Kraft Foods: reported solid Q3/2009 results

Northfield / IL. (kf) Kraft Foods Inc. reported solid third quarter 2009 results fueled by strong profit performance across all geographies. Volume/mix, which improved sequentially from the second quarter 2009, was the key driver of organic net revenue growth and a significant contributor to income growth and margin expansion versus the prior year.

«We continue to build our operating and financial momentum despite the difficult consumer environment», said Irene Rosenfeld, Chairman and CEO. «Our volume/mix, profit margin and cash flow trends are strengthening as we successfully execute our growth plan. As a result, we expect to deliver higher earnings and cash flow in 2009, while further increasing our brand investments to drive future growth».

Regarding the company´s possible offer for Cadbury PLC, Rosenfeld commented, «We remain interested but will maintain a disciplined approach. Our criteria include accretion to cash EPS in the second year, delivering a return on investment well in excess of our cost of capital, and maintaining both our investment grade credit rating and our dividend».

Rosenfeld concluded, «We remain focused on driving sustainable top-line growth, while implementing our strong cost-savings pipeline. We are making good progress toward our goal to be at or above industry margins in the next two years, and are well-positioned to deliver top-tier performance».

  • Net revenues declined 5,7 percent to 9,8 billion USD, including the unfavorable impact of 5,6 percentage points from currency and 0,6 percentage points from divestitures.
    Organic net revenues grew 0,5 percent driven by 0,7 percentage points from volume/mix, partially offset by negative 0,2 percentage points from pricing. Volume/mix gains were negatively impacted by approximately 0,8 percentage points due to the planned discontinuation of less profitable product lines over the past year. The pricing decline included the unfavorable impact of approximately 1,6 percentage points in response to lower dairy costs, consistent with the company’s adaptive pricing model for its cheese business in the U.S. Pricing was also negatively impacted by 0,2 percentage points due to the absence of a value added tax credit in Brazil that benefited prior year results.
  • Operating income increased 38,7 percent from the prior year to 1’419 million USD. This increase included a negative 7,9 percentage point impact due to currency.
    Operating income margin increased 470 basis points year-over-year to 14,5 percent. Approximately 70 basis points of the margin increase were attributable to improved volume/mix. The remainder of the margin increase largely reflected an improved alignment of prices with input costs, the year-over-year change in unrealized gains and losses on hedging activities, lower costs due to the completion of the Restructuring Program and the absence of asset impairment charges incurred in the prior year. These gains were partially offset by higher overhead costs, including incremental investments in systems, increased marketing investments and the absence of the value added tax credit in Brazil.
  • The tax rate of 24,6 percent was down from 28,3 percent in the prior year period. The tax rate in each year reflected the timing of discrete items, primarily the settlement of tax audits.
  • Earnings per share from continuing operations were 0,55 USD, up from 0,34 USD in third quarter 2008.

Third Quarter 2009 Results By Segment

U.S. Beverages: Organic net revenues increased 1,5 percent as higher price levels were partially offset by unfavorable volume/mix. The increase in net revenue was driven by solid growth in Capri Sun ready-to-drink beverages, Kool-Aid and Country Time powdered beverages as well as Starbucks and Maxwell House coffees. Volume/mix was negatively impacted by the planned discontinuation of a less-profitable product line, management´s decision to forego unprofitable volume, and the timing of a merchandising program versus the prior year.

Segment operating income increased 60,2 percent as lower costs due to the completion of the Restructuring Program and an improved alignment of prices with input costs were partially offset by incremental marketing investments.

U.S. Cheese: Organic net revenues declined 10,3 percent as a 6,8 percentage point gain in volume/mix was more than offset by a 17,1 percentage point reduction from lower price levels. This price decline was in response to significantly lower dairy costs, consistent with the company’s adaptive pricing model. Incremental marketing investments behind Kraft Singles processed slices and Philadelphia cream cheese drove volume/mix and market share gains.

Segment operating income grew 12,2 percent as the benefits of improved volume/mix more than offset lower pricing net of input costs and increased marketing investments.

U.S. Convenient Meals: Organic net revenues increased 5,0 percent as strong volume/mix gains were partially offset by lower price levels in response to lower input costs. Pizza generated double-digit growth behind further gains in market share. Incremental investments in value-oriented consumer programs drove more than 20 percent growth in DiGiorno pizza. Oscar Mayer Deli Fresh meats also delivered double-digit growth. The planned discontinuation of less-profitable product lines slowed growth by approximately one percentage point.

Segment operating income increased 60,8 percent as improved alignment of prices with input costs, strong volume/mix gains and lower costs due to the completion of the Restructuring Program more than offset increased marketing investments.

U.S. Grocery: Organic net revenues declined 3,0 percent reflecting the planned discontinuation of less-profitable product lines, which accounted for about one-half of the revenue decline, as well as the timing of a merchandising program versus the prior year. These factors more than offset solid growth from investments behind Kraft mayonnaise and Miracle Whip spoonable dressings and Jell-O dry packaged desserts.

Segment operating income increased 9,3 percent as the benefits of improved alignment of prices with input costs more than offset incremental investments in marketing.

U.S. Snacks: Organic net revenues declined 3,3 percent due to lower price levels. Solid volume/mix gains in core biscuit brands and snack nuts were offset by a decline in bars and the timing of a merchandising program versus the prior year. Lower price levels reflected lower input costs and investments to better manage price gaps in snack nuts. Net revenue of the top five biscuit brands grew approximately five percent.

Segment operating income increased 3,2 percent as lower investments in marketing and improved alignment of prices with input costs more than offset an increase in overhead costs.

Canada + North America Foodservice: Organic net revenues declined 1,0 percent as strong volume/mix gains and higher price levels in Canada were more than offset by lower revenues in North America Foodservice. Continued marketing investments and successful customer programs drove strong growth in Canada. North America Foodservice declined due to unfavorable volume/mix, reflecting an industry-wide decrease in casual dining traffic, lower pricing in response to significantly lower dairy prices and the planned discontinuation of a less-profitable product line.

Segment operating income increased 2,0 percent including an unfavorable currency impact of approximately 6,0 percentage points. Excluding the impact of currency, the increase in segment operating income was driven by the improved alignment of prices with input costs and lower costs due to the completion of the Restructuring Program. Increased marketing investments, higher overhead costs and the impact of unfavorable volume/mix partially offset these gains.

Kraft Foods Europe: Organic net revenues declined 0,8 percent as higher price levels were more than offset by lower volume/mix. Management´s decision to forego unprofitable volume and the planned discontinuation of less-profitable product lines slowed growth by approximately 1,7 percentage points.

  • Coffee was flat as growth in retail, including strong performances by Kenco and Carte Noire, offset a decline in revenue from foodservice channels. New products and incremental marketing investments drove Tassimo growth of more than 25 percent.
  • Chocolate declined in response to weakening economic conditions in Iberia, France and Belgium as well as from the discontinuation of less-profitable product lines. These factors more than offset solid revenue growth and market share gains by Milka, Marabou and Freia.
  • Biscuits declined as the impact of weakening economic conditions, particularly in Iberia, were partially offset by growth in key brands such as Tuc, Mikado and Ourson.
  • Cheese declined despite growth in Philadelphia cream cheese, which increased due to the introduction of new packaging and successful new product launches.

Segment operating income increased 83,5 percent including an unfavorable impact from currency of more than eleven percentage points. Lower costs due to the completion of the Restructuring Program and the absence of an asset impairment charge recognized in the prior year quarter accounted for approximately 80 percentage points of the increase. Excluding these factors, segment operating income grew due to an improved alignment of prices with input costs and favorable volume/mix. Higher investments in cost-savings initiatives and marketing partially offset these gains.

Kraft Foods Developing Markets: Organic net revenues increased 8,1 percent driven by solid gains from each region’s priority brands.

  • In Latin America, the priority brands, which collectively grew nearly 20 percent, drove strong organic revenue growth. Tang powdered beverages increased over 45 percent.
  • In Asia Pacific, higher price levels and volume/mix gains drove revenue growth. The priority brands collectively grew more than 20 percent, led by Oreo cookies and Tang powdered beverages.
  • In Central and Eastern Europe, Middle East + Africa, organic revenue increased largely due to higher price levels and strong mix. However, volume/mix declined due to weakening economic conditions. The priority brands collectively increased more than nine percent, including more than 20 percent growth in Jacobs coffee.

Organic revenue growth in the quarter was negatively impacted by approximately one percentage point due to the absence of a value added tax credit in Brazil that benefited the prior year quarter.

Segment operating income increased 2,2 percent including an unfavorable currency impact of approximately 22 percentage points. Excluding currency, a combination of volume/mix gains, improved alignment of prices with input costs and lower costs due to the completion of the Restructuring Program more than offset the impact of the absence of the Brazilian value added tax credit in the prior year and increased investments in marketing.

Outlook

Kraft Foods increased its guidance for 2009 diluted earnings per share to at least 1,97 USD versus the previous expectation of at least 1,93 USD. This guidance reflects strong year-to-date profit performance and a reduction in its full-year effective tax rate to approximately 30,0 percent versus the previous expectation of approximately 31,5 percent.

The new guidance also reflects further investments in marketing to drive future growth as well as an estimate for certain costs in connection with the company´s possible combination with Cadbury PLC.

The company also revised its forecast for 2009 organic net revenue growth to be approximately two percent versus a prior expectation of approximately three percent. The change in outlook primarily reflects a lower contribution from pricing as a result of lower-than-expected input costs. It also reflects management’s decision to forego unprofitable volume as well as weakening economic conditions in certain countries in Western and Eastern Europe.

As a result of its increased profit guidance, as well as the benefit of improved working capital management, the company raised its outlook for full-year discretionary cash flow to at least 3,0 billion USD versus its previous estimate of 2,6 billion USD.

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