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Kraft Foods Inc.

Kraft Foods Inc. (Kraft), the largest branded food and beverage company headquartered in the U.S. and the second largest worldwide, faced challenges in 2003 and responded with actions designed to restore growth.  Volume increased 0.7%, as volume growth from ongoing businesses (including acquisitions) of 1.6% was partially offset by the impact of divestitures.  Operating income declined 1.7% to $6.0 billion, as higher commodity and benefit costs, unfavorable product mix and the impact of prior-year gains on the sales of businesses were partially offset by the absence of $253 million in pre-tax integration-related and separation charges incurred in 2002, favorable currency of $94 million and volume growth. During 2003, Kraft increased its quarterly dividend by 20%, to $0.18 per common share.

In December 2003, Kraft announced a new single-CEO management structure and elected Roger K. Deromedi as Chief Executive Officer.  In January 2004, Kraft introduced its Sustainable Growth Plan, which is expected to deliver consistent, long-term growth in volume, revenues and earnings.  The plan includes a global restructuring program that will improve the company’s cost structure and utilization of assets.  The program is expected to cost up to $1.2 billion pre-tax, with the majority of charges to be incurred in 2004 and 2005.  The program is expected to generate approximately $400 million in annual pre-tax savings by 2006.  In 2004, estimated pre-tax savings of $120– $140 million will be reinvested in brand-building initiatives.

A separate Kraft Foods Inc. Annual Report is available at www.kraft.com.

North American Food

Kraft Foods North America, Inc. (KFNA) volume increased 1.6%, due to contributions from new products, and gains in Beverages, Desserts and Cereals, and Cheese, Meals and Enhancers, partially offset by lower Biscuits, Snacks and Confectionery volume and a reduction in trade inventories.  Operating companies income declined 0.7% to $4.9 billion, as higher commodity and benefit costs, unfavorable mix and increased promotional spending were partially offset by the absence of $229 million in pre-tax integration-related and separation charges incurred in 2002, volume growth, and pricing actions taken early in the year in response to higher commodity costs. 

Beverages, Desserts and Cereals recorded strong volume growth of 5.3%.  Ready-to-drink beverages once again grew volume in the double digits, driven by new products Capri Sun Sport and Capri Sun Refreshers.  Desserts volume was up, driven by strong consumption of Jell-O sugar-free ready-to-eat desserts and the introduction of Jell-O Smoothies.  Coffee volume was down due to competitive activity, although both consumption and share trends showed sequential improvement in the fourth quarter.

Biscuits, Snacks and Confectionery volume declined 4.7%, primarily due to softness in the cookie category, which declined due to the impact of consumers’ health and wellness focus, lower contributions from new products and higher pricing.  Volume was up in Snacks, driven by growth in Planters nuts, which benefited from strong category growth due to increased consumer awareness of the health benefit of nuts.

Cheese, Meals and Enhancers volume grew 1.7%.  In Cheese, volume was up, due to improved consumption and share trends from the investment program that began in the third quarter.  Volume also increased in Canada, Mexico and Foodservice. Volume was down in both Meals and Enhancers.

Oscar Mayer and Pizza volume increased 1.0%, driven by solid growth in cold cuts, Oscar Mayer bacon and Boca meat alternatives. Pizza volume was up slightly, benefiting from geographic expansion of DiGiorno Deep Dish Pizza.

International Food

Kraft Foods International, Inc. (KFI) volume decreased 1.6%, as the impact of divestitures more than offset volume growth from ongoing businesses of 1.4%.  Ongoing business volume was up due to tack-on acquisitions, which accounted for 1.5 points of growth, and growth in several key developing markets including Brazil, China and Russia, moderated by the impact of price competition, particularly in Germany and France, and the impact of the European summer heat wave on the coffee and confectionery businesses.  Operating companies income decreased 3.6% to $1.3 billion, as lower gains on sales of businesses, unfavorable mix, higher benefit costs and infrastructure investment in developing markets were partially offset by the absence of $24 million in pre-tax integration-related and separation charges incurred in 2002, pricing actions and favorable currency of $72 million.

Volume in Europe, Middle East and Africa increased 0.3%, as ongoing volume growth of 0.8% was partially offset by the impact of divestitures. Snacks volume was up, benefiting from the acquisition of the Family Nutrition biscuits business in Egypt, and Kar Gida salted snacks in Turkey, partially offset by softness in the confectionery business, due to price competition and the summer heat wave in Europe. Beverages volume declined, due primarily to price competition in Germany, but coffee volume was up strongly in Russia, benefiting from expanded distribution of Maxwell House and Jacobs coffees, and in Poland, due to the launch of Jacobs Ice Presso ready-to-drink coffee and Maxwell House 3-in-1.

In Latin America and Asia Pacific, volume decreased 4.4%, due to the impact of divestitures. Volume from ongoing businesses increased 2.3%, driven by gains in key markets including Argentina, Australia, Brazil and China.  Snacks volume grew, as gains in biscuits in Argentina, Australia, Brazil and China, driven by new products, were partially offset by a decline in confectionery. Beverages volume grew strongly, driven by double-digit gains in Brazil, where a ready-to-drink version of Maguary juice was launched, as well as gains in China and Venezuela.

Roger K. Deromedi Chief Executive Officer