Kraft Foods: Reports Solid Third Quarter Results

Northfield / IL. (kf) Kraft Foods Inc. reported third quarter 2010 results that reflected solid performance in every geography and management´s decision to significantly step-up brand-building investments. «We had another good quarter, and we are executing well», said Irene Rosenfeld, Chairman and CEO. «Our global growth strategy of focusing on snacking and Power Brands gives us a clear path to top-tier performance. The Cadbury integration has proceeded smoothly and quickly, and we are already benefiting from significant cost synergies. I remain confident that we will achieve our goals for 2010 and accelerate our growth in 2011».

• Net revenues in the third quarter increased 26,2 percent to 11,9 billion USD, including a 26,2 percentage point impact from the Cadbury acquisition, a negative 2,3 percentage points from currency and a negative 0,2 percentage points from divestitures. Kraft Foods´ base business organic net revenues grew 2,5 percent, driven by 2,3 percentage points from pricing and 0,2 percentage points from volume/mix. Combined Organic Net Revenues grew 2,1 percent, including 0,1 percent growth from Cadbury. Actions taken to normalize Cadbury trade inventories during the quarter tempered Combined Organic Net Revenue growth by approximately one-half percentage points and Cadbury organic net revenue growth by about two percentage points.
• Operating income increased 13,4 percent to 1’519 million USD, including a favourable impact of 22,5 percentage points from Cadbury, partially offset by a negative 6,1 percentage point impact from Integration Program and acquisition-related costs. Currency had a negative impact of 2,9 percentage points. Excluding these factors, management´s decision to significantly step-up advertising investments resulted in Kraft Foods´ base business operating income to be essentially flat with the prior year quarter. Operating income margin was 12,8 percent. This was 140 basis points lower than the prior year, driven by an unfavourable impact of 100 basis points from the increased advertising investments and a 60 basis point negative impact from Integration Program and acquisition-related costs.
• The tax rate was 30,0 percent compared to 23,8 percent last year, reflecting a greater benefit from discrete items in the prior year quarter.
• Diluted earnings per share were 0,43 USD, including a negative impact of 0,04 USD related to Integration Program and acquisition-related costs. Operating EPS in the third quarter was 0,47 USD, down from 0,53 USD primarily due to higher taxes, reflecting the timing of discrete items versus the prior year quarter.

Kraft Foods North America

Net revenues increased 9,3 percent. This included favourable impacts of 7,8 percentage points from the Cadbury acquisition and 0,7 percentage points from currency, partially offset by a negative 0,3 percentage point impact from divestitures.

Kraft Foods´ base business organic net revenue increased 1,1 percent. Pricing in response to higher input costs accounted for 3,1 percentage points of the increase, with each business unit realizing favourable net pricing. This was offset somewhat by volume/mix, which was unfavourably impacted by higher pricing, the continued weak consumer environment and lower levels of merchandising activity versus the prior year quarter. Focused investments drove solid volume/mix growth in Power Brands. In addition, the introduction and expansion of new product platforms.

Combined Organic Net Revenues increased 1,0 percent, fuelled by approximately three percent growth in Power Brands.

Cadbury organic net revenue declined 0,5 percent, reflecting the lapping of the prior year quarter´s highly-successful introduction of Trident Layers gum and the strong shipments of Halls cough drops in anticipation of the H1N1-influenced flu season. This was partially offset by strong performance of Stride and Dentyne gum in the current quarter.

Segment operating income grew 4,8 percent, reflecting the favourable impacts of 8,6 percentage points from Cadbury, net of Integration Program costs, and 0,6 percentage points from currency. Excluding these factors, segment operating income was down due to a double-digit increase in advertising. favourable pricing and productivity more than offset higher input costs.

Kraft Foods Europe

Net revenues increased by 29,0 percent, including a 36,0 percentage point impact from the Cadbury acquisition and a negative 8,7 percentage point impact from currency. Kraft Foods´ base business organic net revenues grew 1,7 percent, driven by volume/mix gains of 1,4 percentage points and 0,3 percentage points from pricing.

• Chocolate revenue was flat in the quarter. Continued strong growth of Freia and Marabou in Scandinavia was offset by weak category performance in other parts of Continental Europe, in part due to unseasonably hot weather.
• Biscuits revenue declined slightly. Strong growth of Power Brands, including Oreo and Belvita,was offset by the timing of promotional programming versus the prior year and a weak category environment.
• Coffee grew mid-single digits. The Jacobs, Carte Noire and Kenco Power Brands drove volume/mix gains. On-demand market expansion and increased brewer placement drove double-digit growth in Tassimo.
• Cheese grew mid-single digits, fuelled by volume/mix gains. New product launches and a successful marketing campaign drove continued growth of Philadelphia.

Combined Organic Net Revenues increased 1,1 percent, driven by approximately three percent growth in Power Brands. Cadbury organic net revenue declined 0,4 percent, as category softness in Southern Europe more than offset solid growth in Britain and Ireland.

Segment operating income grew 57,3 percent, reflecting the favourable impact of 51,1 percentage points from the Cadbury acquisition, net of Integration Program costs, and a negative 12,8 percentage point impact from currency. Excluding these factors, the increase in segment operating income was driven by productivity improvements, lower overhead costs and lower advertising costs due to the timing of programming versus the prior year quarter.

Kraft Foods Developing Markets

Net revenues increased 69,8 percent, including a favourable impact of 66,1 percentage points from the Cadbury acquisition. Currency had a negative 3,7 percentage point impact.

Kraft Foods´ base business organic net revenues grew 7,4 percent, driven by 5,3 percentage points from volume/mix gains and 2,1 percentage points from pricing.

• In Latin America, organic revenues grew double digits due to higher pricing and strong volume/mix gains, particularly in Brazil. Power Brands collectively grew 18 percent.
• In Asia Pacific, organic revenues grew double digits due to strong volume/mix gains, particularly in China and Indonesia. Power Brands collectively grew more than 30 percent.
• Central and Eastern Europe, Middle East + Africa organic revenues declined slightly due to extremely weak economic conditions and soft category trends, particularly in Russia and Central Europe. Share gains in key markets and categories partially offset market weakness. Power Brands collectively grew eight percent.

Combined Organic Net Revenues increased 4,8 percent, propelled by growth in Power Brands of approximately twelve percent. Normalizing Cadbury trade inventories negatively impacted growth by approximately two percentage points.

Cadbury organic net revenues grew only 0,7 percent as normalizing trade inventories tempered growth by approximately five percentage points. Growth was driven by gains in chocolate in Asia, particularly India, which were partially offset by soft gum category trends in Russia, Japan, South Africa and Mexico.

Segment operating income grew 29,8 percent, reflecting a positive impact of 36,8 percentage points from the Cadbury acquisition, net of Integration Program costs, and a negative 5,2 percentage point impact from currency. Excluding these factors, segment operating income declined modestly as the benefits from favourable volume/mix and lower overheads were more than offset by the decision to significantly increase advertising investments.

Outlook

Kraft Foods confirmed its 2010 guidance for Combined Organic Net Revenue growth in a range of three to four percent and Operating EPS of at least 2,00 USD. In addition, the company reiterated its 2011 targets for Combined Organic Net Revenue growth of at least five percent and mid-teens growth for Operating EPS.