CAGNY Conference: Kraft Foods highlights turnaround progress

Northfield / IL. (kf) At the Consumer Analyst Group of New York (CAGNY) Conference in Boca Raton (FL), Irene Rosenfeld, Chairman and CEO of Kraft Foods Inc., highlighted Kraft´s solid momentum as the company enters the final year of its three-year turnaround. Tim McLevish, Executive Vice President and CFO, underscored the company´s steady financial progress, noting strong top- and bottom-line growth and improving cash generation. The company also reaffirmed its 2009 guidance.

«We are well-positioned to win going forward», said Rosenfeld. «We have a strong plan. We are making the right investments. And we are executing well. The majority of our businesses are now delivering, and all geographies are contributing».

Punctuating this fact, Rosenfeld noted that the company delivered strong results across the board in 2008, including the best performance in North America since the company´s IPO in 2001; four percent growth on the top and bottom lines in Europe; and 18 percent growth on the top line and nearly 40 percent on the bottom line in Developing Markets.

Rosenfeld: «We are turning Kraft Foods into a unique combination of focus and scale. «It´s a combination none of our competitors can match – one that will allow us to deliver the top-tier, sustainable growth that we – and our investors – expect».

The company provided additional perspective on its 2008 fourth quarter volume and share performance. Against a backdrop of high absolute price points due to unprecedented input cost inflation and a crisis of consumer confidence, Kraft Foods´ volumes held up much better than predicted. Looking forward, the company expects volume growth to improve as 2009 progresses.

Rosenfeld noted that fourth quarter U.S. market share was disappointing. However, she explained that in the four categories that drove the change, Kraft Foods still realized very solid growth, just slightly below that of the category overall.

The company also showed that private label is no stronger in Kraft Foods´ categories than in food and beverage overall. Rosenfeld emphasized that the company´s investments to differentiate its brands are enabling Kraft Foods to outperform its branded competitors.

«Doing what we said we´d do – and it´s working»

In reviewing progress against the company´s strategies, Rosenfeld highlighted benefits from rewiring the organization. She explained how general managers are now empowered with full profit-and-loss and balance sheet responsibility and metrics aligned with shareholder value. As a result, they are reacting faster to market changes and delivering improvements in revenues, operating income and cash flow.

Next, Kraft Foods spotlighted efforts to reframe categories, its second growth strategy. In 2008, the «growth diamond» guided investments aligned with key consumer trends in quick meals, health and wellness, snacking and premium products. These efforts have helped revitalize Kraft Foods´ new product growth through more than a dozen platform-based innovations, like Cakesters snack cakes, Biskuat affordable nutrition biscuits and Oscar Mayer Deli Fresh meats.

The growth diamond also has helped improve the relevance of brands like Oreo cookies (22 percent global growth), Milka chocolate (20 percent organic growth and now the No. 2 chocolate player in Europe), Rainforest Alliance-certified Kenco coffee (double-digit revenue and 1,2 points of share growth in the fourth quarter) and DiGiorno pizza (five consecutive quarters of double-digit revenue growth and margin expansion).

Rosenfeld noted improvements to Kraft Foods´ portfolio driven by strategic acquisitions such as the LU biscuit business, key divestitures of slow-growth businesses and the pruning of less-profitable products. Taken together, these actions enhance growth on both the top and bottom lines. The company also reinforced its clear focus on priority categories, core brands and key markets. With clear portfolio roles, Kraft Foods is now better able to skew investments to maximize growth opportunities.

As a third strategy, Kraft Foods has been investing in sales as a sustainable competitive advantage. Rosenfeld announced High-Visibility Wall- to-Wall, the next evolution of its successful sales initiative in North America. The enhanced program will drive one percent of incremental revenue annually, adding to the one percent increase delivered by the current program.

The company also noted improved customer collaboration, which led to double-digit growth with global customers in 2007 and 2008, up from just four percent in 2005. Building on this momentum, the company will invest at least 100 million USD in collaborative customer marketing programs. Kraft Foods also discussed plans to increase market share through higher-growth channels in North America and in Developing Markets.

Regarding its fourth strategy, reduce costs without compromising quality, Rosenfeld recapped benefits from the company´s restructuring program that ended in 2008. Over the past four years, the company streamlined operations by closing 36 manufacturing facilities and simplified the organization by eliminating 19’000 positions. This delivered 1,1 billion USD in savings to date and will deliver 200 million USD in incremental savings in 2009.

Rosenfeld also discussed investments in quality designed to move Kraft Foods´ products from «good enough» to «truly delicious». And consumers have noticed, now rating 65 percent of the company´s key products as preferred to the competition, compared to just 44 percent in 2006.

Financial turnaround on-track

«We have made steady progress toward our goal of sustainable growth», said McLevish. «In 2007, we got the top line growing. And last year, we demonstrated that we can grow both the top and bottom lines, while still investing for the future».

The company reconfirmed its 2009 guidance, noting about a point of impact, entirely due to recent declines in dairy inputs. The effects of the company´s pruning programs, weak consumer sentiment and retailer inventory reductions are expected to drive a volume decline in the first quarter of up to five percent. However, the company expects significant improvement in volume trends in subsequent quarters.

McLevish reaffirmed a commitment to GAAP reporting and the company´s guidance of 1,88 USD earnings per share in 2009, which reflects about 0,40 USD of headwinds versus the prior year, primarily from currency and pension. He also underscored the company´s continuing commitment to deliver an incremental one billion USD of annual discretionary cash flow over the next few years.

«We have rebuilt our brand equities, and our pricing power is the strongest it´s been in some time», McLevish concluded. «We delivered our earnings guidance for the second year in a row and generated strong cash flow. We remain confident that we will build market shares and expand profit margins this year and that we´ll be well-positioned to deliver sustainable growth in line with our long-term targets».

«Make today delicious»

Looking to the future, Rosenfeld unveiled a higher purpose that clearly captures the essence of Kraft Foods: «Make today delicious». This new purpose, along with a clear set of values, will help build a high-performing culture and put the company a step further on its path to delivering top-tier performance.

«’Make today delicious’ defines, unites and inspires us», said Rosenfeld. «During the past two years, we´ve built a solid foundation by reinvesting in our brands, putting a new organization in place and improving our cost structure. As the next step in our turnaround, we´re adding three new ingredients to our recipe for success – a higher purpose that acts as a common call to action, values in action that guide our behavior and a new look and feel to visually depict our renewed energy. Together, they will accelerate our journey from good to great» (kf).