Food

Kraft Foods (Kraft) is focused on becoming a more nimble, execution-oriented, cost-effective competitor in categories with growth and profit potential. It is successfully executing against its Sustainable Growth Plan, which included an increase in marketing spending of approximately $460 million in 2004, to drive top-line growth.

As a result, Kraft’s net revenues were up 5.5% for the year. Importantly, Kraft’s revenue growth accelerated in the fourth quarter, and grew in all four quarters in North America, providing solid evidence that the actions being taken at Kraft are having their intended effect. Kraft’s volume was up 2.8% for the year. Operating income declined 21.3% to $4.6 billion in 2004, primarily as a result of costs associated with its restructuring program, additional marketing spending and unfavorable commodity costs.

Kraft created a new global organization in January 2004, and made excellent progress on its restructuring plans as the year progressed. The restructuring program is expected to cost a total of $1.2 billion over three years, of which approximately $600 million is expected to require cash payments. Kraft projects $400 million in annualized cost savings by 2006.

Kraft continues to transform its product portfolio through internal innovation, acquisitions and divestitures. During the fourth quarter of 2004, Kraft reached agreements to divest its sugar confectionery, U.K. desserts and U.S. yogurt businesses. Those transactions are expected to be completed by mid-2005.

Kraft North America Commercial’s revenue momentum increased significantly in 2004, while the acquisition of Veryfine Products Inc. and its Fruit₂0 brand of zero-calorie flavored water added a promising growth candidate to the North American portfolio, as did Kraft’s expanded distribution agreement with Starbucks and its licensing agreement for Tazo tea. The launch of Kraft’s Back to Nature line marked a major entry into the fast-growing natural and organic category, and its South Beach Diet initiative is very promising. Kraft International Commercial’s revenue performance, excluding currency, was disappointing, due to price competition and other factors. Kraft successfully launched Tassimo, its new, proprietary hot beverage system, in France in 2004 and is expanding into more countries in 2005.

New products will play a key role in Kraft’s growth going forward, and Kraft is focusing on fewer, bigger and better ideas using a new fast-track process for key priorities. I am confident that Kraft is on track to achieving its full potential and can deliver stronger results in the years ahead.

Philip Morris Capital Corporation and SABMiller

Philip Morris Capital Corporation (PMCC) reported operating companies income of $144 million for 2004, significantly below results for 2003, reflecting an increase of $140 million in the provision for losses. The increase primarily related to PMCC’s exposure to the troubled airline industry. Lease portfolio revenues were also lower, partially offset by gains from asset sales. While PMCC’s exposure to the airline industry continues to be a concern, the increase in its allowance for losses brings the total provision to a level that I believe is prudent in light of the continuing turmoil within the airline sector. Absent that provision, PMCC had a very solid year, generating more than $800 million in cash flow for Altria.

Since July 2002 we have held an economic interest in SABMiller, which now stands at 33.9%. We are pleased with our investment in SABMiller, which increased substantially in value last year. Under the terms of our investment, we are obliged to hold our stake in SABMiller until at least June 30, 2005, and as of this writing, no decision had been made regarding our future intentions.