Kraft Foods Reports Strong Second Quarter Earnings

NORTHFIELD, Ill., Aug. 5 /PRNewswire-FirstCall/ -- Kraft Foods Inc. (NYSE: KFT) today reported strong second quarter 2010 earnings that reflected increased gross profit margins and significant brand-building investments in every geography.

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“We delivered strong earnings in the quarter and the first half of the year, despite difficult conditions in many markets that tempered top-line growth,” said Irene Rosenfeld, Chairman and CEO.  “We’re making excellent progress on the Cadbury integration and expect to realize even greater synergies.  In light of our strong earnings momentum, we will reinvest our 2010 upside to build our brands and to harmonize business practices.  We will deliver at least $2.00 of Operating EPS this year while building a stronger foundation to achieve top-tier growth in 2011.”

Kraft Foods North America

Net revenues increased 6.3 percent, including a 6.9 percentage point impact from the Cadbury acquisition and a favorable 1.6 percentage point impact from currency.

Combined Organic Net Revenues(1) declined 1.3 percent reflecting a 1.9 percent decline in organic net revenue(1) from Kraft Foods’ base business and 7.5 percent organic net revenue growth from Cadbury.

Kraft Foods’ base business performance was affected by a 2.0 percentage point decline in volume/mix and essentially flat price levels, reflecting the following factors:  

• A continued weak consumer environment
• Reduced merchandising by a key customer in the United States
• Aggressive promotional activity by competitors in several U.S. categories, particularly in cheese, salad dressings and biscuits
• A negative impact of approximately one-half percentage point from the shift of Easter-related shipments into first quarter 2010

These factors offset the benefits of investments in marketing and innovation that drove solid growth in base consumption in key brands, including:  Ritz and Triscuit crackers; Oreo cookies; Capri Sun ready-to-drink beverages; Kool-Aid powdered beverages; Philadelphia cream cheese; Oscar Mayer bacon and Jell-O ready-to-eat desserts.

Cadbury growth reflected strong gains from successful new product launches of Trident Layers, Stride Shift and Dentyne Pure gum.

Segment operating income grew 11.0 percent including favorable impacts of 8.1 percentage points from the Cadbury acquisition, net of integration program costs, and 1.4 percentage points from currency.  Excluding these factors, the increase in operating income reflected productivity savings and lower overheads, partially offset by the impact of lower volume/mix, higher raw material costs and increased investments in advertising.

Kraft Foods Europe

Net revenues increased 34.1 percent, including a 31.8 percentage point impact from the Cadbury acquisition and a negative 2.6 percentage point impact from currency.

Combined Organic Net Revenues(1) increased 3.9 percent reflecting Kraft Foods’ base business organic net revenue(1) growth of 5.2 percent and flat organic net revenues from Cadbury.  Combined Organic Net Revenue growth benefitted by approximately one percentage point from the favorable impact of an accounting calendar change for certain biscuits operations, net of a negative impact from the shift of Easter-related shipments into first quarter 2010.

Kraft Foods’ base business growth was broad-based and driven by volume/mix gains across all categories.  Volume/mix growth of 7.9 percentage points was partially offset by a negative 2.7 percentage point impact from net price reductions.  The accounting calendar change for certain biscuit operations added 2.5 percentage points to the growth rate, but was partially offset by an unfavorable 0.7 percentage point impact from earlier Easter-related shipments.  

Net revenues for the priority brands in Kraft Foods’ base business collectively increased more than 8 percent, driving solid growth in each category.

• Chocolate grew low-single digits due to volume/mix gains, partially offset by lower price levels.  Strong in-store marketing activities and continued momentum drove growth in Milka, Freia, Marabou and Toblerone.
• Coffee grew low-single digits, driven by volume/mix gains behind Jacobs.  Marketing investments and the launch of the product into Spain drove double-digit revenue growth of Tassimo.
• Cheese grew mid-single digits due to volume/mix gains, partially offset by lower price levels.  The continued success of new packaging and marketing drove strong growth of Philadelphia.
• Biscuits grew double-digits due to volume/mix gains and the accounting calendar change.  Robust marketing support behind priority brands as well as successful launches in new geographies, including Cote D’Or in Belgium and Oreo in France, drove base business growth.

Cadbury revenue was flat in the quarter versus the prior year.  Solid growth in Britain and France was offset by weak economic conditions in Southern Europe, especially in Spain and Greece, as well as the unfavorable impact of approximately one percentage point from earlier shipments of Easter products into the first quarter.  

Segment operating income grew 61.1 percent including favorable impacts of 35.6 percentage points from the Cadbury acquisition, net of integration program costs, and 0.4 percentage points from currency.  Excluding these factors, the increase was driven by gains from volume/mix growth across all categories, lower spending on cost savings initiatives and lower overhead costs.  These gains were partially offset by lower pricing net of costs and an increase in advertising.

Kraft Foods Developing Markets

Net revenues increased 73.4 percent, including a 61.4 percentage point impact from the Cadbury acquisition and a favorable 1.9 percentage point impact from currency.

Combined Organic Net Revenues(1) increased 8.1 percent reflecting Kraft Foods’ base business organic net revenue(1) growth of 10.4 percent and Cadbury organic net revenue growth of 4.0 percent.  Combined Organic Net Revenue growth benefitted by approximately one-half percentage point from the favorable impact of an accounting calendar change for certain operations in Asia Pacific.

Kraft Foods’ base business growth was driven by 8.7 percentage points from volume/mix gains and 1.7 percentage points from higher price levels.  The accounting calendar change for certain operations in Asia Pacific added approximately one percentage point to the growth rate.  Kraft Foods’ base business priority brands collectively grew more than 17 percent.

• In Latin America, organic revenues grew double-digits due to strong volume/mix gains and higher pricing.  Priority brands collectively grew nearly 20 percent, led by Tang powdered beverages and Oreo cookies.
• In Asia Pacific, organic revenues grew double-digits due to strong volume/mix gains, particularly in China, Australia and the Philippines, and included the benefit of the accounting calendar change for certain operations.  Priority brands collectively grew nearly 30 percent, led by Oreo cookies and Tang powdered beverages.
• Central and Eastern Europe, Middle East & Africa grew mid-single digits despite weak economic conditions and soft category trends, particularly in Russia, Central Europe and Southeast Europe.  Share gains in key markets and categories offset market weakness.  Priority brands collectively grew 9 percent, including strong growth of Jacobs coffee.

Cadbury growth reflected gains in gum across Latin America and chocolate in Asia, particularly India, which were partially offset by soft gum category trends in Japan, South Africa and Mexico.

Segment operating income grew 69.6 percent including a positive impact of 53.4 percentage points from the Cadbury acquisition, net of integration program costs, and a negative 9.9 percentage point impact from currency.  Excluding these factors, the increase primarily reflected strong gains from volume/mix growth that were partially offset by higher marketing investments and overhead costs to support future growth.

(1) Please see discussion of Non-GAAP Financial Measures below.

(2) Integration Program costs are defined as the costs associated with combining the Kraft Foods and Cadbury businesses, and are separate from those costs associated with the acquisition.

(3) Acquisition-related costs include transaction advisory fees, UK stamp taxes, and the impact of the Cadbury inventory revaluation.

OUTLOOK

Kraft Foods adjusted its forecast for 2010 Combined Organic Net Revenue growth to a range of 3 to 4 percent from prior guidance of at least 4 percent.  The change in outlook reflects the normalizing of Cadbury’s trade inventory practices as well as an aggressive promotional environment in certain U.S. categories.

The company also confirmed its guidance for 2010 operating earnings per share of at least $2.00.  This guidance reflects the combination of stronger-than-expected year-to-date profit performance and greater-than-anticipated synergies from the integration of Cadbury, offset by investments in brand-building activities and additional actions that will drive top-tier growth.

The company also increased its estimate of total cost synergies expected from the integration of Cadbury to at least $750 million from at least $675 million, and made a commensurate adjustment to the total costs of the integration program to approximately $1.5 billion from $1.3 billion.

CONFERENCE CALL

Kraft Foods will host a conference call for investors with accompanying slides to review its results at 5 p.m. EDT today.  Access to a live audio webcast with accompanying slides is available at www.kraftfoodscompany.com, and a replay of the event will also be available on the company’s web site.

ABOUT KRAFT FOODS

Kraft Foods is building a global snacks powerhouse and an unrivaled portfolio of brands people love.  With annual revenues of approximately $48 billion, the company is the world’s second largest food company, making delicious products for billions of consumers in approximately 170 countries.  The portfolio includes 11 iconic brands with revenues exceeding $1 billion – Oreo, Nabisco and LU biscuits; Milka and Cadbury chocolates; Trident gum; Jacobs and Maxwell House coffees; Philadelphia cream cheeses; Kraft cheeses, dinners and dressings; and Oscar Mayer meats.  Approximately 70 brands generate annual revenues of more than $100 million.  Kraft Foods (www.kraftfoodscompany.com; NYSE: KFT) is a member of the Dow Jones Industrial Average, Standard & Poor's 500, Dow Jones Sustainability Index and Ethibel Sustainability Index.

FORWARD-LOOKING STATEMENTS

This press release contains a number of forward-looking statements.  Words, and variations of words such as "expect," "goals," "plans," "believe," "continue," "may," "will," and similar expressions are intended to identify our forward-looking statements, including but not limited to, statements regarding our expected synergy targets; our confirmation of 2010 Operating EPS; our adjustment to expected 2010 adjusted Combined Organic Net Revenue; we’re making excellent progress on the Cadbury integration and expect to realize even greater synergies; our plan to reinvest our 2010 upside to build our brands and to harmonize business practices; our plans for building a stronger foundation to achieve top-tier growth in 2011; and our Outlook, in particular, our belief that our change in outlook reflects the normalizing of Cadbury’s trade inventory practices and aggressive promotional environment in certain U.S. categories; our beliefs for confirming 2010 operating earnings per share; our intent regarding additional actions that will drive top-tier growth; and our adjustments to the total costs of the integration program.  These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause our actual results to differ materially from those indicated in our forward-looking statements.  Such factors include, but are not limited to, continued volatility of input costs, pricing actions, increased competition, risks from operating internationally, our indebtedness and our ability to pay our indebtedness, failure to realize the expected benefits of our combination with Cadbury, continued weakness in economic conditions and tax law changes.  Please also see our risk factors, as they may be amended from time to time, set forth in our filings with the SEC, including the registration statement on Form S-4, as amended from time to time, filed by Kraft Foods in connection with the Cadbury offer, our most recently filed Annual Report on Form 10-K and subsequent reports on Forms 10-Q and 8-K.  Kraft Foods disclaims and does not undertake any obligation to update or revise any forward-looking statement in this slide presentation, except as required by applicable law or regulation.

NON-GAAP FINANCIAL MEASURES

The company reports its financial results in accordance with accounting principles generally accepted in the United States (“GAAP”).  

The company’s top-line measure is organic net revenues, which excludes the impact of acquisitions, divestitures and currency.  The company uses organic net revenues and corresponding growth ratios as non-GAAP financial measures.  Management believes this measure better reflects revenues on a going-forward basis and provides improved comparability of results because it excludes the volatility of currency, and the one-time impacts of acquisitions and divestitures from net revenues.

To reflect the impacts of a significant business combination, as defined by SEC Regulation S-X, the company uses Combined Organic Net Revenues as a top-line measure.  Accordingly, Combined Organic Net Revenues includes the impacts of significant acquisitions, and excludes the impacts of other acquisitions, divestitures and currency.  The company uses Combined Organic Net Revenues and corresponding growth ratios to reflect the organic growth rates for Kraft Foods’ base business and Cadbury.  On a year-to-date basis, the organic growth rate of Cadbury reflects growth from the date of acquisition, or February 2, 2010, through the end of the second quarter.  Similar to organic net revenues, management believes Combined Organic Net Revenues better reflects revenues on a going-forward basis of the combined business.

The company uses Operating EPS, which is defined as diluted EPS attributable to Kraft Foods excluding costs related to:  the integration program; acquisition-related costs, including transaction advisory fees, U.K. stamp taxes and the impact of the Cadbury inventory revaluation; acquisition-related financing fees; and the impact of a deferred tax charge resulting from the recently enacted U.S. health care legislation.  Management believes this measure better reflects earnings per share on a going-forward basis and provides improved comparability of results because it excludes the volatility of currency; certain impacts related to the Cadbury acquisition; other one-time impacts; and divestitures from earnings per share.

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 and six months ended June 30, 2010 and 2009.  Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the company’s results prepared in accordance with GAAP.  In addition, the non-GAAP measures the company is using may differ from non-GAAP measures used by other companies.  Because GAAP financial measures on a forward-looking basis are neither accessible nor deemed to be significantly different from the non-GAAP financial measures, and reconciling information is not available without unreasonable effort, with regard to the non-GAAP financial measures in the company’s Outlook, the company has not provided that information.  

SEGMENT OPERATING INCOME

Management uses segment operating income to evaluate segment performance and allocate resources.  The company believes it is appropriate to disclose this measure to help investors analyze segment performance and trends.  Segment operating income excludes unrealized gains and losses on hedging activities (which are a component of cost of sales), certain components of its U.S. pension plan cost (which is a component of cost of sales and marketing, administration and research costs), general corporate expenses (which are a component of marketing, administration and research costs) and amortization of intangibles for all periods presented.  The company centrally manages pension plan funding decisions and determination of discount rate, expected rate of return on plan assets and other actuarial assumptions.  Therefore, the company allocates only the service cost component of its U.S. pension plan expense to segment operating income.  The company excludes the unrealized gains and losses on hedging activities from segment operating income to provide better transparency of its segment operating results.  Once realized, the company records the gains and losses on hedging activities within segment operating results.  Accordingly, the company does not present these items by segment because they are excluded from the segment profitability measure that management reviews.  

SOURCE Kraft Foods