Chris Jakubik - Vice President Investor Relations Irene Rosenfeld - Chairman and CEO Tim McLevish - Chief Financial Officer

Terry Bivens – JP Morgan Judy Hong – Goldman Sachs Ken Zaslow - BMO Capital Markets David Palmer – UBS David Driscoll – Citi Investment Research Eric Katzman - Deutsche Bank Alexia Howard - Sanford Bernstein Vincent Andrews - Morgan Stanley Jonathan Feeney – Janney Montgomery Scott Andrew Lazar – Barclays Capital Ann Gurkin – Davenport Robert Moscow - Credit Suisse Bryan Spillane – Banc of America Chris Growe - Stifel Nicolaus

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 our earlier today and is available on our web site, Kraft.com. Also available on our web site are slides that we will refer to during our prepared remarks.

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. Please refer to the cautionary statements and risk factors contained in the company's 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 remarks will exclude those items affecting comparability. These excluded items are captured in the GAAP to non-GAAP reconciliations within our news release, and they are also available on our web site.

Irene will lead things off today with her perspective on our 2008 results and 2009 outlook. Then Tim will highlight our financials and review the results for each of our business segments.

After that we’ll take your questions. With that, I'll hand it off to Irene.

I’m very pleased to report that Kraft Foods delivered its earnings guidance for the second year in a row. We did it in the face of a very challenging and highly volatile operating environment.

Looking at the past two years we’ve made steady progress toward our ultimate goal of sustainable growth. I’m very pleased with our success in accelerating top line growth, to the investments we’ve made in product quality in marketing and in innovation.

I feel particularly good about our performance in 2008 in sustaining our top line momentum while growing our bottom line. As you know, in 2007 we focused on Wave I investments on the categories that mattered most.

We saw the impact in the marketplace as we stepped up our top line growth in all regions around the world. In 2008 we made further progress in our turn around.

We completed most of the heavy lifting on brand reinvention with our Wave 2 investments. We began to reallocate our resources to priority categories, core brands and key markets and to exploit our sales capabilities to leverage the power of our portfolio.

Importantly, our investments since 2007 have rebuilt our brand equities to the point where we now have renewed pricing power. For the first time in several years pricing and productivity fully covered increased in input costs.

Even more important our actions have gotten the fly wheel turning, enabling us to grow both the top and the bottom lines while simultaneously investing in our future. I remain confident that we can sustain this performance.

Having said that, given this highly volatile environment the fourth quarter had a number of puts and takes. We have managed through them and I think we have positioned ourselves well for further improvement.

In fact, as we complete our turn around in 2009 we will emerge an even stronger competitor. For several reasons I believe we’ve only begun to realize our potential.

For instance, slide five is the recent history of our revenue growth. It shows that we’ve progressively improved our growth rates year over year.

It also shows that in 2008 we were able to respond to an unprecedented environment in an unprecedented way. As the market leader in over 80% of our portfolio we took the lead on pricing.

We priced aggressively to reflect higher input costs in all regions around the world. As you can see pricing contributed 7.6 percentage points of growth to our top line.

We priced aggressively because it was the right thing to do to address rapidly rising input costs and to preserve our ability to invest in our brands. We also continued to actively prune less profitable products and less productive trade programs to stage the portfolio for sustainable growth.

As expected, these actions adversely affected our 2008 volume performance. The peak impact was clearly felt in Q4, mainly due to the cumulative effect of pricing actions taken during the year.

The fourth quarter also saw a significant hit from our trade efficiency programs. This was especially evident in Cheese, Snacks and EU coffee.

This, together with retailer inventory reductions in North America and declining consumer sentiment worldwide, significantly affected Q4 volumes. Looking ahead, our pruning program has strengthened our portfolio.

We have improved the ROI of our trade programs. The pricing we’ve taken leaves us well positioned to cover higher costs in 2009.

We’re now taking appropriate pricing actions much more quickly, enabling us to better manage changes in input costs both up and down. It is particularly important in categories like cheese, where we’re now pricing closer to the market and you can see it playing through in our margins.

Overall I’m quite comfortable that our pricing at current levels and our strengthened brand equities leave us well positioned to deliver our goals in 2009, which brings me to our market share and slide six. Despite fits and starts during the year we’re making solid progress in key markets around the world.

This chart shows our US market share performance. As you can see on the right, we’ve made steady improvements on a rolling 52 week basis.

As I mentioned, we were at peak pricing in Q4. We priced quickly and aggressively in late Q3 and early Q4 in response to the rapid rise in input costs.

Combined with the spike in unemployment and rapid deterioration of consumer sentiment its not surprising that branded consumption was down and private label picked up share. I don’t mean to minimize these results, we take market share very seriously as a key indicator of our long term franchise health, but I feel quite confident about our ability to compete in the marketplace going forward.

Our price gaps are in very good shape with some relatively minor exceptions. Our 2009 advertising and merchandising plans will continue to emphasize the value proposition of our brands.

We have significant cost savings at our backs to reinvest in brand building. Our growth is now sufficiently broad based to enable us to make the necessary portfolio trade offs to deliver our earnings commitments.

That brings me to the outlook for the year. In 2009 I expect to complete our turn around marked by continued top line growth while building both profit margins and market share.

More specifically, we will continue to manage input costs through a combination of pricing and productivity. Margins will expand from improving volume and product mix trends together with overhead leverage.

We will also realize significantly more synergies from our LU biscuit acquisition. Finally, market share will improve as we lap our pricing actions and benefit from continued investments in our brands and sales capabilities.

We’ll talk more about the details of our 2009 plans in two weeks at the Cagny Conference. With that you will hear the actions we are taking will enable us to emerge from our turn around an even strong competitor capable of delivering sustainable growth.

Let me now speak to our 2009 guidance. In terms of organic revenue guidance we expect volume mix to improve as the year progresses.

The contribution from pricing, however, will be less than previously anticipated due to the recent precipitous decline in dairy costs. As a result, we’ve adjusted our 2009 organic revenue guidance to approximately 3% growth from at least 4%.

Regarding EPS if you recall at back to school we set an expectation that we would deliver $2.00 GAAP EPS in 2009 and from an operating perspective we’re still on that path. However, as slide eight shows since that time we’ve faced a number of sizeable headwinds.

Currency and pension are the most significant and the changes that are the least under our control in the short term. Taken together they represent a year over year hit to earnings of about $0.24.

We continue to find ways to mitigate these impacts and to backstop our plan. In fact, versus our original guidance we found additional opportunities to cover half the impact of these new headwinds.

As other US based multi-nationals are also finding, at current levels the impact of the strong dollar is too much to overcome. As a result, we believe that 2009 GAAP EPS guidance of $1.88 is the most appropriate stance at this time.

Of course, if the US dollar weakens we expect that our earnings outlook will improve commensurately. In sum, despite those significant headwinds I believe the investments we’ve made over the past two years and our plans for 2009 will enable Kraft to emerge from this environment an even stronger company.

Obviously the world has changed greatly since we embarked on our plan to get Kraft Foods growing again. Through it all I’m very pleased with the results of our turn around to date.

I feel even more confident about our ability to deliver sustainable growth in the future. Now I’ll turn the call over to Tim.

Please keep in mind that unless otherwise noted my comments will exclude the items affecting comparability that were highlighted in our press release. I’ll begin my comments with slide 11 on our top line growth.

As you can see, organic growth in Q4 was 4.4%. This came on the back of nearly 10 points of pricing.

That is simply unprecedented in the modern history of Kraft Foods. It reflects the cumulative effect of the numerous cost driven price increases we took this year in virtually every category and every market around the world.

It was the key reason that for the first in several years we fully offset higher input costs through a combination of pricing and productivity. At the same time volume in the quarter was down about five points versus the prior year.

As Irene mentioned this was not simply a function of price elasticity. More than half of our Q4 volume decline was due to a combination of inventory reductions by US retailers and our own decision to sacrifice less profitable volume through both pruning and trade spend efficiency programs.

As we look forward to 2009 we expect our top line growth to be a better balance between pricing and volume mix. In 2009 we expect pricing to moderate as the year progresses mainly driven by the precipitous decline in dairy costs.

As a result, organic revenue growth will be about 3% in 2009. Overall, however, we’re well positioned for pricing and productivity to again cover the higher input costs we expect in 2009.

At the same time, we expect the contribution from volume and mix to improve progressively over the coming quarters. There are three reasons; first, we expect to gain further momentum in the marketplace from investments in quality, marketing and innovation that we’ve already made and will continue to make in 2009.

Second, retailer inventory reductions are likely to continue in Q1. Third, due to the timing of Easter in 2009 shipments for this important holiday will shift to the second quarter.

This will benefit Q2 volume but negatively impact Q1. Turning to slide 13 and the drivers of Q4 and 2008 earnings per share.

Above the line we delivered strong gains from operations in the quarter but it was matched by unfavorable currency and unrealized mark to market losses related to our commodity hedging activities. As you can see in the chart our operating gains in the fourth quarter were a significant part of the full year.

That’s consistent with the guidance we provided in January. This reflects the benefits of pricing and productivity catching up to the increases in our input costs.

Below the line was also essentially a push. The benefits of a lower tax rate and fewer shares outstanding were offset by higher interest expense and a dilution from the exit of Post.

In the end, we delivered our full year guidance of $1.88 on an ex-items basis. Before getting into our segment discussion I’d like to spend a few minutes on 2009 guidance and how it relates to our 2008 EPS excluding items.

First, we remain committed to treating the future costs of restructuring type initiatives as an ordinary cost of doing business and eliminating ex-items reporting. This underscores our move to a more consistent ongoing cost reduction program to fund investments in the business as well as our desire to be more transparent with our investors.

It’s also a key indicator of the underlying health of our portfolio and our ability to deliver earnings growth in a more predictable fashion. Second, and just as important, we foresee strong income growth from our base business in 2009.

We expect to offset more than $0.40 of headwinds versus our 2008 ex-items earnings. We will offset these negative impacts in a high quality way.

We have a robust stream of cost savings ahead of us. So you can expect higher margins in 2009 driven by improving volume trends, product mix and further overhead leverage.

As Irene mentioned, if the US dollar reverses course our earnings outlook will improve. I’ll take a few minutes now to share some highlights of our business segment results.

I’ll start with North America where our 2008 results were the best combination of top and bottom line growth since 2001. Nearly 5% organic revenue growth was the best we delivered in four years and 7% organic income growth was the best in six years.

Q4 results were clearly impacted by the combination of retailer inventory reductions, the pruning of lower margin products and eliminating inefficient trade spending. These had the biggest effect on Beverages, Grocery, Snacks, and Foodservice.

Nonetheless we delivered solid income growth in a challenging volatile environment. Our investments have improved our brand equities across the business and our results are now reflecting the benefits of our broad portfolio.

Now let’s take a look at individual segments. In US Beverages our investments in quality, marketing and innovation behind Capri Sun, Maxwell House and Tassimo have continued to pay off.

However, lower powdered beverage results negatively impacted revenue and operating income for the segment. This was due to a combination of comparisons with a very strong prior year and retailer inventory reductions this year.

The combination of lower powdered beverage revenue, the corresponding negative mix and higher marketing costs led to a significant drop in Q4 profit margin versus the prior year. As we look at our 2009 plan in Beverages we expect better powdered beverage revenue growth and further improvements in coffee margins to drive consistent year on year margin improvement as the year progresses.

In US Cheese revenue growth reflected double digit price increases partly offset by a decline in volume. Three factors drove this decline; first, through the end of Q4 list prices remained near historical highs across most cheese categories, negatively impacting consumption.

Second, we took the lead on pricing to the cost curve on the way up and competition was slow to follow, expanding our price gaps. Third, we made a conscious decision not to chase unprofitable promoted volume during the holiday season particularly in the natural cheese business.

As a result of the last two actions we lost some share in Q4. On the other hand we were successful in better aligning our pricing with input costs not just in Q4 but all year.

Our pricing and trade efficiency efforts contributed to a strong rebound in product margins from 2007 levels. Looking forward we remain confident that the results of our Cheese business will be more consistent.

Here’s why. First, we expect that our new pricing paradigm will better maintain optimal price gaps, improve vol mix and deliver more stable margins in the mid to high teens.

As barrel cheese costs have dropped to near government support levels we have lowered our prices accordingly. We will maintain our price gaps versus competition within our targeted ranges while still delivering solid margins.

Second, our marketing around the value proposition of Kraft Singles and Velveeta is lifting consumption of two of our highest margin cheese businesses. Third, innovations such as Bagel-fuls will continue to deliver incremental growth.

Moving on to US Convenient Meals, as we outlined in last quarters call we expected Q4 results to reflect pricing catching up with higher input costs and it did, driving double digit growth in both organic revenue and operating income. Our investments in quality and innovation continued to pay off.

Our new line of single serve pizza offerings under the “For One” banner added to the already strong base growth of our DiGiorno, CPK and Jack’s brands. Deli Creations sandwiches also grew double digit in Q4 driven by the new flatbreads line.

Oscar Mayer bacon posted double digit growth in both volume and revenue on the back of quality improvements and new marketing programs. Overall volume was down slightly in the quarter due to a combination of pruning our South Beach Living frozen entrees business and higher prices particularly in cold cuts.

Both of these actions were on strategy and were strong contributors to the improved profitability of the Convenient Meals segment. As we move forward, the success of our key growth platforms and new products will lead to further organic growth and margin expansion in 2009.

On to US Grocery which had a mixed Q4. Jell-O and Mac n’ Cheese continued to deliver solid top and bottom line growth behind strong value oriented marketing.

However, these gains were offset by lower volumes, unfavorable mix and lower profits due to pruning our Handi-Snacks ready to eat dessert business and price elasticity’s and retailer inventory reductions particularly in spoonable and pourable dressings. These near term factors aside we remain encouraged by the changes in the long standing trends we’re seeing as a result of our investments in our high margin Grocery portfolio.

Looking at US Snacks, it was truly a tail of two cities at the category level. Biscuits delivered its best annual growth since 2001.

Our focus on our largest brands is paying off. This is particularly evident in the fourth quarter.

Oreo grew by more than 20% and the Cakesters platform approached the $100 million mark. As a result Biscuits delivered solid profit growth.

The gains in Biscuits were more than offset by two things, lower volumes in snack nuts due to expanded price gaps and a decline in snack bars. Looking forward we expect impulse categories like Snacks will see continued pressure from consumer weakness.

However, as we fix snack, nuts and bars and continue to invest in Biscuits we are confident that we can improve our vol mix and margins in our Snacks business in 2009. We announced a price reduction in January to address our price gaps in nuts and we’ll continue to invest in quality, marketing and innovation across our entire line of Snacks offerings.

Turning to Canada and North America Foodservice, we had another strong quarter in Canada driven by pricing, strong volume and share growth. Having reestablished Canada as a stand alone business an increased investment in marketing and innovation across the portfolio served us well in 2008.

We expect to see further operating gains in 2009 as we continue to leverage our scale in this important market. I would note that reported Q4 operating income in Canada was adversely impacted by currency.

In Foodservice the effect of exiting a low margin unbranded supply contract and the significant slow down in restaurant traffic led to lower volume and revenue in the quarter. However, our focus on higher margin, higher growth opportunities, improve the profitability of our Foodservice business despite the negative macro trends in 2008.

Overall, it was a terrific year for our Canada and North America Foodservice segment. Looking forward, currency and volumes will continue to be a challenge in the near term.

Given the base business gains from marketing and innovation we expect our competitive standing to continue to improve. Now I’ll turn to our International businesses.

We continued to see the benefits of our 5-10-10 strategy focused on priority categories, core brands and key markets. In the EU the balance of growth firmly shifted to pricing with more than six points of cost driving pricing in Q4.

In fact, 2008 was the first year in a long time in which our EU business essentially offset higher input costs through a combination of pricing and productivity. Growth in our focus areas remains solid.

In Chocolate we continued to deliver solid growth from our investments in marketing and innovation particularly behind our billion dollar Milka brand. Investments in our high margin Philadelphia spreads helped to offset price related declines in base cheese consumption.

In coffee, gains were mainly driven by the continued growth of Tassimo on demand coffees and the successful re-launch of Kenco in the UK. At the profit line EU operating margins improved in Q4 over last year as they had for much of the year.

The LU biscuit business added substantially to operating results in 2008. Even excluding the acquisition our EU operating profit was up in 2008.

Higher input costs were more than offset by higher pricing and favorable product mix. In 2009 we anticipate greater costs synergy as we continue to integration of the businesses and we expect further financial improvement in the EU.

In Developing Markets we saw continued strength with organic growth of 15% driven by solid mix gains and almost 17 points of cost driven pricing. Volume was down in the quarter due to a decline in Asia.

This is caused by a combination of our pruning activities and lower consumption resulting from the melamine scare. Beyond these factors our focus on and investments in priority categories, core brands, and key markets continues to pay off.

Operating profit growth was excellent, almost 30% with particularly strong results in EEMA and Asia/Pacific. Looking forward, we expect to see the reported results of our Developing Market business pressured by slower GDP growth and currency.

We will continue to invest to improve our competitive position and have factored this into our plans. I’ll conclude on another focused area for us, cash flow.

In addition to improving our earnings base last year we also made good progress in managing the other elements of our cash flow. We delivered solid working capital improvements; we posted a 3-day reduction in our cash conversion cycle, most important inventory was the main contributor.

We held our 2008 CapEx to $1.4 billion or 3.2% of net revenues while still supporting our growth. That’s down from roughly 3.4% of net revenues last year.

Slide 25 shows that we generated about $2.8 billion of discretionary cash flow in 2008. Included in this result is a benefit of approximately $300 million from a non-recurring deferred interest payment.

Even adjusting for this, we improved considerably from last year’s level of $2.3 billion. With that I’ll hand it back to Irene for some closing comments.

To sum it up, we had a strong 2008 and we’re well positioned in 2009. We’ve continued to build momentum despite a challenging and volatile environment.

Our investments in the business are paying off and stronger top and bottom line growth around the globe. Obviously though it’s a new world, but in this new world I am confident that our fundamental strengths and strategies will enable us to successfully complete our turn around in 2009 and continue to deliver strong earnings and cash flow.

Now we’d be happy to take your questions.

Just to look a little bit at the alternate channel business specifically I’m interested in Wal-Mart, I know you can’t talk about it per se but it seems like through most of 2008 you were able to offset what looked like worse volume performances in Nielsen with outsize gains in volume at Wal-Mart. As we look at the Wal-Mart panel data through the end of December basically you’re fourth quarter it seems as though that trend is still continuing that let’s say sales in alt channels continue to be pretty robust.

Is this inventory reduction, is that coming in the alternate channel, even though consumption was good you may have slowed down your shipments? I’m trying to get to whether inventories let’s say in the alternate channel are quite low as we head into the year.

Do you see what I’m getting at?

As you know, traditional channels are increasingly less representative of our market and I think you’re seeing that in the numbers. They continue to decline relative to the non-measured channels and we continue to have very strong performance in a number of these alternate channels including Wal-Mart.

I feel very good about the fact that the combination of increased customer traffic, that customers like Wal-Mart are seeing the current value oriented environment is serving us well. It is helping to drive revenue and profit for both of us.

Without a doubt we saw inventory reduction in those channels as much as we saw it in traditional channels. We expect that we will continue to see some of that into the first quarter but as I said before I think we’re well positioned given the investments that we’ve made in our brand equities and our fundamental products.

I feel very good that we’re well positioned to compete in that environment.

Foreign exchange looked kind of bleak at the end of the third quarter as well and certainly the market was not performing. What would you say has been the major delta that causes you to lower guidance as we go into ’09?

What really changed between the time you reported this quarter and Q3?

As we mentioned there’s really two major factors both of which are somewhat out of our control. One is currency as you said, the other is pension costs.

We’re seeing a reduction in the discount rate as well as the return on our assets. The combination of those two factors has caused us to lower our guidance.

As we said, our business performance is actually very much on track and in fact we’ll be stronger then we had originally forecast. Currency is the main issue particularly in developing markets like Brazil and Russia.

As I said in my remarks if the currency improves we would expect to see our EPS improve correspondingly.

I’m wondering if you can give us a little bit more perspective on this volume and pricing trade off. As we look out 2009 as pricing moderates I guess you’re assuming volume trends to improve.

I’m wondering your confidence level in expecting that outlook especially with weak consumers around the world and potentially more threats from private labels.

Overall I feel very good that our price gaps are in good shape. We’ve recently announced a couple of actions like the actions we just took in nuts to get our gaps back into line.

I think net net the gaps are in a good shape. I think the focus that we’ve placed on brand equity investment were certainly benefiting us.

We’re able to adjust our price levels much more quickly then we used to so I feel quite confident that we’re well positioned to be able to address changes in pricing up or down very rapidly.

You talked about in 2009 pricing and productivity offsetting the input cost inflation. If you could talk a little bit more about the input cost inflation out look.

I think you mentioned in Q3 call that you’re expecting the commodity component of the cost to be flattish in 2009. I’m wondering where the pressure is in terms of the input cost inflation.

In 2008 you saw progressive increases in some of our commodity input costs over the course of the year. That peaked early in the fourth quarter and have come off since that time.

We’re seeing declines in many of the commodities. However, if you look at the average 2008 prices compared with what we expect in 2009 or even from current levels we do expect to see average year on year increases of probably somewhere in the $200 million range.

As Irene mentioned we think our brand equities are strong so that we can offset that in our pricing. We’ve reflected that in our guidance.

Can you clarify in 2008 what that number was? I think you had mentioned $2 billion was what you were expecting before.

Its about $2 billion, we had some hedging losses as you know at year end but it’s about $2 billion is the impact in 2008.

On slide six you were talking about the market share gains, you kind of give the idea that you’re feeling confident about the market share gains. Looking at that slide and also the data that we have it does look like your market share gains are sliding relative to where you would have been last couple quarters.

Can you talk about why you are feeling a little bit more confident about regaining market share and also can you talk about some of the initially focused category brands like Oscar Mayer, DiGiorno, Cheese, Jell-O, all those categories are those focused brands not doing as well as you thought? Can you lay out a little picture for us?

As you know, we priced very aggressively to cover the unprecedented cost increases. At the same time, certainly as we look into the fourth quarter, consumers began to pull back a little bit in response to the economic environment.

That probably was the single biggest impact on our share performance. We also took some actions ourselves to stage the portfolio for the future.

As we mentioned, we pruned some less profitable products. We also took the opportunity to improve the ROI of our trade spending particularly in the Biscuit and Cheese categories.

As a result of that, we took a bit of a hit in the fourth quarter. I think our 52 week number is certainly the most representative metric to look at as we go forward.

I think we really, as a result of these actions, have emerged from this year even stronger. As we said, we expect to see market share improvement beginning in Q2 as we lap the pricing changes.

I know the lower cheese prices will limit the top line growth relative to your expectations. Does that also relative to your expectations does that also take down what you would have thought your profits would have been or would the profit growth have been the same as your expectations a quarter ago?

No, in fact our profits should go up. We’re looking to cover our costs using pricing to cover our costs.

As a result of the momentum that we’re seeing we feel very comfortable that regardless of what happens on the cost side that we will be able to deliver the guidance that we’ve laid out.

I was wondering if you could perhaps give a little bit more insight into your strategy in the Cheese business to the degree that you can in this forum. It appears that Kraft is really attempting, particularly in the natural cheese part of its business, and beyond just the seasonal aspects around the fourth quarter promotions you talked about to effectively minimize the importance of this business by taking out permanently the less profitable part of that business.

I’m wondering also with regard to that Cheese segment, where do you think that you can get in light of any soft of strategies you’re trying to achieve, where do you see that business being in terms of margins in the medium to long term?

Part of our focus strategy and our portfolio management is our ability to prune some of the less profitable items in favor of the more profitable items. The experience we had in Cheese is a perfect example.

You are correct in saying that we are essentially deemphasizing natural cheese in favor of products like Singles and Velveeta which particularly in the current economic environment are doing exceptionally well. As a result, you’re seeing our margins come back to the mid teens levels which we think is a sustainable level for our Cheese business.

What are the cost savings from the LU biscuit acquisition expected to be in ’09? What’s interest expense guidance for ’09?

Let me take the last one first. Interest expense, you can see we have about $20 billion worth of debt on our balance sheet and most of it is fixed rate debt and our average interest rate has been a little bit over 6%.

You can kind of get the math. I don’t expect any material changes from that going into 2009.

Savings from LU we did a nice job integrating that business. You know that we, by agreement, had held back on some of the French manufacturing synergies and so forth for a period of time.

We didn’t get a lot of that in 2008 but as we get into 2009 and 2010 we expect that we will pick up in that regard. We have, in the fourth quarter particularly, of 2008 developed an integration plans with our EU business and we have anticipation of seeing some nice synergies as a result of that.

Is it possible for you to quantify if for us?

I can’t quantify that right now.

A question on the ’09 pricing, if its going to be lower then you expected, why wouldn’t you have expected better volume growth, you said revenue growth would be unchanged.

It’s a combination of actions across the portfolio. The biggest single impact on our lower revenue guidance is the fact that dairy costs have come down so precipitously.

We expect to see stronger volumes in response to those reductions but we’re still, on most of our other categories going to see pricing that will be up year over year. It’s essentially the balance across the portfolio that brings us to the guidance of at least 3%.

We had previously been our expectation of 4% and virtually the entire reduction from that to about 3% is attributable to dairy costs which have gone down from in excess of $2.00 back in the third quarter to support levels a little over $1.10 today. That in and of itself has resulted in the larger majority of the reduction in revenue expectations.

I have question about the inventory reductions at retail. I was a little bit surprised.

I know you had kind of given us a heads up on that. Even still, I generally thought inventory levels at retail were probably two weeks, maybe three weeks at most relatively efficient retailers and you’ve also seen pretty good at home consumption versus away from home.

I’m kind of surprised. Are you surprised that the retailers are doing it or is it a function of their cash flow and inventory levels?

We’re not surprised. We had foreshadowed as we talked in our third quarter call that as we understood retailers to be increasingly focused on cash in the current economic environment that we thought we might see some liquidation in the fourth quarter and in fact that’s consistent with what happened.

The inventory reductions that we saw were not totally a surprise but they were a big part of our volume declines in the fourth quarter. We expect that as we head into the first quarter we may continue to see some of that.

It was primarily focused in 2008 in North American and in 2009 we may very well see some of that in International as well and that’s one of the reasons that we’ve suggested that our share improvement and some of our volume trends will begin to improve more in the second quarter.

How much of the SKU cuts that you’re doing across the business, how much of that do you think is a function of those particular brands not being in a leadership position where you’re feeling a squeeze from private label or something like that. How much of the top line ’09 target is hit by SKU cutting?

Let me start by saying most of what we pruned you wouldn’t even know we had in the first place. These are not major businesses, it’s just the opportunity as the portfolio is starting to perform and we are delivering our results we’re using this as an opportunity to continue to ensure that all the SKUs in the portfolio are adding value and are accretive to our performance.

The changes that we made are some Foodservice SKUs that you wouldn’t necessarily be aware of and a variety of other products, Handi-Snacks, pudding for example, they’re small items that we had the opportunity as we were doing as well as we were to continue to stage the portfolio for sustainable growth.

It is the right thing to do to prune those SKUs that we have done. It probably, in the fourth quarter cost us about a percent and a half of our volume reduction.

We expect until that until that anniversaries in 2009 it will have a similar impact and we do have some additional pruning we expect remain in the portfolio. That’s all baked in to our revenue guidance and expectations.

Did you mention any cash costs from the pension issue?

I didn’t mention it. We do not anticipate that we will have a required pension contribution in 2009.

As you can imagine we invested our pension assets probably 70% equities, 30% fixed income. They performed pretty much with the market this year so we saw a pretty important reduction in our asset values.

That will not require though a required contribution in 2009. We are looking at, and likely will make a voluntary contribution to the plan, however.

I have a question on the mark to market hit. As far as I can tell it was about a $0.10 hit in 2008.

Many other companies in the sector seem to be excluding these factors from their recurring numbers. Could you explain what the hit was this quarter, which particular commodities are we seeing this in the most?

I suspect it may be packaging and fuel but maybe you can speak to that. In terms of the guidance for 2009 if we were to assume that current spot markets remain roughly where they are do you have a certain amount of mark to market losses built into that $1.88 forecast?

If so, how much?

You’re about right; we had about $0.09 full year impact from commodity hedging activity. In the fourth quarter the majority of that hit, hit us about $0.08 worth.

It’s really spread across our commodity. We always have an active hedging program to protect some period out in the future of our commodity requirements.

The mark to market at the end of the year, those had declined. There was a fair amount of oil related impact; some of the packaging materials, the resins and so forth were impacted by that as well.

Obviously some of that will essentially come back to us in 2009 in the coverage that we have. At the end of the year obviously by definition we are mark to market in 2009.

If commodities continue to come down we still have some hedge positions that could put a little pressure but that’s fully embedded within our expectations.

I’m trying to triangulate a couple things. You said on a number of occasions in the call that you’re comfortable with where the price gaps are yet I think also its fair to say that the share and volume trends in the quarter don’t appear to be sustainable and the economy, if anything is weaker today then is was three or six months ago.

I don’t think anybody’s outlook for the next three or six months looks so great. Why are things going to get better?

Why are your price gaps okay where they are?

There’s been a lot of dislocation in the course of 2008 especially with the recent spike in unemployment and as well as the aggressive pricing actions that we and a number of our peers took. As a result of that we’ve been seeing a lot of trading in, a lot of trading out, a lot of trading down.

We’ve got a number of businesses that are benefiting quite well from that phenomenon. DiGiorno, Oscar Mayer, Deli Creations are business that are benefiting greatly from the fact that consumer are eating more at home.

Then we’ve got products like Kool-Aid, Mac N’ Cheese, Jell-O that are benefiting very much because they’ve got very strong value messages against their competitive frame. That’s one of the reasons I feel quite comfortable that we are well positioned.

Having said that, there’s no question in this current economic environment it will be tough sledding in the near term. I feel very good about the investments that we’ve made and the health of our businesses and I feel quite confident that as a number of our gaps in a couple of categories like nuts and cheese in particular get more in line that we will begin to see the share recovery in 2009.

Outside of those two categories you don’t see a risk to step up in promotional spending or any sort of price give back in 2009?

We feel quite comfortable that we will be able to maintain the gas that we’ve got with the programming that we’ve laid out.

Are you still thinking about gaps in percentage terms or do you think its more appropriate now to be thinking about them in penny terms?

It varies category by category. Let me assure you that that is something that we look at quite rigorously.

Once again, I feel quite comfortable that our price gaps are in good shape and that we are well positioned to win going forward.

You cash flow was very strong in the year, you have a strong balance sheet, your stocks indicated about 8% or 9% but you didn’t buy stock back in the quarter and you’re not anticipating buying it back next quarter. How should we think about that relative to your comments about the business momentum?

Our stock price is quite attractive but in the current environment with the difficult liquidity generally in the marketplace we think it’s prudent to constrain our cash at this point.

You talked there was some weakness in premium coffee, snack bars, some self decided weakness in discontinuing the Handi-Snacks, cutting back in Handi-Snacks ready desserts and some strength definitely in furthermore value oriented part of your portfolio like Kraft Singles and Velveeta. I’m wondering this seems like it’s a change.

It certainly seems like your reversal from three or four years ago when the marching orders were to move the consumer up into higher priced mix items. If you could make a blanket statement across your portfolio would it be a negative margin factor for you if consumer sought more value items in 2009 and 2010 considering I know some of your value products like Kraft Singles are actually quite high margin.

What you see category by category is that we feel very good; we’ve got very strong margins in each segment of the market. If you think about the growth diamond that I’ve laid out in the past to talk about what we’re doing to try to make our products more contemporary and relevant, certainly premium was one of the points.

Without a doubt in the short term we’re going to see a little bit less emphasis on that corner of the diamond. We certainly continue to see very strong performance of snack, quick meals, and of our health and wellness products.

They all have very attractive margins. That’s consistent with the guidance that we’ve given going forward.

As part of that trade down that’s happening within the grocery store could inventory de-loading by retailers be related to their store brand promotions or store brand plans in certain categories?

It could be but I would tell you as we look at it across the board its much more related to their desire to conserve cash in the current economic environment.

On the market share piece I want to make sure I understand it. I think I recall on the third quarter call you had talked about some of the market share offset the pricing but that in the fourth quarter you’d expect that share number to actually improve from where you were in the third.

You were already at that point in the fourth quarter. I want to make sure I understand what changed or transpired differently from that point that made shares go so dramatically in the other direction.

It was not only just the fourth quarter but it was actually the month of December. I think it was a combination of the fact that we had very aggressive pricing that certainly hit the marketplace on most of our categories at that point we had double digit increases in a couple of our core categories like Cheese and Grocery.

At the same time that we saw consumers beginning to pull back a little bit. The consumer environment and the reaction to that environment were a little bit more intense then we had anticipated at the time of the third quarter call.

Net net I feel terrific about our performance on the year. We did exactly what we said we were going to do in a very difficult environment.

I think we’re well positioned for the future.

On the inventory reductions we certainly heard some other consumer companies discuss that, notably in the HPC side. Haven’t heard at least yet, a whole lot of packaged food companies talk about that as being much of an issue.

Its hard for you obviously to speak to what other companies are seeing or not but is there something you think different about either your portfolio or position you’re in with respect to retailers that you might see it and others in the food industry would not.

No, I think our retail partners have been quite clear about their desire to manage their inventories in this difficult economic environment and I think you’re seeing in place just about every category in the store.

At this stage, given what you’re thinking about for input costs, inflation incrementally in ’09 it would suggest obviously you just need very little in the way of incremental pricing certainly relative to ’08 which hopefully would allow more of the productivity that you’ve been generating you’ve got another incremental $300 million or so coming through from the restructuring and what not to flow through obviously to drive the earnings side of the equation versus last year. The one offset would be one piece that hasn’t come up which is the marketing side.

I think you’re expected to end ’08 at around 7% of sales or so. Given some of the share changes that we’ve seen more recently what are your thoughts broadly speaking around where marketing needs to go in ’09, also taking into account that you’re getting more for your money these days.

I’m trying to get a sense what an offset is to more the productivity flowing through.

We’re going to continue to use a combination of pricing and productivity as you said to cover our input costs and in fact if we start to see input costs fall that will give us even more money to reinvest back in the business. That’s how we’re looking at that equation.

Our plan is to continue to increase A&C, I think you saw solid investment in 2008 despite the difficult environment and I think that’s one of the reasons I feel so confident about 2009. At the end of the day our objective is to have a competitive share of voice in this current environment as you rightly point out that will cost us a little bit less money.

That’s a good thing. Our goal is to continue to improve our share of voice.

We increased our A&C last year about 13% and you’re going to see a significant increase again in 2009.

If you go back about nine months or so there was great emphasis by Kraft and a lot of other companies to invest in emerging markets. Obviously the world has change greatly since then.

I’m curious your philosophy on those markets and do you think its going to take an extended period of time for related growth or the appeal of those markets to come back, your outlook there.

Those markets are still quite appealing to us. There’s no doubt that they are slowing down relative to some of the growth rate that they’ve had historically.

They are still the greatest source of our growth. In fact, if you look at the growth profile that we have laid out we’ve been growing well beyond our long term growth rate targets in the developing markets.

Even if, as the markets start to soften I remain confident that we can deliver the guidance that we’ve given. Developing market will continue to be an important part of our growth and they delivered magnificently in 2008.

A lot of progress has been made on product innovation and adding quality back. The salad dressing inventory reduction you just had a year of pretty substantial quality improvements there for advertising, packaging changes.

Now there’s a big inventory reduction. I find it hard to believe that retailers are focusing on that category across brand and private label.

Private label is growing substantially still. I hate to focus on one thing but is this really across private label and brand or is it just brand?

Salad dressing actually is a great example of the impact of our investments. We’ve been losing share in that category about two points a year.

I feel awfully good about where we ended up in 2008 across all channels. We continue to see the impact of the investments that we’ve made in taking out the preservatives, changing the bottle and increasing the marketing support behind that category.

Without a doubt salad dressing is performing better then it has historically as a result of the investments that we’ve made. That said, across a number of the dry grocery categories in particular we did see inventory liquidation in the fourth quarter which was a contributor to the softness that we saw in the volume performance.

What other categories going forward do you foresee being hit by these inventory reductions? What do we expect in first quarter?

It has hit us pretty much across the board. As we indicated we do expect perhaps some in the first quarter, some further inventory reductions.

I don’t think there’s a single category that’s singled out it really goes across the board.

For ’09 in looking at currencies are any of your translation exposures hedged for ’09 versus ’08?

Transactionally we have an active hedging program for currencies. Translationally we typically do not hedge.

When we’re trying to track the translation impact we should just assume all currencies are un-hedged at this point.

From a translational standpoint that would be the case. There’s a fair number of moving parts in that.

We do most of the transactional that’s some of our sourcing. We actually have some Euro denominated debt and so forth.

Most of that tends to be offset with either hedges or natural offsets. Purely the translational we do not hedge.

As you can imagine we have a number of different currencies that impact that. If I go back six to nine months ago you used to be able to track the currency impact on us from the Euro but because of the significant changes in some of the other currencies the Brazilian real, the Russian currency, etc.

it’s a little bit more difficult then to point to one currency.

For magnitude how big an impact were those emerging market currencies, or are those emerging market currencies on the pension headwind is it half, is it a quarter?

On the pension headwind?

On the currency headwind.

Emerging markets I would say probably half of the impact.

On the pension headwind was there an increase in your discount rate that went into the expense calculation?

A very modest reduction. It’s essentially where it was last year but actually a modest reduction.

I want to make sure I understand the volume dynamic in the fourth quarter. If I heard it right, there was about a point and a half drag on shipments from inventory reductions.

How much did it affect your take away? I know that you’ve eliminated some SKUs so what was your take away volume relative to your shipment volume in the fourth quarter?

Without a doubt half of the impact came from the pruning that we did as well as the inventory reductions. The other half came from the impact that the aggressive pricing actions that we took particularly in Cheese and Grocery impacted our volume.

In some cases in a number of those categories it did play through into the market share results which is why we feel that we will still have seen impact on market share into the first quarter and then should start to see the recovery as we lap those pricing actions that we will see that reverse as we head into the second quarter. The inventory reductions hit our volume but it’s the pricing elasticity that really had the impact our consumption and therefore on our market share.

If you look out into ’09 if you tack back to the back to school conference and you think about you gave some preliminary indications about how you were looking at ’09. I’m trying to gauge stripping away the pension headwind and the currency headwind your confidence level in the underlying operation it just seems to me when you look at ’09 input costs are coming down.

Demand for eating at home is increasing, maybe pricing environment probably not as favorable. It seems to me that’s an environment that should be pretty good for a company like Kraft.

Is that the right way to look at this?

There’s no question that the business performance is stronger than we had forecast even in September and feel terrific about that. We did what we said we were going to do in an exceptionally difficult environment.

Most importantly in the course of last year we took a number of actions both in terms of our investments as well as in some proactive actions in the form of product pruning and improving trade ROI that will stage us well for the future. Without a doubt our business performance is every bit as strong if not stronger then what we saw in September and there’s a number factors that you alluded to that are going to definitely be tail winds for us in 2009.

The entire reason for us taking our guidance to $1.88 is currency. As I said, if the currency improves, if the dollar weakens we would expect our EPS to move up commensurately.

If you go back to school we said $2.00, we’re $1.88 now. We identified between pension and currency $0.24 worth of headwinds more then we had anticipated at that time.

The operational improvements that I already mentioned recover half of that.

Relative to some categories I know there’s obviously Cheese and Coffee where prices have been down and likely will be down at retail in ’09. Are there categories where you’ve announced price increases so far for ’09?

No, in fact we feel quite comfortable across the portfolio that we are well positioned with respect to pricing. Except for a couple of the categories, two of them you mentioned, the other one that we talked about was nuts, we just announced a pricing action, a price decline on our nuts business a week ago.

Relative to the private label threat as you see it for your businesses I’d ask first if you have a composite private label share gain that occurred in the quarter, maybe most North American numbers and whether you see the threat being larger and more aggressive in the US versus say the UK or EU generally.

Without a doubt our share performance around the world was quite strong. We are focused very much on the US shares because they’re a lot more solid then some of the data we get elsewhere in the world.

Without a doubt, as you look at our composite share performance against private label we actually fared better than many of our branded competitors. I feel very good that the investments that we made in our brands, in our quality, in our marketing efforts as well as in our pipeline innovation is serving us very well and enabling us to perform quite well in the current environment.

That said, I think we’re going to probably have another quarter of challenge as we lap the year ago period before we had taken a number of these prices up.

Do you think the risk for private label is any different between the US and EU?

It’s a significant factor in both markets. In the EU we’re doing exceptionally well.

Tim talked about the restage of our Kenco brand. We’ve got a very strong platform there of sustainability and its serving us very well.

That’s a very nice business that is recovering well despite the economic environment. At the end of the day the key to our success is our ability to ensure that our brand equities are adequate to justify the prices that we’re charging for our products and I think the results of 2008 would suggest that we’re well positioned in that regard.

Thanks very much and we’ll see you all in a couple weeks at Cagny.