Kraft Reports Strong
Second Quarter Results; Raises Guidance
- Q2 net revenues increased 21.4% to $11.2 billion; organic
net revenues(1) grew 6.9% - Q2 diluted EPS of $0.48 increased 9.1%; $0.58
excluding items(1), 16.0% above prior year - 2008 organic revenue growth
guidance raised to at least 6%, up from at least 5% - 2008 EPS guidance
excluding items raised to at least $1.92
Source: Kraft Foods
Last update: 7:06 a.m. EDT July 28, 2008
"Our business
continues to strengthen in a challenging operating
environment, and performance is exceeding our
expectations," said Irene
Rosenfeld, Chairman and Chief Executive Officer. "Our investments are driving
stronger top-line growth and we are now seeing that play
through in improved
profitability. I
expect our year-over-year results to improve further in the
back half of 2008 as we continue to reinvest in our brands
and reduce our
costs."
-- Net revenues: Second quarter net revenues
increased 21.4 percent to
$11.2
billion. Net revenue growth included a
favorable impact of
9.6
percentage points from the LU biscuit acquisition and a 5.6
percent gain
from currency that was partially offset by an
unfavorable impact of 0.7 percentage
points from divestitures.
Excluding
these factors, organic net revenues grew 6.9 percent.
Higher
pricing contributed 7.2 percentage points, while favorable
mix added
0.7 percentage points. Volume was down
only 1.0 percent
despite the
impact of significant cost-driven pricing actions taken
during the
quarter.
-- Operating income: Reported operating income
in the quarter increased
27.1 percent
from the prior year to $1.5 billion.
Operating income
excluding
items(1) increased 27.6 percent versus the prior year.
Operating
income margin excluding items(1) increased to 15.3 percent
in second
quarter 2008 from 14.5 percent in second quarter 2007.
The benefits
of strong revenue growth and associated overhead cost
leverage, as
well as a commodity hedging favorability, more than
offset
significantly higher input costs and investments in product
quality,
marketing and new products. Results
include approximately
$150 million
in gains from certain commodity hedging activities(1),
which will
be offset in the second half of 2008.
-- Tax rate: Kraft's reported tax rate in
second quarter 2008 was
37.9
percent. Excluding items(1), the second
quarter rate was
36.1 percent
compared to 32.5 percent in second quarter 2007. The
second
quarter rate is consistent with the company's full-year
guidance of
33.5 percent excluding items but reflected quarterly
timing of
certain discrete items.
-- Earnings per share: Second quarter 2008
reported earnings per share
were $0.48,
up 9.1 percent from $0.44 in second quarter 2007.
During the
quarter, the company incurred $0.05 per share in asset
impairment,
exit, implementation and other costs, compared to $0.06
in the same
quarter a year ago. The company also
incurred $0.04 in
losses on
the divestiture of certain biscuit assets that was
required as
part of the company's LU biscuit acquisition.
Items(1) Affecting EPS Comparability ------------------------------------ Second Quarter --------------------------------------- 2008 2007 Growth (%) ------ ------- ----------- Reported EPS $0.48 $0.44 9.1% Asset Impairment, Exit, Implementation And Other Costs 0.05 0.06 Loss on divestitures (0.04) (0.00) ------ -------- EPS excluding items $0.58* $0.50 16.0% * Does not add due to rounding.
Second quarter 2008 earnings per share excluding items were
$0.58, an increase of 16.0 percent versus second quarter 2007. Compared to the
prior year, earnings per share excluding items reflected a $0.06 contribution
from operational gains, a $0.06 timing benefit from certain commodity hedging
activities, a $0.03 benefit from currency and a $0.03 contribution from lower
shares outstanding. These were partially offset by a $0.07 negative impact from
higher interest expense and a $0.03 negative impact from a higher tax rate.
SECOND QUARTER 2008 RESULTS, DISCUSSION BY SEGMENT(2) Q2 2008 (percent growth) --------------------------------------------------- Operating Organic Income Net Net Operating Excluding Revenues Revenues(1) Income Items(1) --------- ------------- ---------- ------------ Total Kraft 21.4% 6.9% 27.1% 27.6% North America 6.7 5.8 15.9 11.5 U.S. U.S. U.S. U.S. U.S. Canada & N.A. Foodservice 12.4 4.4 21.7 40.8 International 49.7 9.2 37.9 54.2 European Union 58.3 3.4 31.2 50.8 Developing Markets 37.5 17.1 44.1 58.7 Organic net revenues grew 3.4 percent driven by solid growth
in ready-to-drink beverages, coffee and powdered beverages. Ready-to-drink
beverage growth in the quarter was driven by trade spending efficiency efforts
that were partially offset by a mid-single-digit volume decline. Growth in
coffee was attributable to the continued success of the Maxwell House restage
along with double-digit Tassimo growth, partially
offset by weakness in Gevalia premium coffee.
Powdered beverage revenue grew in the quarter primarily due to successful value-oriented
consumer programs behind Kool-Aid. Operating income excluding items increased
5.7 percent from the benefits of price increases and trade spending
efficiencies, lower marketing spending and favorable product mix, partly offset
by higher input costs and the impact of lower volume.
Organic net revenues grew 10.0 percent reflecting
significant, cost-driven price increases that were partially offset by lower
volume. Volume and product mix gains from new products such as Bagel-fuls, Singles Select processed cheese slices and LiveActive cheeses were more than offset by volume weakness
related to pricing actions, particularly in the natural cheese category.
Operating income excluding items increased 7.3 percent in the second quarter.
Pricing and lower marketing and overhead expenses more than offset the impact
of higher input costs and lower volume.
Organic net revenues grew 7.6 percent driven by broad-based
innovation and marketing success that enabled volume growth, favorable product
mix and price increases. Key growth drivers in the quarter included DiGiorno Ultimate pizza, Oscar Mayer Deli Fresh meats,
Oscar Mayer Deli Creations sandwiches and Oscar Mayer fully cooked bacon.
Operating income excluding items increased 3.4 percent as the contribution from
pricing, favorable product mix, and volume growth more than offset input cost
inflation.
Organic net revenues grew 4.5 percent as price increases in
several categories more than offset lower volume and unfavorable product mix.
Double digit revenue growth from the relaunch of
Kraft pourable salad dressings and continued momentum of Kraft macaroni and
cheese, as well as strong growth in Jell-O dry packaged desserts, was partially
offset by pricing-related volume weakness in spoonable
dressings such as Kraft mayonnaise and Miracle Whip. Operating income excluding
items increased 5.2 percent as pricing and overhead savings more than offset
higher input costs.
Organic net revenues grew 5.1 percent as pricing more than
offset unfavorable product mix and lower volume. Solid growth in biscuits and
pricing in snack nuts were partially offset by weakness in the snack bar
business. Within biscuits, innovation and higher marketing support led to
strong revenue gains in core brands such as Oreo, Chips Ahoy! and Ritz.
Biscuits revenue also benefited from the successful launch of Nilla Cakesters as the company
builds on its Cakesters snack cake platform. Revenue
growth in ready-to-eat cereal was driven by higher pricing and the continued
strength of Honey Bunches of Oats. Operating income excluding items increased
13.9 percent as the benefits of price increases and lower trade spending more
than offset the impact of higher input costs, including approximately $50
million in realized gains from certain commodity hedging activities which will
be offset in the second half of 2008; lower volume; unfavorable product mix;
and higher marketing and overhead costs.
Canada & North America Foodservice
Organic net revenues grew 4.4 percent behind solid volume
growth. Volume gains were primarily driven by new product innovation and
improved go-to-market plans with key customers in
European Union
Organic net revenues grew 3.4 percent due to pricing actions
combined with favorable product mix, partially offset by a modest volume
decline. Chocolate grew at a double-digit rate due to strong volume growth from
our focus on core brands, as well as pricing actions to offset higher input
costs. Coffee declined due to volume softness resulting from pricing actions
taken to offset higher input costs. Cheese grew at a double-digit rate in the
quarter driven by pricing gains in the
Developing Markets
Organic net revenues grew 17.1 percent driven by strong
gains in pricing and product mix with modest volume growth. Every region
delivered double-digit organic net revenue growth in the quarter. Successful
brand investments and pricing drove growth across all key markets in the
Eastern Europe, Middle East & Africa region, particularly in the
2008 OUTLOOK(1)
Kraft has raised its outlook for 2008 organic net revenue
growth to at least 6 percent, up from a previous expectation of at least 5
percent as a result of further pricing actions to offset rising input costs.
Additionally, the company now expects 2008 EPS of at least
$1.54 per share versus a previous expectation of at least $1.56 per share,
reflecting better-than-expected growth from operations, offset by the $0.04
loss on the divestiture of certain biscuit assets.
Excluding items, the company raised its EPS guidance to at
least $1.92 versus at least $1.90 previously to reflect better-than-expected
growth from operations.
The company continues to expect cumulative annualized
savings from the restructuring program to reach approximately $1.0 billion by
year-end and $1.2 billion by the end of 2009. To date, cumulative annualized
savings from this cost restructuring program totaled approximately $927
million, up from approximately $785 million at the end of 2007.
Also reflected in its guidance, the company reaffirmed that
its 2008 full-year effective tax rate excluding items is expected to be 33.5
percent.
Company guidance does not reflect the impact of the pending
split-off transaction to merge the company's Post cereals business into Ralcorp
Holdings, Inc. The company expects to update its guidance following the
completion of this transaction.
CONFERENCE CALL
Kraft Foods will host a conference call for investors with
accompanying slides to review its results at 8 a.m. EDT on July 28, 2008.
Access to a live audio webcast with accompanying slides is available at
http://www.kraft.com and a replay of the event will be available on the
company's web site.
ABOUT KRAFT FOODS INC.
For more than a century, Kraft ( http://www.kraft.com) has offered delicious foods and beverages that fit the way consumers live. Today, we are turning the brands that consumers have lived with for years into brands they can't live without. Millions of times a day in more than 150 countries, consumers reach for their favorite Kraft brands, including nine with revenues exceeding $1 billion: Kraft cheeses, dinners and dressings; Oscar Mayer meats; Philadelphia cream cheese; Maxwell House coffee; Nabisco cookies and crackers and its Oreo brand; Jacobs coffees; Milka chocolates; and LU biscuits. Kraft is one of the world's largest food and beverage companies with annual revenues exceeding $37 billion, more than 100,000 employees and more than 180 manufacturing and processing facilities globally. The companyis a member of the Standard & Poor's 500 index as well as the Dow Jones Sustainability Index and Ethibel Sustainability Index.
FORWARD-LOOKING STATEMENTS
This press release contains forward-looking statements regarding our 2008 guidance, in particular, expected organic revenue growth and EPS; our expectation that our business will continue to strengthen; that our performance is exceeding our expectations; our belief that our investments are driving stronger top-line growth; our expectation that our results will improve year-over-year in the back half of 2008; our intent to continue to reinvest in our brands and reduce our costs; our expectation that gains from commodity hedging activity will be offset in the second half of 2008; and with regard to our 2008 outlook, our expectation for cumulative annualized savings related to our restructuring program, our full-year effective tax rate, our expectation to split-off our Post cereals business and merge it and our expectation to update guidance following completion of the transaction. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors, include, but are not limited to, continued higher input costs, pricing actions, increased competition, increased costs of sales, our ability to realize the expected cost savings and spending from our planned restructuring program, unexpected safety or manufacturing issues, unanticipated expenses such as litigation or legal settlement expenses, our failure to consummate the Post merger, a shift in our product mix to lower margin offerings, risks from operating internationally, and tax law changes. For additional information on these and other factors that could affect our forward-looking statements, see our filings with the SEC, including our most recently filed Annual Report on Form 10-K/A and subsequent reports on Forms 10-Q and 8-K. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this press release.
NON-GAAP FINANCIAL MEASURES
The company reports its financial results in accordance with generally accepted accounting principles (GAAP). The company is presenting various operating results, such as operating income, operating income margin, effective tax rate, net earnings and EPS on both a reported basis and on a basis excluding items that affect comparability of results. When the company uses operating results, such as operating income, operating income margin, effective tax rate, net earnings and EPS, excluding items, they are considered non-GAAP financial measures. The term "items" includes asset impairment, exit and implementation costs primarily related to a restructuring program that began in the first quarter of 2004 (the "Restructuring Program"). These restructuring charges include separation-related costs, asset write-downs, and other costs related to the implementation of the Restructuring Program. Other excluded items pertain to asset impairment charges on certain long-lived assets, gains and losses on divestitures, interest from tax reserve transfers from Altria Group, Inc., the favorable resolution of Altria Group, Inc.'s 1996-1999 IRS Tax Audit in 2006, and other one-time costs related to the company's European Union segment reorganization.
Management believes that certain non-GAAP financial measures
and corresponding ratios provide additional meaningful comparisons between
current results and results in prior operating periods. More specifically,
management believes these non-GAAP financial measures reflect fundamental
business performance because they exclude certain items that affect
comparability of results.
The company's top-line guidance measure is organic net
revenues, which excludes the impact of acquisitions, divestitures and currency.
The company uses organic net revenues and corresponding growth ratios as
non-GAAP financial measures. Management believes this measure better reflects
revenues on a going-forward basis and provides improved comparability of
results.
Management uses segment operating income and segment operating income excluding items to evaluate segment performance and allocate resources. Beginning in the second quarter of 2008, we began excluding unrealized gains and losses on hedging activity from segment operating income in order to provide better transparency of our segment operating results. Segment operating income now excludes unrealized gains and losses on hedging activity (which is a component of cost of sales), general corporate expenses and amortization of intangibles for all periods presented. Management believes it is appropriate to disclose this measure to help investors analyze segment performance and trends.
See the attached schedules for supplemental financial data and corresponding reconciliations to certain GAAP financial measures for the quarters ended June 30, 2008, and June 30, 2007. Because GAAP financial measures on a forward-looking basis are neither accessible nor deemed to be significantly different, and reconciling information is not available without unreasonable effort, with regard to the non-GAAP financial measures in our 2008 Outlook, we have not provided that information. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the company's results prepared in accordance with GAAP. In addition, the non-GAAP measures the company is using may differ from non-GAAP measures that other companies use. A reconciliation of all non-GAAP measures to the nearest comparable GAAP used in this earnings release can be found on the company's web site, http://www.kraft.com.
(1) Please see
discussion of Non-GAAP Financial Measures.
(2) Please refer
to the company's Form 8-K filed April 11, 2008 for
discussion of
changes to reportable business segments.
Schedule 1
----------
Kraft Foods Inc.
Condensed Statements of Earnings
For
the Quarters Ended June 30,
(in millions,
except per share data) (Unaudited)
As Reported
Excluding Items
(GAAP) (1) (Non-GAAP) (1)
--------------------------
-------------------------
2008 2007 % Change
2008 2007 % Change
------ ------ ---------- ------
------ ---------
Net revenues $11,176 $9,205
21.4% $11,176 $9,205
21.4%
Cost of sales 7,132 5,945
(20.0)% 7,137 5,920
(20.6)%
Gross profit 4,044 3,260
24.0% 4,039 3,285
23.0%
Marketing,
administration &
research costs 2,305
1,926 (19.7)% 2,281
1,901 (20.0)%
Asset impairment and
exit costs 103 107
3.7% - - -
(Gains) / losses on
divestitures, net 74
(8) (100.0+)% - - -
Amortization of
intangibles 4 4 - 4
4
-
General corporate
expenses 48 43
(11.6)% 48 43
(11.6)%
Operating income 1,510
1,188 27.1% 1,706
1,337 27.6%
Interest & other
debt
expense, net 331 149
(100.0+)% 331 149 (100.0+)%
Earnings before income
taxes 1,179 1,039
13.5% 1,375 1,188
15.7%
Provision for income
taxes 447 332
(34.6)% 496 386
(28.5)%
Effective tax rate 37.9%
32.0% 36.1% 32.5%
Net earnings $732 $707
3.5% $879 $802
9.6%
Earnings per share:
Basic $0.49 $0.45
8.9% $0.58 $0.51
13.7%
Diluted $0.48 $0.44
9.1% $0.58 $0.50
16.0%
Average shares
outstanding:
Basic 1,508 1,587 1,508 1,587
Diluted 1,524 1,606 1,524 1,606
Gross margin 36.2% 35.4% 36.1% 35.7%
Operating income
margin 13.5% 12.9% 15.3% 14.5%
(1) Reconciliation of GAAP to Non-GAAP Condensed
Statement of Earnings is
available at http://www.kraft.com.
Schedule 2
----------
Kraft Foods Inc.
Reconciliation of GAAP and Non-GAAP Information
Net Revenues
For
the Quarters Ended June 30,
($ in millions) (Unaudited)
Impact
of
As Divest-
Impact Impact
Organic
Reported itures of
of
(Non-
(GAAP) /Other Acquisitions
Currency (GAAP)
------ ------- ------------ -------- ------
2008 Reconciliation
--------------------
Canada & N.A.
Foodservice 1,170 -
- (87) 1,083
------ ------- ------------ -------- ------
------ -------
------------ -------- ------
European Union 2,915 (28)
(731) (298) 1,858
Developing Markets 1,790 -
(137) (128) 1,525
------ ------- ------------
-------- ------
International $4,705 $(28)
$(868) $(426) $3,383
------ ------- ------------ -------- ------
Kraft Foods $11,176 $(28)
$(869) $(513) $9,766
====== ======= ============ ======== ======
2007 Reconciliation (as
Restated)
--------------------------------
Canada & N.A.
Foodservice 1,041 (4)
- - 1,037
------ ------- ------------ -------- ------
------ ------- ------------ -------- ------
European Union 1,841 (44)
- - 1,797
Developing Markets 1,302 -
- - 1,302
------ ------- ------------ -------- ------
International $3,143 $(44)
$- $- $3,099
------ ------- ------------ -------- ------
Kraft Foods $9,205 $(73)
$- $- $9,132
====== ======= ============ ======== ======
%
Change Organic Growth Drivers
----------------- --------------------------
As Organic
Reported (Non-
(GAAP) GAAP) Volume
Mix Price
-------- -------
--------------------------
2008 Reconciliation
-------------------
Canada & N.A.
Foodservice 12.4% 4.4%
4.4 (2.4) 2.4
-------- ------- ---------- -------
-----
-------- ------- ---------- -------
-----
European Union 58.3% 3.4%
(2.2) 1.5 4.1
Developing Markets 37.5% 17.1%
1.1 3.6 12.4
-------- ------- ---------- -------
-----
International 49.7% 9.2%
(0.4) 2.0 7.6
-------- ------- ---------- -------
-----
Kraft Foods 21.4%
6.9% (1.0)pp 0.7pp
7.2pp
======== ======= ========== =======
=====
Schedule 3
----------
Kraft Foods Inc.
Reconciliation of GAAP and Non-GAAP Information
Operating Income(1)
For
the Quarters Ended June 30,
($ in millions) (Unaudited)
Asset Asset
Impairment, Impairments /
Exit and Other
As Implementation Expenses -
Reported Costs - Non-
(GAAP) Restructuring Restructuring
--------- ---------------
--------------
2008 Reconciliation
-------------------
Canada & N.A.
Foodservice 140 29 -
--------- ---------------
--------------