990727 Philip Morris 2nd Quarter Results

Philip Morris Companies Inc. announced that on an underlying basis, second- quarter net earnings grew 2.9% to $2.1 billion and diluted earnings per share rose 3.7% to $0.85 per share.

“Our businesses continued to make steady progress during the second quarter, performing in line with our expectations,” said Geoffrey C. Bible, chairman of the board and chief executive officer. “We are beginning to emerge from this transition year, and we are seeing signs of recovery in Asia, where our international tobacco business delivered strong volume and share gains in several key markets. Overall, our brand franchises remain strong as exemplified by our share performance, and our businesses are poised for robust growth in the years ahead.”

The comparison of underlying results excludes the second quarter 1999 impact of $45 million in pre-tax charges for employee separation and other programs in the company's domestic tobacco business, and the 1998 impact of $232 million in pre-tax charges related to voluntary early retirement and separation programs for the company's domestic tobacco and corporate operations, as well as $199 million in pre-tax charges for tobacco litigation settlements.

Underlying operating revenues, adjusted for divestitures, grew 4.5% to $19.8 billion. Underlying operating companies income, which excludes the previously mentioned pre-tax items as well as results from operations divested since the beginning of 1998, increased 1.3% to $3.9 billion. Reported operating companies income rose 12.0% to $3.9 billion, while net earnings of $2.0 billion and diluted earnings per share of $0.84 grew 16.9% and 18.3%, respectively. Both underlying and reported operating companies income reflect an adverse currency impact of $60 million.

During the quarter, the company bought back 20 million shares of its stock at a cost of $783 million.

For the first six months of 1999, on an underlying basis, operating revenues reached $39.3 billion, up 5.3%; underlying operating companies income increased to $7.7 billion, up 0.6%; and net earnings and diluted earnings per share grew 2.2% and 2.5%, respectively. On a reported basis, operating revenues of $39.3 billion were up 5.2%; operating companies income increased 16.3% to $7.3 billion; and net earnings and diluted earnings per share were up 22.4% and 22.7%, respectively.

Unless otherwise specified, the following review of the company's performance refers to second-quarter 1999 results compared with those for 1998. Results exclude businesses divested since the beginning of 1998.

NORTH AMERICAN FOOD:

Kraft Foods North America (Kraft) turned in a solid quarter. Underlying operating companies income rose 7.0% to $946 million, driven by volume gains, lower commodity costs and continued productivity savings.

Kraft's beverage business posted double-digit volume growth led by the continued success of Capri Sun ready-to-drink beverages and by gains in powdered soft drinks. Kraft also benefited from the performance of recently introduced Tang ready-to-drink beverages and Kool-Aid Fruit T's soft drink mix.

The frozen pizza business continued to deliver strong volume gains. This growth was broad-based, fueled by Di Giorno Rising Crust, Jack's and Tombstone frozen pizzas, including the introduction of Tombstone Half & Half frozen pizza, with different toppings on each half.

The processed meats business generated good volume growth on the continued success of Oscar Mayer Lunchables lunch combinations, including All Star Burgers and All Star Hot Dogs, as well as new Lunchables Pancakes and Waffles, which were introduced in May. Oscar Mayer bacon and hot dogs also contributed to volume gains, as did newly introduced Louis Rich Carving Board chicken strips.

Volume grew in Canada, driven by gains in cheese, coffee and salad dressings, as well as by new product introductions including Capri Sun ready-to- drink beverages, Kraft Spaghetti Dinners and Kool Pops frozen desserts.

In cereals, volume was flat in an aggressive competitive environment. However, new products such as Post Oreo O's ready-to-eat cereal enjoyed continued success.

Volume for Maxwell House coffees was essentially flat. However, Kraft benefited from its agreement to market Starbucks coffee, which it continues to roll out nationally to grocery customers. In addition, Kraft's overall coffee share was up.

Volume was essentially in line with year ago in Kraft's cheese business, and a number of product lines gained share including Kraft Singles cheese slices, Velveeta Pasteurized Processed Cheese Product Loaf and Breakstone's sour cream and cottage cheese.

In the meals business, volume was down as lower sales of Minute Rice were partially offset by growth in the Kraft Macaroni & Cheese product line, including new Easy Mac dinners, and by the success of Stove Top Oven Classics packaged dinners introduced in the second half of 1998.

In desserts and snacks, volume declined on softness in dry packaged desserts consumption, but the business continued to drive growth in its other core categories. The introduction of Kraft Handi-Snacks Snack Box generated volume gains.

In enhancers, volume was lower in an intensely competitive environment, but Kraft continued to benefit from its recently introduced Light Done Right! dressings. Kraft also increased its volume and leadership share in the barbecue sauce category.

INTERNATIONAL FOOD:

International Food underlying operating companies income grew 2.2% to $276 million reflecting lower commodity and overhead costs, partially offset by lower total volume, primarily attributable to Germany, Russia, Ukraine and parts of Latin America.

In coffee, volume was down due to intense price competition and market softness in Germany, while trade inventory reductions in Sweden have continued to distort the volume picture. However, volume grew in the established markets of France, Spain, Austria, Denmark and the developing markets of Central Europe. A number of Kraft Food International's (KFI) roast and ground coffees gained share, including Carte Noire and Grand'Mere in France, Gevalia in Sweden and Denmark, Jacobs Monarch in Austria and Saimaza in Spain. In soluble coffee, share grew for Carte Noire in France, Kenco in the United Kingdom and Maxim and Maxwell House in Korea.

In confectionery, KFI's volume declined primarily due to continued economic softness in Russia and aggressive competition in chocolate in the United Kingdom and Sweden. KFI's chocolate tablets performed well in most markets, with share gains by Cote d'Or in France, Milka in Italy and Austria, and Marabou in Sweden. The confectionery category also benefited from successful new product launches in several countries and continued growth in Central Europe. In Germany, KFI launched a line of premium chocolate products under the Suchard brand name. In Austria and Poland, KFI introduced line extensions of its Milka and Prince Polo brands, respectively.

In the cheese and grocery business, KFI's volume growth was driven primarily by gains in Germany, Spain, Australia, Southeast Asia and Japan. In Germany, volume benefited from recently launched Philadelphia Fantasia individual portion cheese, Kraft Lunchables lunch combinations and Milka Mousse ready-to-eat snacks. In Italy, Philadelphia Cream Cheese continued to perform strongly and Kraft Lunchables were introduced, furthering the geographic expansion of Lunchables products in Europe. In Australia, Vegemite yeast spread delivered strong volume growth, and KFI recorded share gains in cheese, spoonable and pourable dressings and peanut butter. In Poland and Bulgaria, KFI continued to expand its powdered soft drinks segment with the introduction of Tang, which also delivered good growth in Egypt and Turkey, as well as the Philippines and other Southeast Asian markets.

In Latin America, lower volume was driven by significantly lower confectionery volume in Brazil due to adverse economic conditions. Clight powdered soft drinks continued to turn in excellent results in Brazil and Mexico.

During the quarter, KFI sold one of its non-core grocery businesses in Europe and announced the pending sale of three additional non-core grocery businesses in the region.

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