Kraft Foods: reports strong Q2/2010 earnings

Northfield / IL. (kf) Kraft Foods Inc. reported strong second quarter 2010 earnings that reflected increased gross profit margins and significant brand-building investments in every geography. «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 are 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 USD of Operating EPS this year while building a stronger foundation to achieve top-tier growth in 2011».

Net revenues in the second quarter increased 25,3 percent to 12,3 billion USD, including a favourable impact of 22,8 percentage points from the Cadbury acquisition, 0,8 percentage points from currency and a negative 0,3 percentage point impact from divestitures. Combined Organic Net Revenues grew 2,2 percent, reflecting 2,0 percent organic net revenue growth from Kraft Foods´ base business and 3,3 percent organic net revenue growth from Cadbury. Kraft Foods´ base business growth was driven by 2,2 percentage points from volume/mix gains, partially offset by a negative 0,2 percentage points from pricing.

Operating income increased 16,8 percent to 1’701 million USD, including a favourable impact of 17,8 percentage points from Cadbury´s operations, partially offset by a negative 11,0 percentage point impact from integration program and acquisition-related costs. Currency had a negative impact of 0,6 percentage points. Excluding these factors, Kraft Foods´ base business operating income increased 10,6 percent reflecting volume/mix gains and productivity improvements, partially offset by higher raw material costs and increased advertising.

Kraft Foods North America

Net revenues increased 6,3 percent, including a 6,9 percentage point impact from the Cadbury acquisition and a favourable 1,6 percentage point impact from currency. Combined Organic Net Revenues declined 1,3 percent reflecting a 1,9 percent decline in organic net revenue 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 DentynePure gum.

Segment operating income grew 11,0 percent including favourable 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 increased 3,9 percent reflecting Kraft Foods´ base business organic net revenue 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 favourable 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 unfavourable 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 eight 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 unfavourable impact of approximately one percentage point from earlier shipments of Easter products into the first quarter.
Segment operating income grew 61,1 percent including favourable 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 favourable 1,9 percentage point impact from currency.

Combined Organic Net Revenues increased 8,1 percent reflecting Kraft Foods´ base business organic net revenue 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 favourable 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 nine 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.

Outlook

Kraft Foods adjusted its forecast for 2010 Combined Organic Net Revenue growth to a range of three to four percent from prior guidance of at least four 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 USD. 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 USD from at least 675 million USD, and made a commensurate adjustment to the total costs of the integration program to approximately 1,5 billion USD from 1,3 billion USD.