches also grew strongly in Q2 driven by the new flatbreads line, this is proving to be highly incremental to our base business.

Finally, strong volume growth in pizza continued. Not only from our base DiGiorno and California Pizza Kitchen offerings, but also from the rollout of our new line of single serve offerings under the For One banner. This drove more than a point of market share gain in frozen pizza during the quarter. At the operating income line, we grew roughly 3% versus the prior year. Here, our strong growth was partly offset by two factors; the launch cost of our Pizza For One initiative and price increases lagging higher cost, particularly cheese. As we move forward, we expect our year-over-year profit performance to improve as well.

On to US Grocery, where organic net revenues were up 4.5%, and operating income grew 30 basis points. Here, our investments to contemporize the portfolio are paying off. Two of our early investments, Jell-O and Mac and Cheese again delivered a combination of pricing, market share gains and higher operating income margins in the quarter. Both categories are benefiting from the current economic environment, as consumers search for value oriented meal solutions. Our pourable salad dressing investment is contributing to the improvement as well. The launch of our new line of Kraft Pure Salad Dressings lead to strong volume growth in the quarter. This came despite a considerable cost driven price increases. These gains were partially offset by declines in other parts of the business, including enhancers like barbecue sauce and spoonable dressings, as pricing actions lead to volume declines. Overall, we're encouraged by the progress we're making to grow our high margin grocery portfolio. In the third quarter, we expect to gain even more traction from our investments which will lead to continued growth in the second half.

Looking at US Snacks and Cereals, organic net revenues were up 5.1% in Q2. That was entirely due to pricing. At the category level, solid gains in biscuits and pricing in nuts were partially offset by a decline in snack bars. In biscuits, 100 calorie pack cookies and crackers were up a double digit rate again, as the momentum from that platform continues. The addition of Nilla Cakesters and the ongoing growth of OREO Cakesters push the Cakesters platform further toward the $100 million mark. Investments in product quality and marketing lead to strong growth in three of our five largest brands. OREO, Chips Ahoy, And Ritz; however, our overall performance in crackers was weak in the quarter for two reasons, both related to timing. One was the fact that our key cracker competitors lagged our price increases resulting in larger than normal price gaps during the quarter. Second, the product news and marketing programs for two of our cracker brands, Triscuit and Wheat Thins are more back half weighted. Going forward, we expect our cracker performance to improve and will lead to even better biscuit performance in the second half.

Turning to snack bars, our business was down significantly in the quarter. This is mainly due to the timing of new product announcements as well as our rationalizing SKUs. However, the trend should improve in the second half as we invest in quality upgrades and marketing. At the operating income line, strong growth and margin gains were offset by a $50 million realized gain from hedging activity. Excluding this factor, operating income was down approximately 8%. Price increases and cutting inefficient trade spending were offset by three things: Higher input costs, unfavorable product mix from lower cracker volume, and higher marketing and overhead costs.

Going forward, the realized gain in this quarter will essentially be given back in the form of higher input costs flowing through our P & L in Q3 and Q4. Nonetheless, we'll continue to invest in innovation and base brand support. And we expect our snacks business to deliver mid single digit profit growth for the full year. Finally, it's noteworthy that our cereal business grew in the quarter, despite the difficult comparisons with the relaunch of our kids cereal business in Q2 last year, and significant pricing this year. Top line growth in the quarter was driven by both pricing and ongoing growth of the flagship Honey Bunches Of Oats adult cereal business. We remain on track to complete the transaction to exit our Post cereal business in the coming weeks.

Turning to Canada and North America foodservice, organic net revenue growth was up 4.4% versus last year. We had another solid quarter in Canada. It was driven by strong volume and share growth from increased investments in marketing and innovation across all categories, and the implementation of improved customer plans as we leveraged our scale with the reestablishment of Canada as a standalone business. In North America foodservice, growth came from a combination of pricing and to a lesser extent, volume. The effects of lower consumer restaurant traffic were offset by strong response to our quality improvements and innovation.

At the operating income line, margin was up 290 basis points. Top line growth, manufacturing efficiencies, and overhead cost leverage more than offset higher input costs. Going forward, both Canada and foodservice will benefit from announced price increases to cover significant commodity cost increases. Volumes may soften in the near term, but given the base business gains from marketing and innovation, we expect solid year-over-year margin improvement to continue in the second half.

Now, I'll turn to our international business, where we continued to show good organic growth by focusing our investments on our core brands, core categories and in key markets. In the EU, this resulted in 3.4% organic revenue growth. We delivered double digit growth in chocolate from the ongoing success of our investments behind core brands, Milka , Toblerone, and Cote d'Or. Cheese also grew at double digit rates, from both pricing and improved Marketing behind Philadelphia. In coffee, revenue declined slightly. This was due to pricing-related volume weakness in our roast and ground business, and it offset the growth we were realizing from investments to trade consumers up to our On Demand and soluble coffee offerings. At the profit line, in line with our forecast, EU operating margins declined slightly versus last year, but they improved sequentially from Q1. Versus prior year, pricing and favorable product mix were offset by higher input costs.

Going forward, as our price realization and product mix further improve, and the benefits of integrating the LU Biscuit business come to fruition, we expect our EU margins to show year-over-year improvement. In developing markets, we had organic growth of 17%. It was driven by solid volume and mix gains despite more than 12 points of pricing. We're continuing to see pay off from our focus on and investments in core categories, core brands and in key markets.

Here is what drove Q2 growth. Jacob's Coffee in Ukraine and Milka and Alpen Gold chocolates in Russia, and further gains from Club Sociale and OREO biscuits in Latin America and consumption and distribution gains in our Asia Pacific region, particularly OREO in China. At the operating income line, margin was up 170 basis points. This resulted from a combination of top line growth and the acquisition of the LU Biscuit business and it more than offset input costs and investments in marketing and distribution infrastructure. Looking forward, while input costs continue to be a challenge, as consumers adjust to higher prices, our profit margins in the second half should remain stable year-over-year.

Finally, before we take your questions, a few notes on cash flow. Capital expenditures through six months were $590 million. That's up from $506 million through six months last year, but on pace to spend just over 3% of net revenue for the year. I'd also note that we continue to make solid progress on our working capital program, despite the rise in input costs. And our cash conversion cycle is reduced by two days versus the second quarter last year. So to summarize, we've had a strong first half, and we remain confident that our strengthening brand equity, our investments, and cost reductions will maintain our operating momentum, increase margins over time, and deliver our raised guidance of at least $1.92 per share ex items in 2008.

Now we would be happy to take

Thank you. (OPERATOR INSTRUCTIONS). Your first question is from Vincent Andrews with Morgan Stanley. Please go ahead.

Good morning, everyone.

Good morning, Vincent.

Just wanted to hear a little bit about I guess two things. One in several categories you mentioned the competitors have lagged on pricing. Is that something you're worried about on a go forward basis or have those competitors already put those price increases through now?

No, I think we're starting to see those gaps narrow and in fact if you look at our market shares, we're starting to see even through the data in June, the last five weeks, our shares are improving sequentially relative to the April-May period, so I think everybody is dealing with the same input cost situation, and we are gradually seeing entire market respond to that situation.

But since you've had to implement another round of price increases in the third quarter, are we set up for another quarter of lagging price increases, and are we going to see the same dynamic in the third quarter?

No, actually, I think as you look across the landscape, everybody is dealing with the same input costs, and I think they're all coming to understand that this isn't going away any time soon, and so the actions that we're seeing in the marketplace, as I said, is that most of our price gaps are narrowing and I think a number of other companies are looking out to Q3 the same way that we are.

Okay, so in other words, there will be a little more of a catch up from a competitor perspective in Q3 relative to the actions you're going to take. Is that a fair statement?

We believe so, yes.

From a volume perspective it's down only 1% in the quarter despite all the pricing. How do you see volume trending for the rest of the year especially as you are going take another set of price increases?

Well I have to tell you our Q2 held up better than we had expected and we feel quite good about that. I think the investments we've made in our brands is certainly paying off, and the fact we have a number of brands in the portfolio that play well in the current environment from a value perspective. As we go forward though, we are heading into some unchartered territory, as additional pricing actions hit the marketplace, and so we have to see how it will play out but I think we are well staged to be able to weather the storm.

Would you care to give us any idea of what type of volume you'd be pleased within the back a half of the year?

I'm not going to give you a specific volume forecast but I will tell you that we did say that our year-over-year performance would improve in the second half and it will.

Quickly on market share, you've traditionally said your goal is grow share in I believe greater than 60% of categories, sounds like you fell below that goal in the quarter and I don't know if you're backing away from that in the near term just because of the pricing dynamics, but any comments related to market share would be helpful.

Well we're clearly disappointed by our share performance this quarter, but we're certainly not surprised given the significant pricing out in the marketplace, and the fact that as we've said a number of our key competitors lagged our actions as well as there was a couple of cases of some deep retailer discounting that we chose not to chase. As I said, the good news is that these price gaps are starting to narrow. We're seeing sequential improvement in our shares and I expect that we will gain or hold share in the majority of our revenue in the back half.

Okay and then my last question --

Vincent, I think we really should give the other analysts a chance.

Okay, go ahead, sure.

All right, thanks.

Thank you. Your next question is from Terry Bivens with JPMorgan. Please go ahead.

Good morning, everyone.

Good morning, Terry.

Just a couple of quick ones. In terms of the dimension of the hedging offset in the back half, Tim, can we assume that's roughly kind of equal to what it was in the second quarter?

Yes. We experienced about $150 million in total of recognition of mark-to-market hedge gains in the second quarter that essentially will be offsetting in the back half of the year spread between third and fourth quarter, a little bit more heavily on the third quarter.

Terry, I think just to add to that, as Tim was talking about in his opening comments, our costs are expected to be up about $2 billion, from a P & L perspective, you had about $800 million flow through in the first half so the second half is going to be a little bit heavier.

Okay, got it. And one last one, on the salad dressings, I think the performance there surprised us a little bit according to the data we were looking at. Irene, could you give us a little more color there? Do you think there was a pipeline fill element to that, or if you could add a little color as to the market dynamics on that one?

Well I'm not sure, in which way it surprised you, Terry. I will with tell you that we're quite encouraged --

To the upside.

I think we're quite encouraged by the results of our reinvention of that business. We did have a tough April as I said, but we gained share in May and June, really for the first time in a long time, and we expect to gain share as the year progress.

Okay, very good. Thank you.

Thanks.

Thank you. Your next question is from Christine McCracken with Cleveland Research. Please go ahead.

Good morning.

Good morning Christine.

Just on your outlook for commodity costs for the second half, you'd obviously mentioned that you're expecting costs to go up but there's a number of areas specifically, dairy and pork that look like at this point they're going to be a little beneficial to you in the second half given what's happening right now. Is that playing into your increased guidance at all, and maybe you could talk given the magnitude of those two specific areas to your portfolio?

Yeah. Well first I would say Christine we're very confident in our ability with the strength of our brands to match cost increases through pricing and productivity we're committed to that. Overall, we're seeing considerable commodity cost increases. There are a couple of offsets. I'm not sure what's going to happen in dairy. Pork seems to see a little bit of a come off but it looks like it's tipping back up again. Our expectations are, you can see from the futures markets what is expected. We are hedged across a good deal of our portfolio for the second half of the year, so we're just going to deal with the cost situation through pricing and productivity as we go forward through the second half of the year.

As costs decline, do you get any, I guess cost or pricing, do you adjust your pricing? I mean you've done that in coffee now as costs came down. Is that something you look at in cheese or in cold cuts?

Clearly, we have to look at the competitive situation. That's the primary driver as costs go up and costs go down and the marketplace adjusts accordingly, we have to respond.

All right, fair enough, thanks.

Thank you. Your next question is from Alexia Howard with Sanford Bernstein. Please go ahead.

Hello there.

Good morning.

A couple of questions here. Advertising spending or brand support, how did that trend in quarter? I don't know how the comps were year on year. Could you give us any clarity into that?

Our spending was up in the quarter and it will be on the year, as we've said, I feel very good about our ability to continue to make the necessary investments in the brand, even in the face of the challenging cost environment. You will see our spending up both in the quarter and you'll see it up for the full year.

Spending in dollar terms clearly is up as we continue to invest in our brands. On a percentage basis with the very high increase in pricing and therefore revenue, you'll see that the percentage is not up quite as much as we had expected but up nonetheless.

Great. Thank you. And then on the European Union, seems to me that the Danone cookies business, the LU business, it was a 16% margin business I think last year. Obviously Europe was in the single digits on a recurring basis last year. You're expecting a couple of hundred million dollars in cost synergies and yet we've still seen the margins drift away for the six months after that acquisition was completed. Can you talk about how the integration process is proceeding and how you expect the margins to develop in the EU going forward as you start to realize those cost synergies?

Well, I have to tell you, the LU business has turned out to be everything we thought it would be and in fact more. The business is growing strongly. If we look at the like-for-like growth, we see is about 6% the EU, and up about 27% in developing markets so we are on track to deliver all the savings that we forecast. I'm even more confident today that it will be a significant platform for our future growth and in fact for the profitability of our international business in general, and for EU in particular and we certainly continue to expect it to be accretive in 2008. Some of those margin impacts are related to the significant pricing that's going on on a number of those businesses in response to input costs.

Okay, great. Thank you very much. I'll pass it on.

Thank you.

Thank you. Your next question is from Andrew Lazar with Lehman Brothers.

Good morning.

Good morning Andrew.

If I look at the contribution on the top line from mix up 0.7%, I know that it's been saying that two, three, or 4% range over the last two years or so, I'm curious if there's anything that happened on mix just specifically on the quarter or is that something that we're likely to see at a somewhat slower pace than we have as obviously the pricing piece really ramps up.

No, I think what you're seeing is just the temporary dislocation driven by the pricing impact and we expect that mix going forward will continue to play an important role but as Tim said for the balance of this year, the major factor driving our revenue will in fact be pricing.

Got you, okay. And then is there anyway to think about what overall corporate volume was ex the 9% decline in ready to drink than the weight of that product kind of impacts the overall volume number pretty dramatically?

Yeah, it's about flat ex ready to drink.

Just the last thing. On take away, is there any way to gauge, we only have what we have in terms of data, which I know is limited in a lot of ways but obviously looking at the big difference between what we've seen let's say over the past quarter in terms of volume for Kraft versus the volume that you posted, is that merely just what we're seeing in terms of trade down in terms of channel shift and such or is any comments you have on helping reconcile that would be helpful.

Well, you know, it's hard to say what exactly is going on. You're seeing lots of dynamics in the marketplace with lots of pricing and that has had some volume impact. There may be in some new categories where we're introducing and building a little bit of the pipeline but again, we're encouraged as we go into the third quarter that we're feeling strong about our brands. We'll continue to realize the pricing and think we can pass that through.

Thank you.

We're obviously dealing with very difficult economic conditions but again we're covering our input costs, building our brand equities and we're committed to deliver the financial results we have identified.

Thank you.

Thank you. Your next question is from Ken Zaslow with BMO Capital Markets.

Good morning everyone.

Good morning, Ken.

One quick one and I'll ask a little bit bigger question. Just a housekeeping. You have $150 million of hedging, 78 out of corporate, 50 out of the snacks, where are the other 22 coming out of?

The other 22 is really spread across the rest of the segments. The 50 that you identified is specifically in snacks and we called that out because of the significant magnitude of it. You know, the rest of it is spread and that's probably about proportional to what we usually see, in any given quarter. The reason we call it out this quarter is because of the magnitude of it but any given quarter we always have some realized gains in the results.

And then my other question is in terms of private label, can you talk about your trends relative to private label and how you are positioning yourself for the future relative to private label given the potential trade down in some of your more important categories. That would be great.

Well I think there's no question we're seeing our investments pay off. We are experiencing some temporary dislocations in a couple of categories due to the significant pricing actions that we've taken in response to costs and as we've said, private label lagged in a couple of these categories and in some cases we actually saw them doing some deep discounting in the face of the high cost environment. In fact I think you're seeing some retailers reporting lower margins due to some of their pricing activities. In addition in a couple of our categories we've chosen not to chase unprofitable volume in the short-term, so it's a number of factors that are contributing. I feel very good though about our ability to continue to grow share in the current environment and as I said earlier, the good news is that our price gaps are starting to narrow and we are seeing sequential improvement in the five week shares through June and we do expect to gain or hold share in a majority of both categories in the back half of the year.

Great. I appreciate it, thanks.

You're welcome.

Thank you. Your next question is from Jonathan Feeney with Wachovia Securities. Please go ahead.

Good morning. Thank you.

Good morning, Jonathan.

I wanted to follow-up on Andrew's question about mix a little bit, when you dig into and by the way, thank you for this mix disclosure. I think this is excellent. When you look at the different segments, despite whether you took really substantial pricing or not in these different segments you did see a deceleration in that and I guess I wonder if it's possible that is there any impact in there away from just sticker shock, that consumers are maybe looking for less expansive ways to buy Kraft Foods within these categories? Could that be sort of going on across the grocery store?

It's hard to say. I do think that some of what we're seeing is just the mathematical impact of what's happening on the volume front and there for mix becomes less of a factor in a number of our core categories. I remain very comfortable that the investments we have made in quality and marketing and innovation in each of our core categories will continue to buoy our brands and enable us to maintain our strong shares in our core categories.

And I guess when you think about volumes being flat, I mean, it would seem to me that the data I've seen, take home food volumes or up a little bit ahead of population for the second quarter, up 2 to 3%. I mean, do you think you're with your current category spread if you weren't taking pricing this the quarter, should you be at a volume growth that's in line with 2 to 3%?

Oh, without a doubt. There's no question that we have seen tremendous strengthen our base businesses as a result of the investments that we've made, but most important, I think the results are showing that despite the challenging economic conditions, we're able to cover input costs while still building our brands and staging them for the future.

Okay. Thank you very much.

You're welcome.

Thanks.

Thank you, your next question is from David Driscoll with Citi Investment Research. Please go ahead.

Thank you, good morning everyone.

Good morning David.

A couple questions. First I want to come back to the volume question. So our Nielsen data had unit volumes down something on the magnitude of 6%. You reported down one for the full Company. Irene, can you give us a little bit more color on the channel splits, how are these non-measured channels performing? Are the numbers that are double digit, what color can you give us here?

They're fabulous. There's no question that some of the volume difference that you're seeing is due to the channel shifts but we're having a tremendous quarter and year with Wal-Mart and we believe that the outlook there continues to be strong as our brands and our value positioning is exceptionally well aligned with where they're going for their shoppers.

Staying with the volumes, is there any delay effect here on how the pricing affects volumes as you report them, meaning do volumes in the quarter reflect the largest impact from higher pricing or would we really see that next quarter?

Well, you know, it's hard to say. As we've said we're taking additional pricing. Certainly the pricing that we took so far through Q2, most of that is reflected in the numbers that you see, but Q3 will continue to be a challenge. We make no bones about that and there's a number of factors at work. We start with the fact that we are taking some additional pricing in response to continued escalation in costs and in some of our categories we're in some unchartered territory. At the same time, we'll also see the reversal of our commodity hedging gains in the third quarter, but I continue to be encouraged by the volume performance to date and as I look at the programming and the innovation pipeline that we've got in the back half of the year, I'm quite confident that we will be able to weather the storm, and as we've said we expect to gain or hold share in the majority of our revenue in the back half of the year.

Final question. Can you, Tim, can you just run us through your eight division lines and tell us what those price increases were by division? It doesn't have to be exact but I want to get a sense of magnitude. I think you said in the prepared comments that 90% of the portfolio had announced price increases in the second quarter?

Yes. We announced price increases over much of our portfolio in the last quarter and last several months. Much of it is already in the marketplace. Some of it is announced but is not effective yet at retail. I can't go through the specifics of each of the businesses and the categories. Perhaps we can talk off line and Chris will share some of that with you if you're interested.

I am. Thank you.

Thank you.

Thank you. Your next question is from Eric Serotta with Merrill Lynch. Please go ahead.

Good morning.

Good morning, Eric.

Looks like through the first half, your organic top line growth was up about 7.5% and for the full year, you're guiding to at least 6%, I realize 7.5 is greater than 6, but it would seem that you're looking for some slowdown in organic revenue growth in the second half. Just wondering, how much of that is related to the tougher comps, as pricing starts to accelerate in the second half of last year versus this additional pricing you're taking, maybe some conservatism around the volume outlook, any color you could give on that would be helpful.

Well, Eric, I think it's all of the above actually, I've come back to the fact that as we've said, Q2 volumes held up better than we had expected. We have announced some pricing that hasn't yet hit the marketplace and we are contemplating some additional pricing and it's a challenging environment. Obviously that has both positives and negatives for our business, the fact that people are eating at home more is certainly a positive. The fact that they continue to look for value, we got to make sure that our brands are delivering that value. Most importantly though, I feel really confident that our investments in quality and marketing innovations will keep the brands strong and enable us to improve our year-over-year performance in the second half despite the pricing that we're seeing.

And Irene, you mentioned some exciting programming and new products for the second half or you mentioned that there would be some. Could you briefly run down what some of those large needle-moving things could be?

Well, some of the biggest needle-movers are some of the items that we just launched that will play through in a much bigger way in the second half, so for example, the Pure salad dressing relaunch will play through our Bagel-Fuls products are now fully at retail and we've started to advertise them. Our Pizza For One, and we also have a number of new items as we mentioned, we've got our natural 2% natural cheese coming out as a hormone-free product. We're the first national brand to do that. We expect that to be a strong item. We've got 100 calorie OREO snack cakes, I mean if you look at each of our categories, we have a number of items coming out in the back half of the year.

Okay, I'll pass it on. Thanks, good luck.

Thank you, Eric.

Thank you. Your next question is from Todd Duvick with Banc of America. Please go ahead.

A couple of quick questions for you. With respect to the Relacore transaction spinning off of Post, can you confirm you're still planning to see about $900 million of debt travel with that transaction?

Yes, that's correct, Todd. As you know, we've made a tender offer for a split transaction that should be priced actually later on this week. We're expecting closing of the transaction in the coming weeks, and yes, there is about a little over $900 million of debt that's expected to come with it.

Okay, that's helpful and then just a final second question, with respect to terming out debt in the capital markets, you made a lot of progress over the last year. You do have a $750 million note that matures in October, but it seems you've got plenty of availability with your credit facility to refinance that with short-term debt. Do you expect to tap the debt capital markets again this year?

Yeah. We do have, you're right. We have about $700 million maturing in and I believe it's in September. As we get closer to that, we'll communicate what our intent is to do with regard to terming out.

Okay, that's helpful. Thank you very much.

Thank you. Your next question is from Chris Growe with Stifel Nicolaus. Please go ahead.

Good morning.

Good morning, Chris.

I just had two follow-ups for you. The first one is relative to the question earlier about private label and I'm just curious as I look at some of the categories where we did see a decelerating trend in market share. Can you say whether private label was the beneficiary of that? Is that where you see the share go, or is it category by category?

It really varies category by category, Chris, but again, what I'm most encouraged by is the fact that we are seeing those price gaps narrow. We've got very strong marketing programs and ANC investment behind our brands and I am confident that we will gain or hold share in a majority of the revenue in the back half of the year.

Okay. And then another clarification point on the increase in marketing, you've talked earlier in the year about a 50 basis point increase in marketing as you define it and that would be around $200 million. Is the dollar number still a good number to use for the year but percentages are changing because of the increased sales growth?

Directionally that's correct. We can't say precisely but directionally $200 million would be a good number.

Just last question. The share repurchase, can that restart, does it restart right after the Post transaction closes; is that right?

We will go back into open market conditions after the Post transaction closes, that's correct.

Okay. Thanks a lot.

You're welcome.

Thank you. Your next question is from Robert Moskow with Credit Suisse. Please go ahead.

Hi, thank you. Not to pick on one division because I thought the numbers showed overall some improvement, but snacks and cereals, it sounded like you were a little disappointed in the second quarter results because maybe it's just because your competitors didn't take the pricing that you took right away, but I thought I heard in your guidance that you think that the full year would be up mid single digit in profits and I think you're down in the first half even with a $50 million benefit on the mark-to-market hedging and then that's going reverse, so doesn't that require like a pretty radical improvement in the back half in order to meet that guidance for the year?

Well actually, Robert, we did see sequential improvement from Q1 in our margins, even if we exclude the hedge gains. As we said, we expect the full 2008 margins to be flat with 2007. We have enormous strengthen in our five, top five core brands, OREO, Chips Ahoy, Ritz, Triscuit, and Wheat Thins, some of those businesses have significant programming that will hit in the back half of the year and that's what makes us confident that we will be able to deliver that margin performance.

Did I misunderstand the guidance? So you think that the margin will be flat for the year? What does that mean?

Well profit will be up. Again we have this denominator effect due to the significant pricing that we've taken, but the profit dollars will be up.

And we're expecting margins to be comparable to last year which obviously can reflect improved profit dollars with a higher price driven revenue, we'll see margins hold above flat.

And does that guidance exclude the cereal business or include the cereal business?

That included the cereal business at this point. Once we complete the transaction, we'll update the numbers and give you more clarity on that.

Okay, thank you.

You're welcome.

Thank you. Your next question is from David Palmer with UBS. Please go ahead.

Thanks. Good morning, everybody.

Good morning.

How do you feel about energy related versus agriculture related inflation as you head into 09 and in particular, I wonder if it becomes more difficult pricing conversation saying you're going to increase price in your products. Do those sort of costs, energy and packaging related in particular, do your customers not really care about where you're seeing the pressure and just think about these pressures equally?

Well, the reality is that it's certainly easier to price for agricultural increases, but the facts are, they're quite interrelated as you know and we anticipate that they will continue to be so into the future, so I think the best thing that we can do is to make sure that we're able to add value to our categories and price our businesses closer to the marketplace and that's what we've been engaged in, and so I feel very comfortable that despite the challenging economic conditions, we will continue to be able to cover input cost inflation while building the brand equities and delivering solid financial performance.

And second and last question, related to channel growth, if we assume that your inventory levels didn't really change, it does seem like your volume trends accelerated in unmeasured channels. Can you give us maybe the color on that? Are you seeing evidence of channel switching or are your share trends improving in these unmeasured channels?

It's actually, David, it's both and it's what I said earlier. We have a very strong relationship with all of our customers. We certainly are seeing some channel shift and we have a lot of confidence that the value positioning of our brand is playing quite well in customers like Wal-Mart. So that is a key piece of our stronger volume performance and we anticipate that that will continue for the balance of the year.

Thank you.

You're welcome, David.

Thank you. Your final question is from Terry Bivens with JP Morgan. Please go ahead.

Just a quick follow-up as we near the split off. Have you guys changed your general guidance on the dilution there?

No, we have not. No. We're still, I mean, we're not, we're in the middle, later on this week we'll be pricing that and that can have some impact but at this point we're not changing any guidance on our expectations of the impact on dilution.

Okay. All right, thanks very much.

You're welcome.

Thank you. I would like to hand the floor back to Chris Jakubik for any further or closing remarks.

Thanks, Jackie. Thanks, everyone for joining us today. For those people in the media who have further questions, Mike Mitchell will be available to take your calls, and for any analysts and investors who have further questions, I'll be around all day. So thanks very much for joining us and we'll speak to you soon.

Thank you. This concludes today's Kraft Foods second quarter 2008 earnings conference call. You may now disconnect your lines.