Kraft Foods: Q4 and Full Year 2014 Results

Northfield / IL. (kfg) Kraft Foods Group Inc. announced financial results that reflected the impact of significant pricing actions to offset record-high commodity costs, mixed execution across the business portfolio as well as a number of factors, which are not expected to repeat, that influenced both the fourth quarter and full year. «While there were some positive developments in the fourth quarter, we did not deliver to our potential in 2014, with the macro environment and our execution affecting our results», said Kraft Chairman and CEO John T. Cahill. «I believe our brands and our people are an unbeatable combination, but as we look at 2015 and beyond, we need to leverage those strengths against a plan that accelerates the pace of change, improves execution and puts Kraft on a clear path to long-term, sustainable growth».

Fourth Quarter Financial Summary

• Net revenues grew 2.2 percent and Organic Net Revenues were up 3.4 percent. Organic growth was driven by positive net pricing of 1.9 percentage points to offset higher input costs, as well as volume/mix gains of 1.5 percentage points from growth in the Refrigerated Meals, Exports and Canada businesses.
• An operating loss of 614 million USD and EPS loss of 0.68 USD were driven by a non-cash loss of 1’364 million USD, or 1.43 USD per diluted share, from market-based impacts to post-employment benefit plans. The loss from market-based impacts to post-employment benefit plans was driven by a combination of lower discount rates and updated published mortality assumptions, partially offset by favorable asset returns.
• Excluding market-based impacts to post-employment benefit plans in both years, operating income grew at a low single-digit rate and EPS grew at a double-digit rate. Operating income growth was primarily driven by lower advertising and overhead costs, as well as the absence of recall costs versus the prior year quarter. A net benefit was also realized from a combination of lower manufacturing costs, primarily driven by productivity gains, and higher net pricing that more than offset higher commodity costs. EPS growth was further enhanced by a lower tax rate versus the prior year quarter.
• Fourth quarter 2014 results also included 92 million USD, or 0.10 USD per diluted share, of unrealized losses from commodity hedging activities.

2014 Financial Summary

• Net revenues decreased 0.1 percent and Organic Net Revenues were up 0.9 percent versus the prior year. Net pricing contributed 1.2 percentage points of growth and reflected significant price increases in response to rising commodity costs that were partially offset by higher promotional spending in the Meals + Desserts and Beverages businesses. Volume/mix declined 0.3 percentage points due to volume losses associated with certain pricing actions, primarily in cheese, as well as category weakness in meals and market share losses in desserts.
• Operating income of 1.9 billion USD and EPS of 1.74 USD included a non-cash loss of 1’341 million USD, or 1.41 USD per diluted share, from market-based impacts to post-employment benefit plans.
• Excluding market-based impacts to post-employment benefit plans in both 2014 and 2013, operating income grew at a mid-single-digit rate while EPS advanced at a double-digit rate. Operating income growth was primarily driven by a reduction in spending on cost savings initiatives’2 reduced marketing expenditures and favorable retirement-related benefit adjustments primarily resulting from lower-than-expected claims experience in 2014. A net benefit was also realized from a combination of manufacturing productivity gains and higher net pricing that more than offset higher commodity costs. EPS growth was further enhanced by a lower tax rate versus the prior year.
• 2014 results were also tempered by 79 million USD, or 0.09 USD per diluted share, of unrealized losses from commodity hedging activities.
• Free Cash Flow of 1.5 USD was in line with the prior year as the current year reflected the benefit of lower pension plan contributions while the prior year included significant working capital improvements.