KRAFT FOODS GROUP REPORTS SECOND QUARTER 2013 RESULTS

- Q2 EPS of $1.38 included a $0.62 gain from market-based impacts to post-employment benefit plans

- 2013 EPS guidance increased to approximately $3.40 from approximately $2.75 primarily reflecting market-based impacts to post-employment benefit plans

- 2013 Free Cash Flow(1) target raised to approximately $1.2 billion from approximately $1 billion

Aug 01, 2013, 16:00 ET from Kraft Foods Group

NORTHFIELD, Ill., Aug. 1, 2013 /PRNewswire/ -- Kraft Foods Group, Inc. (NASDAQ: KRFT) today reported second quarter results that reflected continued gains from productivity and overhead savings.

(Logo:  http://photos.prnewswire.com/prnh/20090420/KRAFTLOGO)

"We continue to make meaningful progress on cost savings, cash flow, market share and building our brands for the long term," said Tony Vernon, CEO of Kraft.  "Our brand investments and top-line growth in the second quarter were held back by the return discipline we're applying to marketing, promotion and innovation.  We expect to see profitable growth from a stronger base going forward and greater revenue growth in subsequent quarters as more new initiatives come to market."

Q2 FINANCIAL SUMMARY

Net revenues in the second quarter declined 1.1 percent to $4.7 billion.

  • Organic Net Revenues(2) declined 1.2 percent from lower volume/mix of 0.9 percentage points and 0.3 percentage points due to lower pricing.
  • The timing of Easter shipments negatively impacted net revenue growth between 0.5 and 1.0 percentage points while product line pruning negatively impacted growth by approximately 1.0 percentage point.

Operating income in the second quarter increased 53.5 percent to $1.4 billion.

  • Results included a $604 million benefit from market-based impacts to post-employment benefit plans driven by higher discount rates and higher asset returns.  Implementation of a voluntary early retirement program triggered a mid-year remeasurement of select pension plans.
  • Excluding the market-based impacts to post-employment benefit plans, gains from productivity and overhead cost savings were more than offset by a combination of increased marketing expenses, the impact of lower volume and higher Restructuring Program(3) costs versus the prior year quarter.

Earnings per share in the second quarter were $1.38.

  • Results included a $0.62 benefit from market-based impacts to post-employment benefit plans.
  • Second quarter results also included $0.09 per share of Restructuring Program costs.
  • Interest expense in the quarter was $130 million or approximately $0.14 per share, reflecting the company's capital structure as an independent company.

Free Cash Flow was $399 million year-to-date.

  • Free Cash Flow continued to pace ahead of expectations due to improved working capital management.

HIGHLIGHTS BY REPORTING SEGMENT

Beverages:

  • Revenues declined reflecting lower prices from higher levels of promotional activity as well as lower green coffee costs versus the prior year.  This more than offset improved product mix from on-demand coffee and liquid water enhancer innovations.
  • Operating income was lower than the prior year quarter reflecting higher marketing costs that were partially offset by favorable pricing net of commodity costs.

Cheese:

  • Revenues increased from a combination of higher prices, volume gains and improved product mix with significant gains in Kraft natural cheeses and Velveeta.
  • Operating income declined slightly due to unfavorable pricing net of commodity costs versus an exceptionally positive prior year period.

Refrigerated Meals:

  • Ongoing revenue growth from Lunchables innovations and the benefits of pricing to cover higher commodity costs were more than offset by volume softness in cold cuts and the impact of Easter shipment timing on bacon volume versus the prior year.
  • Operating income declined due to a negative impact from pricing net of commodity costs versus a strong prior year period and higher marketing expenses, which were partially offset by significant productivity gains. 

Grocery:

  • Revenues declined as top-line gains from investments in innovation behind brands such as Velveeta dinners and Planters snack nuts were more than offset by weakness in Kraft spoonable and pourable dressings and JELL-O.
  • Operating income declined as significantly higher marketing investments and lower volumes more than offset overhead cost savings.

International & Foodservice:

  • Strong revenue growth in Canada from Philadelphia cream cheese, Kraft peanut butter, Kraft Singles and natural cheese and MiO liquid water enhancers was partially offset by product line pruning in Foodservice.
  • Double-digit operating income growth reflected improved product mix and lower manufacturing costs driven by net productivity gains, partially offset by significant marketing investments.

OUTLOOK "Our focus on cost and cash is providing the fuel to reinvest in our brands while delivering better-than-expected Free Cash Flow," said Tim McLevish, CFO of Kraft.

Kraft updated its guidance for 2013, including:

  • Organic Net Revenue growth expected to be in line with or slightly lower than the growth of the North American food and beverage market;
  • EPS of approximately $3.40, including the $0.62 year-to-date benefit from market-based impacts to post-employment benefit plans, versus approximately $2.75 previously; and
  • Free Cash Flow of approximately $1.2 billion versus approximately $1.0 billion previously.

CONFERENCE CALL Kraft will host a conference call to discuss its second quarter 2013 results today at 4 p.m. Central time.

The call will be hosted by:

  • Tony Vernon, CEO
  • Tim McLevish, EVP and CFO
  • Chris Jakubik, VP, Investor Relations

Live Event Dial-in Details: United States Dial-In: 1-888-350-0137 International Dial-In: 1-970-315-0478 Access code: 16551214

To ensure timely access, participants should dial in approximately 10 minutes before the call starts.  A listen-only webcast will be available to the general public in real time on Kraft's Web site at http://ir.kraftfoodsgroup.com

A replay of the conference call will be available until August 14, 2013, by calling 855-859-2056 from the United States and Canada, and 404-537-3406 from other locations.  The access code for the replay is 16551214.  An archive of the webcast will be available for one year at http://ir.kraftfoodsgroup.com, under "Events and Webcasts."

ABOUT KRAFT FOODS GROUP Kraft Foods Group, Inc. (NASDAQ: KRFT) is one of North America's largest consumer packaged food and beverage companies, with annual revenues of more than $18 billion.  The company has an unrivaled portfolio of products in the beverages, cheese, refrigerated meals and grocery categories.  Its iconic brands include Kraft, Maxwell House, Oscar Mayer, Philadelphia, Planters, Velveeta, Capri Sun, Lunchables and JELL-O.  Kraft's 23,000 employees in the United States and Canada have a passion for making the foods and beverages people love.  Kraft Foods Group is a member of the Standard & Poor's 500 and the NASDAQ-100 indices.  For more information, visit www.kraftfoodsgroup.com and www.facebook.com/kraft.

FORWARD-LOOKING STATEMENTS This press release contains a number of forward-looking statements.  The words "deliver," "continue," "will," "expect" and similar expressions are intended to identify the forward-looking statements.  Examples of forward-looking statements include, but are not limited to, statements regarding Kraft's growth, progress, marketing and innovation, cost savings, Organic Net Revenue growth, EPS and Free Cash Flow.  These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are beyond Kraft's control.  Important factors that could cause actual results to differ materially from those indicated in the forward-looking statements include, but are not limited to, increased competition; continued consumer weakness and weakness in economic conditions; Kraft's ability to differentiate its products from retailer and economy brands; Kraft's ability to maintain its reputation and brand image; continued volatility and increases in commodity and other input costs; pricing actions; increased costs of sales; regulatory or legal changes, restrictions or actions; unanticipated expenses and business disruptions; product recalls and product liability claims; unexpected safety or manufacturing issues; Kraft's indebtedness and its ability to pay its indebtedness; Kraft's inability to protect its intellectual property rights; tax law changes; Kraft's ability to achieve the benefits it expects to achieve from the spin-off and to do so in a timely and cost-effective manner; and its lack of operating history as an independent, publicly traded company.  For additional information on these and other factors that could affect Kraft's forward-looking statements, see Kraft's risk factors, as they may be amended from time to time, set forth in its filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 29, 2012.  Kraft disclaims and does not undertake any obligation to update or revise any forward-looking statement in this press release, except as required by applicable law or regulation.

NON-GAAP FINANCIAL MEASURES Kraft reports its financial results in accordance with accounting principles generally accepted in the United States ("GAAP"). 

Kraft's top-line measure is Organic Net Revenues, which Kraft defines as net revenues excluding the impact of transactions with Mondelez International, Inc., acquisitions, divestitures (including the termination of a full line of business due to the loss of a licensing or distribution arrangement, and the complete exit of business out of a foreign country), currency and the 53rd week of shipments in 2011.  Organic Net Revenues is a non-GAAP financial measure that management believes better reflects the underlying growth from the ongoing activities of Kraft's business and provides improved comparability of results.

Kraft uses Free Cash Flow, which Kraft defines as cash flow from operations less capital expenditures.  Free Cash Flow is a non-GAAP financial measure that management believes better reflects the cash available to invest in growth and product development and is a better measure of Kraft's ability to generate cash while maintaining its fixed assets.

See the attached schedules for supplemental financial data and corresponding reconciliations of the non-GAAP financial measures referred to above to the most comparable GAAP financial measures for the three months ended June 29, 2013 and June 30, 2012.  Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, Kraft's results prepared in accordance with GAAP.  In addition, the non-GAAP measures Kraft uses may differ from non-GAAP measures used by other companies, and other companies may not define the non-GAAP measures Kraft uses in the same way.

(1) Free Cash Flow is a non-GAAP financial measure and is defined as cash flow from operations (~$1.85 billion) less capital expenditures (~$650 million). Please see the discussion of non-GAAP financial measures at the end of this press release.

(2) Organic Net Revenues is a non-GAAP financial measure. Please see the discussion of non-GAAP financial measures and the reconciliation to GAAP at the end of this press release.

(3) As previously disclosed, on Oct. 29, 2012, Kraft Foods Group's Board of Directors approved a $650 million restructuring, related implementation and spin-off transition program ("Restructuring Program") reflecting primarily severance, asset disposals, other manufacturing-related one-time costs and professional service fees within its finance, legal and information systems functions.

Kraft Foods Group, Inc.

Condensed Consolidated Statements of Earnings

For the Three Months Ended 

(in millions of dollars, except per share data)  (Unaudited)

June 29,

2013

June 30,

2012

% Change

Fav / (Unfav)

Net revenues

$ 4,735

$ 4,786

(1.1)%

Cost of sales1,2

2,780

3,150

13.3%

Gross profit

1,955

1,636

19.5%

Selling, general and administrative expenses1,2

535

687

22.1%

Asset impairment and exit costs1

22

38

42.1%

Operating income

1,398

911

53.5%

Interest and other expense, net

(130)

(21)

(100.0+)%

Royalty income from Mondelez International

-

16

(100.0)%

Earnings before income taxes

1,268

906

40.0%

Provision for income taxes

439

303

(44.9)%

Effective tax rate

34.6%

33.4%

Net earnings

$     829

$     603

37.5%

Per share data3:

Basic earnings per share

$    1.39

$    1.02

36.3%

Diluted earnings per share

$    1.38

$    1.02

35.3%

Weighted-average common shares outstanding:

Basic

594

591

(0.5)%

Diluted

599

591

(1.4)%

1  In the second quarter of 2013, Kraft recorded $82 million of Restructuring Program costs.  This was comprised of $22 million within asset impairment and exit costs; implementation costs of $50 million within cost of sales ($26 million) and selling, general and administrative expenses ($24 million); and spin-off transition costs of $10 million within selling, general and administrative expenses.  In the second quarter of 2012, Kraft recorded $61 million of Restructuring Program costs.  Kraft recorded restructuring costs of $38 million within asset impairment and exit costs, and implementation costs of $23 million within cost of sales ($20 million) and selling, general and administrative expenses ($3 million).  No spin-off transition costs were incurred.

2  In the second quarter of 2013, Kraft recorded $604 million of income related to market-based impacts of certain post-employment benefit plans.  This income was recorded in cost of sales ($350 million) and selling, general and administrative expenses ($254 million).  There were no market-based impacts on these post-employment benefit plans in the second quarter of 2012.

3  Basic and diluted earnings per share and the average number of common shares outstanding were retrospectively restated for the three months ended June 30, 2012, for the number of Kraft Foods Group shares outstanding immediately following its spin-off from Mondelez International, Inc. on October 1, 2012.

Kraft Foods Group, Inc.

Reconciliation of GAAP to Non-GAAP Information

Net Revenues

For the Three Months Ended

(in millions of dollars)  (Unaudited)

% Change

Organic Growth Drivers

Reported (GAAP)

Impact of Currency

Sales to Mondelez International

Organic

(Non-GAAP)

Reported (GAAP)

Organic

(Non-GAAP)

Vol / Mix

Price

June 29,

2013

Beverages

$           753

$                 -

$                 -

$          753

(3.2)%

(3.2)%

1.4pp

(4.6)pp

Cheese

945

-

(20)

925

5.0%

2.8%

1.2pp

1.6pp

Refrigerated Meals

897

-

-

897

(0.7)%

(0.7)%

(2.8)pp

2.1pp

Grocery

1,138

-

(3)

1,135

(6.4)%

(6.7)%

(5.1)pp

(1.6)pp

International & Foodservice

1,002

8

(18)

992

1.3%

3.1%

2.3pp

0.8pp

Kraft Foods Group, Inc.

$          4,735

$                   8

$               (41)

$         4,702

(1.1)%

(1.2)%

(0.9)pp

(0.3)pp

June 30,

2012

Beverages

$              778

$                    -

$                   -

$             778

Cheese

900

-

-

900

Refrigerated Meals

903

-

-

903

Grocery

1,216

-

-

1,216

International & Foodservice

989

-

(27)

962

Kraft Foods Group, Inc.

$          4,786

$                  -

$               (27)

$         4,759

Kraft Foods Group, Inc.

Operating Income 

For the Three Months Ended

(in millions of dollars)  (Unaudited)

Reported (GAAP)

June 29,

2013

June 30,

2012

% Change

Fav / (Unfav)

Operating Income:

Beverages

$     126

$ 135

(6.7)%

Cheese

150

157

(4.5)%

Refrigerated Meals

104

131

(20.6)%

Grocery

304

409

(25.7)%

International & Foodservice

168

126

33.3%

Unrealized gains / (losses) on hedging activities

2

5

Certain post-employment benefit plan income / (costs)

567

(42)

General corporate expenses

(23)

(10)

Kraft Foods Group, Inc.

$ 1,398

$ 911

53.5%

Note:  In the second quarter of 2013, Kraft recorded Restructuring Program costs within segment operating income and general corporate expenses as follows:  Beverages ($10 million); Cheese ($29 million); Refrigerated Meals ($11 million); Grocery ($14 million); International & Foodservice ($8 million); and General corporate expenses ($10 million).  In the second quarter of 2012, Kraft recorded Restructuring Program costs within segment operating income as follows:  Beverages ($11 million); Cheese ($26 million); Refrigerated Meals ($6 million); Grocery ($9 million); and International & Foodservice ($9 million).  In the second quarter of 2013, Kraft also recorded $604 million of income related to market-based impacts on certain post-employment benefit plans.  There were no market-based impacts on these post-employment benefit plans in the second quarter of 2012.

Kraft Foods Group, Inc.

Condensed Consolidated Statements of Earnings

For the Six Months Ended 

(in millions of dollars, except per share data)  (Unaudited)

June 29,

2013

June 30,

2012

% Change

Fav / (Unfav)

Net revenues

$ 9,281

$ 9,239

0.5%

Cost of sales1,2

5,823

6,154

5.4%

Gross profit

3,458

3,085

12.1%

Selling, general and administrative expenses1,2

1,167

1,357

14.0%

Asset impairment and exit costs1

84

76

(10.5)%

Operating income

2,207

1,652

33.6%

Interest and other expense, net

(253)

(23)

(100.0+)%

Royalty income from Mondelez International

-

28

(100.0)%

Earnings before income taxes

1,954

1,657

17.9%

Provision for income taxes

669

571

(17.2)%

Effective tax rate

34.2%

34.5%

Net earnings

$ 1,285

$ 1,086

18.3%

Per share data3:

Basic earnings per share

$    2.16

$    1.84

17.4%

Diluted earnings per share

$    2.14

$    1.84

16.3%

Average shares outstanding:

Basic

593

591

(0.3)%

Diluted

598

591

(1.2)%

1  In the six months ended June 29, 2013, Kraft recorded $201 million of Restructuring Program costs.  This was comprised of $84 million within asset impairment and exit costs; implementation costs of $94 million within cost of sales ($50 million) and selling, general and administrative expenses ($44 million); and spin-off transition costs of $23 million within selling, general and administrative expenses.  In the six months ended June 30, 2012, Kraft recorded $116 million of Restructuring Program costs.  Kraft recorded restructuring costs of $76 million within asset impairment and exit costs, and implementation costs of $40 million within cost of sales ($36 million) and selling, general and administrative expenses ($4 million).  No spin-off transition costs were incurred.

2  In the six months ended June 29, 2013, Kraft recorded $604 million of income related to market-based impacts of certain post-employment benefit plans.  This income was recorded in cost of sales ($350 million) and selling, general and administrative expenses ($254 million).  There were no market-based impacts on these post-employment benefit plans in the six months ended June 30, 2012.  

3  Basic and diluted earnings per share and the average number of common shares outstanding were retrospectively restated for the six months ended June 30, 2012, for the number of Kraft Foods Group shares outstanding immediately following its spin-off from Mondelez International, Inc. on October 1, 2012.

Kraft Foods Group, Inc.

Reconciliation of GAAP to Non-GAAP Information

Net Revenues

For the Six Months Ended 

(in millions of dollars)  (Unaudited)

% Change

Organic Growth Drivers

Reported (GAAP)

Impact of Currency

Sales to Mondelez International

Organic

(Non-GAAP)

Reported (GAAP)

Organic

(Non-GAAP)

Vol / Mix

Price

June 29,

2013

Beverages

$           1,474

$                 -

$                  -

$      1,474

(0.8)%

(0.8)%

4.2pp

(5.0)pp

Cheese

1,941

-

(33)

1,908

5.9%

4.1%

3.7pp

0.4pp

Refrigerated Meals

1,723

-

-

1,723

0.8%

0.8%

(1.6)pp

2.4pp

Grocery

2,216

-

(5)

2,211

(3.5)%

(3.7)%

(3.7)pp

-

International & Foodservice

1,927

13

(34)

1,906

0.6%

2.4%

2.2pp

0.2pp

Kraft Foods Group, Inc.

$              9,281

$                 13

$                (72)

$         9,222

0.5%

0.4%

0.7pp

(0.3)pp

June 30,

2012

Beverages

$              1,486

$                    -

$                     -

$         1,486

Cheese

1,832

-

-

1,832

Refrigerated Meals

1,710

-

-

1,710

Grocery

2,296

-

-

2,296

International & Foodservice

1,915

-

(54)

1,861

Kraft Foods Group, Inc.

$              9,239

$                    -

$                (54)

$         9,185

Kraft Foods Group, Inc.

Operating Income 

For the Six Months Ended 

(in millions of dollars)  (Unaudited)

Reported (GAAP)

June 29,

2013

June 30,

2012

% Change

Fav / (Unfav)

Operating Income:

Beverages

$              251

$              233

7.7%

Cheese

322

324

(0.6)%

Refrigerated Meals

201

224

(10.3)%

Grocery

632

748

(15.5)%

International & Foodservice

292

227

28.6%

Unrealized gains / (losses) on hedging activities

(3)

6

Certain post-employment benefit plan Income / (costs)

568

(99)

General corporate expenses

(56)

(11)

Kraft Foods Group, Inc.

$          2,207

$          1,652

33.6%

Note:  In the six months ended June 29, 2013, Kraft recorded Restructuring Program costs within segment operating income and general corporate expenses as follows:  Beverages ($32 million); Cheese ($63 million); Refrigerated Meals ($26 million); Grocery ($37 million); International & Foodservice ($20 million); and General corporate expenses ($23 million).  In the six months ended June 30, 2012, Kraft recorded Restructuring Program costs within segment operating income as follows:  Beverages ($17 million); Cheese ($45 million); Refrigerated Meals ($12 million); Grocery ($22 million); and International & Foodservice ($20 million).  In the six months ended June 29, 2013, Kraft also recorded income of $604 million related to market-based impacts on certain post-employment benefit plans.  There were no market-based impacts on these post-employment benefit plans in the six months ended June 30, 2012.

Kraft Foods Group, Inc.

Condensed Consolidated Balance Sheets

(in millions of dollars)  (Unaudited)

June 29,

2013

December 29, 2012

ASSETS

Cash and cash equivalents

$           1,164

$             1,255

Receivables (net of allowances of $26 in 2013 and $28 in 2012)

1,223

1,089

Inventories, net

1,898

1,928

Deferred income taxes

418

420

Other current assets

116

131

   Total current assets

4,819

4,823

Property, plant and equipment, net

4,028

4,204

Goodwill

11,275

11,346

Intangible assets, net

2,631

2,631

Other assets

311

325

   TOTAL ASSETS

$         23,064

$           23,329

LIABILITIES

Current portion of long-term debt

$                    3

$                      5

Accounts payable

1,444

1,556

Accrued marketing

621

740

Accrued employment costs

141

194

Other current liabilities

1,073

1,111

   Total current liabilities

3,282

3,606

Long-term debt

9,967

9,966

Deferred income taxes

521

288

Accrued pension costs

1,055

1,990

Accrued postretirement health care costs

3,501

3,502

Other liabilities

438

405

   TOTAL LIABILITIES

$         18,764

$           19,757

EQUITY

Common Stock, no par value (595,910,581 shares issued in

     2013 and 592,783,696 in 2012)

-

-

Additional paid-in capital

4,354

4,240

Retained earnings / (deficit)

481

(206)

Accumulated other comprehensive losses

(509)

(460)

Treasury stock, at cost

(26)

(2)

   TOTAL EQUITY

4,300

3,572

      TOTAL LIABILITIES AND EQUITY

$         23,064

$           23,329

Kraft Foods Group, Inc.

Reconciliation of GAAP to Non-GAAP Information

Free Cash Flow

For the Six Months Ended

(in millions of dollars)  (Unaudited)

June 29,

2013

Net earnings

$ 1,285

Depreciation

204

Receivables, net

(111)

Inventories, net

16

Accounts payable

(62)

Other

(721)

Operating cash flow

611

Capital expenditures

(212)

Free cash flow

$     399

SOURCE Kraft Foods Group



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