CAN HE KEEP PHILIP MORRIS GROWING? Mike Miles rode into Marlboro Country with a charge to continue improving profits 20% a year. But consumers are resisting high-priced cigarettes, and the Kraft cheese business has gone soft. The new CEO is dealing with some surprising problems.
By Patricia Sellers REPORTER ASSOCIATE Kate Ballen

(FORTUNE Magazine) – I AM A WORRIER,'' says Philip Morris CEO Michael Miles. ''I worry whether tomorrow will be Wednesday. I worry instead of exercising.'' Last year, when Miles won the four-man horse race to become head of the world's largest, most profitable consumer products company, he fretted that there would be nothing left to worry about. ''If there has ever been a company that looked like it didn't need fixing,'' he said, ''Philip Morris is it.'' Well, that's one thing he can stop worrying about. Six months in the saddle, Miles is discovering that the task of producing 20% annual earnings growth -- the measure of success at Philip Morris -- is far more daunting now than in the recent past. His predecessor, Hamish Maxwell, hit the bull's-eye in each of the past five years, and investors expect the same marksmanship from the new man. ''We're going to shoot for it,'' says the laconic Miles, 52, the Gary Cooper of corporate cowboys. But he is facing a different marketplace -- and a much more difficult one.

-- PROBLEM NO. 1: U.S. tobacco. Despite Philip Morris's blockbuster acquisitions of Kraft (1988) and General Foods (1985), domestic cigarettes is still the business that puffs up profits, bringing in $4.8 billion in operating income last year, or almost half the corporate total. Trouble is, the American cigarette industry is declining 2% to 3% a year. Much worse, smokers are switching in packs from Philip Morris's premium products -- Marlboro, Merit, Virginia Slims, and Benson & Hedges -- to cheaper brands with smaller profit margins. Unit sales of Marlboro, America's leading cigarette, fell 3.3% last year. Bargain brands -- and Philip Morris now markets them too -- are a bigger threat to investors and to that 20% goal than the product liability litigation now before the Supreme Court.

-- PROBLEM NO. 2: The food business is not the staple it used to be. Recession-battered consumers have changed their shopping habits. The combination of price-sensitive buyers and a narrowing of the quality gap between private-label and brand-name goods means slower sales for Kraft General Foods. KGF's North American revenues rose only 1% last year. Excluding special charges, operating income increased a disappointing 8% as the Cheese Whizzes in the Kraft U.S.A. unit -- using a Miles-made strategy -- missed internal profit targets by $125 million. Management says that profits probably will rise less than 10% in 1992. Miles to the rescue? Not if he can help it. Sober, self-effacing, and professional in the extreme, he dreads being viewed as changemaker or revolutionary. But he is: Miles, who ran Kraft General Foods from 1989 to 1991, is the first non-tobacco man and nonsmoker to lead Philip Morris in its 145-year history. In his comments to FORTUNE, the first major interview since he took over, he made clear that he wants any change to come from the ranks: ''I say to managers that once I've had a chance to put my 2 cents in, do what you want. Every 100th time, I will want it to be my call.'' Miles does recognize that part of his job is to calm his fellow worriers. Says he: ''Right now our people are operating in difficult times, and it's hard to see a lot of light at the end of the tunnel. There's a bit of a tendency to think things are going to be bad for as far out as we can see.'' Bad? Many managers would love to have Miles's problems. The company earned $3 billion last year on sales of $48.1 billion. (The company reports $56.5 billion, but that includes excise taxes that it collects and passes on to governments.) Philip Morris sells more than 3,000 items, including cigarettes, Kraft cheeses, Post cereals, Maxwell House coffee, Entenmann's baked goods, Toblerone chocolate, and Miller beer, which is the world's second-largest brewer yet represents only 8% of revenues. The stock has returned an average 36% to investors annually, including reinvested dividends. The value of the shares outstanding hit $74 billion last December and has since slid to $69 billion. That still exceeds the value of any other U.S. company except Exxon. The new CEO's biggest ''problem'' may be deciding where to invest Philip Morris's money. The company gushes more excess cash than any other enterprise but Exxon. During the next five years, Miles figures, Philip Morris will throw off free cash of more than $21 billion -- almost $500,000 an hour on average. This excess is the money left over after capital expenditures, dividends, and taxes -- and Philip Morris can use it either to pay for acquisitions or to buy back stock. Miles plans to do both, and he will spend the savings a bit differently than his predecessor did. While Maxwell spent $2.5 billion on share repurchases throughout his eight years as CEO, Miles says he probably will dole out $2 billion over the next two years alone. The new boss wants to use much of the rest to acquire food and tobacco operations, mostly outside the U.S. Philip Morris already has annual international revenues of $15 billion, more than Coca-Cola, PepsiCo, and Kellogg combined. And though weakened at home, Marlboro, a $10-billion-a-year brand worldwide, is a racehorse abroad as markets in Asia, Eastern Europe, and the former Soviet Union have opened. Says Miles: ''Our international business will grow more rapidly than the domestic through the Nineties.'' But for all his plans for global expansion, Miles knows only one business can keep profit growth apace with the past: U.S. tobacco. Understanding the trouble in tobaccoland requires knowing why the business has burned so brightly for so long: inordinate pricing power. According to the U.S. Labor Department, the tobacco industry's 10% average annual price increases over the past 11 years exceeded those of any other product, including hospital rooms and prescription drugs. Since nicotine junkies didn't seem to resist stiff price hikes, Philip Morris U.S.A.'s sales went up 9% to $9.4 billion in 1991, and operating profits rose even faster to reach $4.8 billion. Operating margin: a fabulous 51%, up from 42% seven years ago. Philip Morris's gains in market share are impressive too -- 43.3% of total U.S. cigarette sales today, vs. 35.9% in 1985. The robust pricing showed its first signs of wobbling in the early 1980s. Smaller companies that had lost customers, such as Liggett Group and Brown & Williamson, a subsidiary of England's BAT Industries, seized on the idea of keeping their factories running by producing cheaper smokes with lower-cost tobacco and less marketing support. Philip Morris management initially spurned the idea of selling less profitable brands but watched its smokers switching to the cheap cigarettes. ''By 1985 we'd seen enough,'' recalls William Campbell, chief executive of Philip Morris U.S.A. ''The emergence of the discount segment and its tremendous growth are the primary events transforming our industry.'' Philip Morris was itself transformed, and last year the company became the market leader in the low-priced segment. Now 17% of the cigarettes Philip Morris U.S.A. sells are discount brands, with names like Cambridge, Alpine, Bristol, and Bucks. Trouble is, by legitimizing the category, Philip Morris seems to have created a monster. Says Emanuel Goldman, who follows the company for Paine Webber: ''The discount segment has come from nowhere, from 11% of industry sales just three years ago to 25% today. The issue for Philip Morris going forward is, What is the continuing rate of growth? If the discount category goes from 25% to 30%, then to 35% or 40%, the company's ability to raise prices at historical rates may be jeopardized.'' If Philip Morris loses its wonderful pricing power, those terrific margins will probably fade. Of course, the company could help profits by raising prices on the cheap brands. Last year that's exactly what Philip Morris and other tobacco marketers did. They pushed up prices of the discount smokes more than 20%, vs. 10% for full-priced cigarettes. Now, with the price gap between discount and premium brands narrowed, the ''cheap'' brands are not so cheap anymore, and the question is: Are consumers so price-sensitive that they will continue to trade down to less expensive labels? Bill Campbell & Co. are trying to keep Philip Morris from living off discount brands. After spending heavily to promote Philip Morris's low-priced cigarettes in 1990 and early 1991, he is pouring money back into Merit and Marlboro. In February, Philip Morris U.S.A. launched a new version of Merit called Merit Ultima, with super-low tar and nicotine. Last summer it spent an estimated $60 million, a record for a new cigarette, to advertise Marlboro Medium, the first offspring of that brand in 20 years. Marlboro Medium, which is milder than traditional Marlboro but draws on smokers who find Marlboro Lights unmanly, was the idea of a woman, Nancy Brennan Lund, 39. Vice president for Marlboro, Lund had to push her concept through the layers of management for five years before the bosses relented. Recalls Campbell, 47, ''A lot of us hated the name, and we said, 'Why don't you call it Marlboro Middle-of-the-Road or Marlboro Mediocre, Nancy?' '' Marlboro Medium should bring in over $750 million, hardly mediocre, in first- year revenues, and has helped reverse Marlboro's overall volume decline. Marlboro is riding taller in the saddle than other full-priced brands, but can it continue to expand? Miles says, ''We are planning to grow Marlboro volume in the U.S.'' Marlboro Woman Lund isn't so sure. She sees the brand's 26% domestic market share increasing, but not its volume. TO PUMP UP SALES of all brands, Philip Morris is engaging in two troublesome tactics. First, it has been moving aggressively to ship extra cases into distributors' warehouses and record them as sales, a practice generally known as trade loading. Philip Morris's activity is not as dangerous as the loading that R.J. Reynolds engaged in several years ago. Reynolds, a subsidiary of RJR Nabisco, lined distributors' warehouses each month in order to hide market share declines. Quitting this behavior cost Reynolds an earnings shortfall of $360 million in 1989, with the money spent to trim production and eliminate inventories. Today all tobacco manufacturers limit the amount of cigarettes that distributors may buy before price increases, but Philip Morris is significantly more generous than RJR.

Campbell defends the practice: ''Our objective is to get Marlboro's inventory up in the stores, where we typically have a 26% share of the market but only 11% of the shelf space. We think keeping pressure on the distribution channels is a good idea.'' ''Wrong,'' says a former Philip Morris executive who has studied trade loading. ''Just because you load the warehouses doesn't mean more cigarettes make it into the stores. What Philip Morris is doing is a financial game to make their sales and profit targets.'' The second worrisome tactic is Philip Morris's drive to sell the cheapest smokes it can make, black-and-white generics. For years the company has produced relatively small amounts of these low-profit cigarettes. You've probably seen them in unadorned packs in places like Wal-Mart, bearing such names as Best Buy, Basic, and Gridlock: The Commuter's Cigarette -- in California, of course. From 1990 to 1991, Philip Morris nearly tripled its sales of black-and- whites to 9.8 billion cigarettes, almost the volume of Marlboro Medium. Campbell's rationale: He wants to participate in every major cigarette category. And growth in black-and-whites helps him meet his goal of lifting Philip Morris's U.S. market share at least a point a year. How, though, can feeding cheap, low-profit generic cigarettes into the marketplace help profitability? Says Campbell, somewhat exasperated by the query: ''What's good for the consumer is good for the industry. How do you like that? That's pretty good, isn't it?'' The test is ultimately whether Philip Morris can sell enough cigarettes at a good price to sustain U.S. tobacco's recent 14% earnings growth. Analyst Goldman considers the stock a strong buy but says: ''They need 13% to 14% earnings growth in the domestic tobacco business to sustain 20% increases in earnings per share. That's the comfort level, though they may be able to get by with 12% growth.'' Campbell says that during the next few years he is shooting for ''low double-digit growth in operating earnings. Some years we'll be a bit higher and some a bit lower.'' Philip Morris stock, recently trading at $75 a share, sells at 13.6 times projected earnings, trailing the market. That's partly because investors remain fixed on tobacco's legal exposure, concerned that an important Supreme Court ruling, expected by this summer, will go against the industry. The market is probably overreacting. The Supreme Court will decide whether the federally mandated warning labels that began appearing on cigarette packs in 1966 bar related claims in state courts. Analysts who have studied the situation say a ruling for the plaintiff, Rose Cipollone, simply would mean more individuals will file suit. No tobacco company has ever lost a liability case or paid a penny to settle, juries being of the opinion that smokers have been adequately warned that cigarettes can ruin their health. Says John McMillin of Prudential Securities: ''A Supreme Court ruling against the industry has limited downside for the stock because worries have already pulled down the price. A tobacco victory could mean the end of major litigation risk and take Philip Morris's stock up 15% to 20%.'' Where, you may ask, is Miles amidst the difficulties? Keeping his nose out of tobacco. Not exactly a wander-the-halls manager, Miles remains a mystery man to the rank-and-file at Philip Morris U.S.A. A new cost-cutting program there prompted rumors that the humorless food guy had ridden into Marlboro Country to spoil the free-spending fun. Says Miles: ''Absolutely wrong. All of the adjustments or cuts or whatever word you want to use have been initiated by Bill Campbell and Philip Morris U.S.A.'' By eliminating layers of plant management and reducing overhead at headquarters, Campbell plans to save $75 million, a modest 1% of costs this year, though there is surely more pain to come. Campbell appears to be a more hard-boiled boss than Miles: ''The don't-fix-it mentality is what got IBM, General Motors, and Sears in trouble,'' he says. ''They didn't fall apart from a blowout. They're dying from a slow leak. Contrast their approach with the Japanese model of continuous improvement.'' MILES'S ROLE as cool observer of Campbell's action plan is no surprise given his history. Straight out of Northwestern University's Medill School of Journalism, where he majored in advertising, Miles joined ad agency Leo Burnett and was known there for a logical, rational approach. ''Good advertising is advertising that sells, period. Just the facts, ma'am,'' he says today. Hicks Waldron, former chairman of Heublein, which hired Miles away from Burnett at age 31, says, ''Mike was the most professional thing I had come across in a long time. His creativity is that he can sort out the creative ideas of others rather than come up with them himself.'' Miles turned around Heublein's Kentucky Fried Chicken chain by devising a strategy that emphasized quality and service, and at Kraft he perked up the marketing by pushing new products. Miles hits his desk by 7 A.M. and thinks about business every minute of his life. Even in his sleep, some say. Composed, even icy at times, Miles leaves underlings wondering what he is really thinking. At meetings with managers, he speaks sparingly, preferring to offer his ''2 cents,'' short and concise, on paper later. He explains, ''Decision-making authority should be as close to the actual implementation as possible.'' At parties he abhors small talk and often settles in a corner chair, alone. SOMETIMES his sobriety and rationality appear extreme. During a rare social excursion five years ago, he went rafting in British Columbia with 11 other executives. When the raft flipped in fast-moving rapids, five of his ! companions died. Asked whether the accident has affected the way he views life or his work, Miles says, ''No, it hasn't. It was obviously a terrible tragedy for families involved with the fatalities and a watershed experience for the two or three people who were carried a long way down the river and survived. I actually was in the water for less than two minutes and got out quickly and never worried about being rescued. As I look back on it, it was as bizarre a twist of fate as jaywalking across Park Avenue and having the person next to you get run over. For me personally, it wasn't that traumatic an event in my life.'' He adds: ''I once had a garden tractor almost roll over on me. That scared me.'' As head of Kraft General Foods, formed after Philip Morris bought Kraft, Miles made Hamish Maxwell's diversification strategy work. Up to that time, top managers at General Foods, acquired three years earlier, had resented their parent and insisted that old brands like Maxwell House and Post could not increase sales very much. Miles stressed growth and revamped advertising. Today at the once laggard General Foods U.S.A., sales of leading products such as Kool-Aid, Jell-O, and Grape Nuts cereal are expanding again. Operating profits rose to more than $700 million last year, vs. $433 million in 1989. But, of all things, Kraft's cheese division turned soft, the aftermath of bad pricing decisions made under Miles's leadership. During the past two years, prices for milk -- the cost of goods in cheese, of course -- turned volatile, and while private-label cheese producers kept their prices down, Kraft priced its products much higher. As Miles explains, the steep pricing was a remnant of an expensive anti-takeover plan that he and Kraft management devised before the hostile bid by Philip Morris. The plan called for extremely high returns in cheese, and, once ensconced in the Philip Morris fold, Kraft stuck to the aggressive targets. Cheese margins were supposed to improve from the low teens to the high teens. Clearly, Kraft managers outfoxed themselves. The private-label brands devoured chunks of the U.S. cheese market. By the time Kraft started slicing prices last year -- as much as 14% on Cracker Barrel -- retailers were living quite nicely off their store brands. In some cases, say industry analysts, they refused to pass on Kraft's price cuts to consumers. The pricing foibles led to last year's $125 million -- at least 20% -- shortfall in expected cheese profits. % Now the food marketers, like the folks at Philip Morris U.S.A., acknowledge that pricing their way to high profits is a luxury of the past. Richard Mayer, who took over KGF North America when Miles became the parent's CEO, says that he expects General Foods' operating income to be up more than 15% as its recovery rolls ahead, but Kraft's prices and profits will likely be flat. ''We need to do what is necessary to make sure America continues to spell cheese K- R-A-F-T,'' says Mayer, 52, a friend of Miles from their Heublein days. He continues: ''We're not viewing this recession as a short-term phenomenon. We see a much more price-sensitive consumer, a narrowing of the quality gap between private-label and branded manufacturers' goods, and profound changes in the retail trade toward low-price operators.'' Misreading consumer demand led KGF to overbuild, and a $455 million pretax write-off against 1991 earnings will cover the cost of some plant closings. Now Mayer is preaching volume growth. ''Without it a company doesn't have a long-term future,'' he says. He is driving the message home by revamping compensation to emphasize revenue and market share goals more than profit targets. Kraft's product line doesn't exactly scream growth, however. Mayonnaise and macaroni-and-cheese dinners are not on the shopping lists of fat-phobic, convenience-oriented shoppers. Although KGF sells more low-fat and fat-free versions of its foods than any other company, future growth from these better- for-you products ''will not be transforming,'' as Mayer says, using a favorite corporate expression. Moreover, marketing spending is not flowing so freely. Flush with cost savings from combining Kraft and General Foods, Miles jacked up marketing expenses 23% in 1990 and 16% in 1991. But this year they will be virtually flat. Mayer has two ideas that he believes can ''transform'' Kraft General Foods -- or at least provide a competitive edge. The first is to get market research and computer people working in teams with brand managers so that everyone better interprets the zillions of sales data generated by supermarket scanners. The strategy should help the company respond quickly to competitors' moves. The other big idea is to distribute all KGF products within a particular region from a single warehouse. The logic: to serve customers better. Retailers typically buy 10% of all their grocery items from KGF but draw from many different warehouses. Last fall in Norcross, Georgia, near Atlanta, KGF set up its first one-stop-shopping center in a warehouse formerly used for General Electric air conditioners. Once fully rigged with KGF's computer gear, the center probably will be the largest and most sophisticated food warehouse in the country. Notes Miles: ''Norcross is what I hope all productivity activities are: efficiency inextricably linked to quality.'' Though his domestic table is modest, Miles can feast on Philip Morris's international opportunities. Consider: The market for cigarettes outside the U.S. in 1980 was 3.9 trillion units, and only 40% was open to Western companies. Today consumers abroad are smoking 4.9 trillion cigarettes a year, and the relaxation of trade barriers in places like Japan, Eastern Europe, and to some extent China gives Philip Morris a chance to reach 95% of those smokers. Says Geoffrey Bible, who heads international food and tobacco: ''We have moved from a potential market of 1.6 trillion cigarettes to one of more than 4.6 trillion units.'' Philip Morris sold 640 billion, or 11.6%, of the world's cigarettes last year. That makes the company the second-largest seller behind the Chinese government, which in 1991 churned out over 1.5 trillion. Philip Morris, though, is the fastest-growing producer by far. And the most profitable. And the best-positioned to seize market opportunities. THE COMPANY'S global strength developed from domestic weakness. A feeble No. 6 among U.S. tobacco sellers during the 1950s, Philip Morris was so desperate to attract customers that it started selling its cigarettes in duty-free shops in foreign countries where Americans liked to travel. While R.J. Reynolds, then the U.S. market leader, focused on its Camel and Winston brands domestically, Philip Morris hired international managers and licensed its cigarettes in markets closed to imports. One interesting byproduct of this early internationalism is a senior operating management more global than most companies'. While Miles and Mayer are Americans by birth, former CEO Maxwell is a Scot. Bill Campbell is Canadian, and David Dangoor, Philip Morris U.S.A.'s marketing boss, is an Iranian schooled in Sweden. Two of the three bosses Miles beat for the CEO spot are Australian: Bible, the international chief, and William Murray, president and chief operating officer. The third is chief financial officer Hans Storr, from Germany. He trots the globe shopping for the cheapest loans. One of Philip Morris's biggest challenges abroad is penetrating markets where governments control prices, levy huge taxes, and even peddle their own brands. How do you deal with the Taiwanese government's Long Life cigarettes and the Japanese monopoly's Dean -- for James Dean? Says Bible: ''We find it's better to work with the governments, vs. playing their fierce opponent.'' Easier said than done. Last year in Hong Kong a 200% tax increase on imported cigarettes doubled the price of a pack of Marlboro and sent Philip Morris's sales sliding 80%. After employees and friends gathered 75,000 signatures of huffy smokers, officials cut the tax in half. In Italy, the company got tangled in a government crackdown on illegal cigarette imports that avoid high Italian taxes. Italy imposed a one-month ban on Marlboro, Merit, and Muratti, a popular local blend, after these brands were seized in an eight-ton truckload of bootlegged butts near the northern border. The company's protest that it can't control bootleggers fell on deaf ears. Bible says that he and Aleardo Buzzi, chief of Philip Morris's international tobacco operations, spent two weeks negotiating a truce with officials. Philip Morris agreed to mark Italian-bound cigarettes to distinguish them from illegal products. International tobacco's profit margins are half those 51% returns in the U.S. But ample gains -- profits rose 24% in 1991 on a 14% increase in revenues -- encourage managers to invest more. The question, of course, is where. Walter Thoma, who runs Philip Morris's tobacco operations in the European Community, says he wants to build ''a huge factory'' because his sales volume has risen 25% during the past three years. Hearing that, CFO Storr rolls his eyes and plays penny-wise banker: ''If you give all of these operating managers who want to build state-of-the-art plants everything on their wish list, we'd have no free cash.'' Storr is opening the corporate purse for expansion eastward. Last month in Turkey, which management views as ''the gateway to the east'' -- meaning Central Asia and the former Soviet Union -- Philip Morris broke ground on a $400 million cigarette factory. Because of taxes, Marlboros cost twice as much as the government's brands, but Turkish officials agreed to lower levies once Philip Morris begins manufacturing, probably next year. Philip Morris in 1990 also bought three deteriorating East German factories that churn out the leading local cigarette, F6. Instead of toning down the ^ taste and spiffing up the package -- as some competitors did with East German brands that they acquired -- Philip Morris kept F6 the same. By not Westernizing the harsh, high-tar cigarettes, the company improved F6's market share to about 35% from 27%. In less than a year Philip Morris earned a profit on its estimated $20 million investment. To meet high demand for exports, Philip Morris is even adding $400 million in new capacity stateside, at its Cabarrus, North Carolina, factory. Last year the company shipped 22 billion cigarettes to the former Soviet Union, its largest order ever and equal to one-tenth of its U.S. volume. By 1997 management wants to sell 80 billion to 100 billion cigarettes a year in the former Soviet Union. Philip Morris barters its cigarettes for products -- probably gold and oil, though management will not say -- that are readily exchangeable for dollars. That way, it takes hard currency out of the market and even earns a profit -- an estimated $75 million last year. The cigarette seller's strides abroad get a food marketer's heart beating wildly. Says Miles: ''When you see the enormous success the international tobacco company has had, it provides that much more inspiration for our food managers to stick with the fight, to chase the opportunity. And inspiration is a very important part of what motivates people.'' Every Philip Morris watcher wants to know: Where will Miles next drop his big bag of cash? ''I can tell you that we would not go outside consumer packaged goods, for sure. We're focused primarily on international,'' says the boss. Since acquisition opportunities in tobacco are limited, figure on food, probably in Western Europe, within the coming year or so. In 1990 Philip Morris bought one of Europe's largest coffee and chocolate companies, Jacobs Suchard, well known for those Alp-angled, nougat-specked Toblerone candy bars. The $4.1 billion deal made Philip Morris the third-largest food marketer in Europe, behind Nestle and Unilever. Says Bible: ''Our revenues today are approaching $10 billion in food, and Nestle has about $15 billion in European sales. But with acquisitions, we'll grow faster than they will. We'll be on Nestle's tail.'' At Kraft, Miles kept a short list of acquisition targets, and some of the same companies are believed to be on his list today. One is H.J. Heinz, a European powerhouse. But Miles figures that CEO Tony O'Reilly has squeezed costs so dutifully that post-acquisition savings would be too slight to make a deal worthwhile. ''I would be willing to do a hostile bid for a company,'' says Miles. ''The Kraft acquisition started off as hostile and ended up officially, I guess, hostile. And the people of Kraft have learned that being part of this larger family can be very good.'' Is PepsiCo a target? Doubtful, for Philip Morris professes no love for a No. 2 soft drink player. Cadbury Schweppes would give Philip Morris a bigger bite of European chocolate. Says Bible: ''Yes, but only in Britain.'' CPC International? ''I'm not looking at it,'' he says. The best catch: Paris-based BSN, which would help Philip Morris get the French, who cannot fathom Velveeta, to at least taste its other cheeses, such as Cracker Barrel and Kraft Natural. Says Bible: ''Their government would never let us buy BSN.'' Successful acquisitions are crucial to Philip Morris, and to Miles, whose hotshot reputation is at stake. If the company expands operating earnings around 15% each year, it can still raise per share net income at that magical 20% rate by borrowing heavily for acquisitions, then tapping the cash-flow fountain to rapidly pay back debt. That way interest costs go down quickly. CAN MILES keep up the pace? To do so might require $85 billion in sales by 1995, with net income of $9 billion. That will mean buying businesses abroad that provide good returns and keeping domestic operations healthy enough to pay for the acquisitions. Philip Morris U.S.A. and KGF North America, the source of more than two- thirds of corporate profits, have serious pricing problems and growth difficulties. But managers are busily working on them. If problems persist and the 20% profit growth goal becomes elusive, don't be surprised if Miles proves himself a man of action. Though comfortable amidst the worries, he may throw in more than just his 2 cents, and play the revolutionary more than he ever intended.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: PRUDENTIAL SECURITIES CAPTION: THE KING OF CASH Philip Morris generates almost $500,000 an hour -- more than most food companies combined. The other big food and tobacco company, RJR Nabisco, is a distant second.