Northfield, Ill., Apr. 30 - Kraft Foods Inc. today reported first-quarter 2008 results that reflect continued momentum as the company enters the second year of its three-year turnaround plan. Organic top-line growth was strong, enhanced by pricing actions to offset higher input costs. Reported earnings per share were lower for the first quarter due to the absence of a one-time interest benefit recorded in 2007. Earnings per share excluding items were in line with the prior year.
"2008 is off to an excellent start and we expect our results to continue to strengthen as the year progresses," said Irene Rosenfeld, Chairman and Chief Executive Officer. "Our investments in product quality, marketing and innovation are leading to better price realization, stronger top-line results and sequential improvement in margins from the fourth quarter of 2007. Our newly-acquired international biscuit business is performing well and integration is on track. And, while input costs remain high, I am confident that our ongoing programs to lower overhead costs and invest in our brands will enable us to deliver our targeted earnings in 2008 and beyond."
-
Net revenues: Quarterly net revenues increased 20.8 percent to $10.4 billion, including favorable impacts of 8.3 percentage points from acquisitions and 5.1 percentage points from currency, partially offset by an unfavorable impact of 0.6 percentage points from divestitures.
Excluding these items, organic net revenues grew 8.0 percent. Higher pricing contributed 4.3 percentage points to organic revenue growth, while favorable mix added 3.6 percentage points. Volume was up modestly in the quarter despite double-digit tonnage declines in ready-to-drink beverages due to significant pricing actions.
-- Operating income: Reported operating income in the quarter
increased 3.8 percent from the prior year to $1.2 billion.
Operating income excluding items(1) increased 7.2 percent
versus the prior year. Operating income margin excluding
items(1) decreased to 12.4 percent in first quarter 2008 from
14.0 percent in first quarter 2007. The benefits of strong
revenue growth and associated overhead cost leverage were more
than offset by significantly higher input costs and, to a
lesser extent, investments in product quality, marketing and
new products.
-- Tax rate: Kraft's reported tax rate in first quarter 2008 was
29.3 percent. Excluding items(1), the first quarter rate was
30.4 percent compared to 32.3 percent in first quarter 2007.
The first quarter rate was consistent with the company's
full-year guidance of 33.5 percent and reflected the timing of
several favorable discrete items.
-- Earnings per share: First-quarter 2008 reported earnings per
share were $0.40, down 7.0 percent from $0.43 in first quarter
2007. The 2007 quarter included $0.03 from a one-time interest
benefit related to the spin-off from Altria Group, Inc. During
the quarter, the company incurred $0.04 per share in asset
impairment, exit, implementation and other costs, compared to
$0.03 in the same quarter a year ago.
Items(1) Affecting EPS Comparability
----------------------------------------------------------------------
First Quarter
-----------------------------
Growth
2008 2007 (%)
--------- --------- ---------
Reported EPS $0.40 $0.43 (7.0)%
Asset Impairment, Exit, Implementation
And Other Costs 0.04 0.03
Interest from tax reserve transfers from
Altria Group, Inc. (0.03)
--------- ---------
EPS excluding items $0.44 $0.44(a) 0.0%
(a) Does not add due to rounding.
First-quarter 2008 earnings per share excluding items were $0.44, equal to the prior year. Compared to the prior year, earnings per share excluding items reflected a $0.02 contribution from operations, $0.03 contribution from lower shares outstanding, $0.01 benefit from a lower tax rate, offset by a $0.06 negative impact from higher interest expense.
During the first quarter, the company repurchased 21.3 million of its shares at a total cost of $650 million, or an average price of $30.50 per share. As of March 31, 2008, the company had spent $4.2 billion under its $5.0 billion share repurchase plan.
FIRST QUARTER 2008 RESULTS, DISCUSSION BY SEGMENT(2)
Q1 2008
(percent growth)
------------------------------------------
Operating
Organic Income
Net Net Operating Excluding
Revenues Revenues(1) Income Items(1)
---------- ----------- --------- ---------
Total Kraft 20.8% 8.0% 3.8% 7.2%
North America 5.8 4.8 (5.8) (3.7)
U.S. Beverages (0.6) 2.4 2.9 7.0
U.S. Cheese 8.8 8.8 (23.0) (23.8)
U.S. Convenient Meals 7.5 7.5 4.6 2.5
U.S. Grocery 1.4 1.4 2.8 2.4
U.S. Snacks & Cereals 2.4 2.7 (28.2) (22.6)
Canada & N.A. Foodservice 15.6 6.4 35.4 40.7
International 50.5 14.4 50.7 51.4
European Union 55.4 9.5 44.1 47.7
Developing Markets 42.9 21.7 59.1 57.0
U.S. Beverages
Organic net revenues grew 2.4 percent driven by solid growth in coffee, partially offset by a decline in ready-to-drink beverages. The successful relaunch of Maxwell House mainstream coffee with product quality and packaging upgrades resulted in high single-digit volume and revenue growth in coffee. Ready-to-drink beverage revenue declined in the quarter as a significant reduction in trade spending to offset higher input costs resulted in a double-digit volume decline. Powdered beverage revenue was flat versus the prior year as double-digit growth in the successful powdered beverage stick platform, particularly Crystal Light, was offset by a decline in Kool-Aid. Operating income excluding items increased 7.0 percent as the benefits of price increases and trade spending efficiencies were partly offset by higher input costs.
U.S. Cheese
Organic net revenues grew 8.8 percent reflecting significant price increases and favorable product mix partially offset by lower volumes. Declines in natural cheese volume from higher pricing were partially offset by gains from innovative new products such as LiveActive snacking and cottage cheeses as well as Singles Select processed cheese slices. Operating income excluding items declined 23.8 percent in the first quarter as the contribution from pricing was more than offset by continued high input costs, including an approximately 30 percent increase in dairy costs, as well as significant investments in marketing.
U.S. Convenient Meals
Organic net revenues grew 7.5 percent driven by a balanced contribution from volume growth, favorable product mix and price increases. Volume growth was primarily driven by ongoing success in pizza, where all brands grew in the quarter, including double-digit volume and revenue growth in premium brands such as DiGiorno and California Pizza Kitchen. Also contributing to the strong performance in the quarter was the continued success of new product platforms like Oscar Mayer Deli Fresh meats and Oscar Mayer Deli Creations sandwiches. Operating income excluding items increased 2.5 percent as the benefits of strong revenue growth more than offset higher input costs and manufacturing capacity investments.
U.S. Grocery
Organic net revenues grew 1.4 percent as price increases in several categories and favorable product mix more than offset volume declines. The relaunch of Kraft pourable salad dressings, with improved product and package quality and integrated marketing support, began in March to address long-standing declines in this category. Macaroni and cheese continued its momentum from the prior year with double-digit revenue growth in the quarter. Operating income excluding items increased 2.4 percent as pricing and manufacturing savings more than offset lower volume, higher input costs, and increased marketing support.
U.S. Snacks & Cereals
Organic net revenues grew 2.7 percent primarily from price increases as well as solid volume gains in biscuits. Cookie growth was driven by double-digit gains in Nabisco 100 Calorie Packs and successful new products and innovations such as Oreo Cakesters and Oreo snack 'n seal reclosable packaging. Crackers also gained in the quarter, fueled by double-digit volume growth in Ritz crackers resulting from improved quality and marketing. Revenue growth in ready-to-eat cereal was driven by higher pricing and gains from further recovery in the kids' cereal portfolio. Growth in the quarter was partially offset by revenue declines in the snack bar business, due largely to new product timing. Operating income excluding items decreased 22.6 percent as the benefits of lower trade spending and price increases lagged higher input costs, particularly grains and oils.
Canada & North America Foodservice
Organic net revenues grew 6.4 percent from a combination of price increases and solid volume growth. Volume gains were primarily driven by new product innovation and improved retail execution. Operating income excluding items grew 40.7 percent resulting from favorable currency, higher pricing and manufacturing efficiencies that more than offset higher input costs.
European Union
Organic net revenues grew 9.5 percent from strong volume growth across all key categories combined with favorable product mix and modestly higher pricing. Chocolate grew double-digits due to continued focus on core brands such as Milka, Toblerone and Cote d'Or. Gains in coffee were driven by growth of the Carte Noire brand in France and the Jacobs brand in Poland. Cheese growth in the region was driven by improved marketing and pricing under the Philadelphia brand. Operating income excluding items grew 47.7 percent primarily due to a 45.3 percentage point contribution from the addition of the Danone biscuit business. The benefits of a strong combination of pricing, volume and product mix, net of higher input costs, also contributed to operating income growth in the quarter.
Developing Markets
Organic net revenues grew 21.7 percent driven by strong gains in pricing, product mix and volume. Investments in marketing drove strong growth across all key markets in the Eastern Europe, Middle East & Africa region. Growth in the Latin America region was driven by pricing and solid volume gains, particularly in Brazil, Argentina, and Venezuela. Revenues in the Asia Pacific region grew due to strong consumption growth, distribution gains and improved marketing, particularly in China. Operating income excluding items increased 57.0 percent, including a 17.0 percentage point benefit from the acquisition of the Danone biscuit business. Volume gains, favorable product mix and pricing net of higher input costs and increased marketing investment were the primary drivers of the strong increase in operating income in the quarter.
2008 OUTLOOK(1)
Kraft has raised its outlook for 2008 organic net revenue growth to at least 5 percent, up from a previous expectation of at least 4 percent resulting from further pricing actions to offset rising input costs. The company also confirmed its expectation that 2008 EPS will be at least $1.56 per share, or $1.90 excluding items.
Additionally, 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 $850 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.
All guidance reflects the inclusion of the acquired international biscuit operations from Danone, but does not include the impact of the company's recent agreement to merge its Post cereals business into Ralcorp Holdings, Inc. The company continues to expect to close the transaction with Ralcorp in mid-2008.
Schedule 1
-----------
Kraft Foods Inc.
Condensed Statements of Earnings
For the Quarters Ended March 31,
(in millions, except per share data) (Unaudited)
As Reported (GAAP) (1) Excluding Items (Non-GAAP)
(1)
-------------------------- ---------------------------
% %
2008 2007 Change 2008 2007 Change
-------- ------- --------- -------- -------- ---------
Net revenues $10,372 $8,586 20.8% $10,372 $8,586 20.8%
Cost of sales 6,891 5,535 (24.5)% 6,877 5,530 (24.4)%
Gross profit 3,481 3,051 14.1% 3,495 3,056 14.4%
Marketing,
administration
& research
costs 2,158 1,822 (18.4)% 2,151 1,806 (19.1)%
Asset
impairment and
exit costs 80 67 (19.4)% - - -
(Gains) /
losses on
divestitures,
net 18 (12) NM - - -
Amortization of
intangibles 7 2 (100.0+)% 7 2 (100.0+)%
General
corporate
expenses 53 50 (6.0)% 53 50 (6.0)%
Operating
income 1,165 1,122 3.8% 1,284 1,198 7.2%
Interest &
other debt
expense, net 305 64 (100.0+)% 305 141 (100.0+)%
Earnings before
income taxes 860 1,058 (18.7)% 979 1,057 (7.4)%
Provision for
income taxes 252 356 29.2% 298 341 12.6%
Effective tax
rate 29.3% 33.6% 30.4% 32.3%
Net earnings $608 $702 (13.4)% $681 $716 (4.9)%
Earnings per
share:
Basic $0.40 $0.43 (7.0)% $0.45 $0.44 2.3%
Diluted $0.40 $0.43 (7.0)% $0.44 $0.44 -
Average shares
outstanding:
Basic 1,518 1,627 1,518 1,627
Diluted 1,534 1,636 1,534 1,636
Gross margin 33.6% 35.5% 33.7% 35.6%
Operating
income margin 11.2% 13.1% 12.4% 14.0%
(1) Reconciliation of GAAP to Non-GAAP Condensed Statement of Earnings
is available at www.kraft.com.
Schedule 2
-----------
Kraft Foods Inc.
Reconciliation of GAAP and Non-GAAP Information
Net Revenues
For the Quarters Ended March 31,
($ in millions) (Unaudited)
As Impact of Organic
Reported Divestitures Impact of Impact of (Non-
(GAAP) / Other Acquisitions Currency GAAP)
--------- ------------- ------------ --------- -------
2008
Reconciliation
---------------
U.S. Beverages $772 $- $- $- $772
U.S. Cheese 957 - - - 957
U.S. Convenient
Meals 1,032 - - - 1,032
U.S. Grocery 792 - - - 792
U.S. Snacks &
Cereals 1,430 - (5) - 1,425
Canada & N.A.
Foodservice 1,050 - - (89) 961
----------------------------------------------------------------------
North America $6,033 $- $(5) $(89) $5,939
----------------------------------------------------------------------
European Union 2,719 (44) (573) (228) 1,874
Developing
Markets 1,620 - (128) (112) 1,380
----------------------------------------------------------------------
International $4,339 $(44) $(701) $(340) $3,254
----------------------------------------------------------------------
----------------------------------------------------------------------
Kraft Foods $10,372 $(44) $(706) $(429) $9,193
----------------------------------------------------------------------
% Change Organic Growth Drivers
-------------------- ----------------------
Organic
As Reported (Non-
(GAAP) GAAP) Volume Mix Price
------------ ------- ----------------------
2008 Reconciliation
-------------------------
U.S. Beverages (0.6)% 2.4% (12.6)pp 10.1pp 4.9pp
U.S. Cheese 8.8% 8.8% (1.3) 1.2 8.9
U.S. Convenient Meals 7.5% 7.5% 2.7 2.9 1.9
U.S. Grocery 1.4% 1.4% (4.3) 1.5 4.2
U.S. Snacks & Cereals 2.4% 2.7% 0.5 - 2.2
Canada & N.A. Foodservice 15.6% 6.4% 2.5 (0.1) 4.0
-------------------------- -------------------- ----------------------
North America 5.8% 4.8% (2.7) 3.4 4.1
-------------------------- -------------------- ----------------------
European Union 55.4% 9.5% 5.8 2.1 1.6
Developing Markets 42.9% 21.7% 8.4 4.2 9.1
-------------------------- -------------------- ----------------------
International 50.5% 14.4% 7.2 2.6 4.6
-------------------------- -------------------- ----------------------
-------------------------- -------------------- ----------------------
Kraft Foods 20.8% 8.0% 0.1pp 3.6pp 4.3pp
-------------------------- -------------------- ----------------------
As Impact of Organic
Reported Divestitures Impact of Impact of (Non-
(GAAP) / Other Acquisitions Currency GAAP)
--------- ------------ ------------ ---------- -------
2007
Reconciliation
---------------
U.S. Beverages $777 $(23) $- $- $754
U.S. Cheese 880 - - - 880
U.S. Convenient
Meals 960 - - - 960
U.S. Grocery 781 - - - 781
U.S. Snacks &
Cereals 1,396 (9) - - 1,387
Canada & N.A.
Foodservice 908 (5) - - 903
----------------------------------------------------------------------
North America $5,702 $(37) $- $- $5,665
----------------------------------------------------------------------
European Union 1,750 (39) - - 1,711
Developing
Markets 1,134 - - - 1,134
----------------------------------------------------------------------
International $2,884 $(39) $- $- $2,845
----------------------------------------------------------------------
----------------------------------------------------------------------
Kraft Foods $8,586 $(76) $- $- $8,510
----------------------------------------------------------------------
Schedule 3
-----------
Kraft Foods Inc.
Reconciliation of GAAP and Non-GAAP Information
Operating Income
For the Quarters Ended March 31,
($ in millions) (Unaudited)
Asset
Impairment, Asset
Exit and Impairments /
Implementation Other Expenses -
As Reported Costs - Non-
(GAAP) Restructuring Restructuring
----------- --------------- ----------------
2008 Reconciliation
-------------------------
U.S. Beverages $143 $9 $-
U.S. Cheese 117 8 -
U.S. Convenient Meals 114 9 -
U.S. Grocery 254 5 -
U.S. Snacks & Cereals 168 10 -
Canada & N.A. Foodservice 111 10 -
----------------------------------------------------------------------
North America $907 $51 $-
----------------------------------------------------------------------
European Union 170 38 3
Developing Markets 148 9 -
----------------------------------------------------------------------
International $318 $47 $3
----------------------------------------------------------------------
Corporate Items (60) - -
----------------------------------------------------------------------
Kraft Foods Operating
Income $1,165 $98 $3
----------------------------------------------------------------------
% Change
--------------------
(Gains) /
Losses Excluding Excluding
on Items As Items
Divestitures, (Non- Reported (Non-
net GAAP) (GAAP) GAAP)
-------------- --------- ---------- ---------
2008 Reconciliation
------------------------
U.S. Beverages $- $152 2.9% 7.0%
U.S. Cheese - 125 (23.0)% (23.8)%
U.S. Convenient Meals - 123 4.6% 2.5%
U.S. Grocery - 259 2.8% 2.4%
U.S. Snacks & Cereals - 178 (28.2)% (22.6)%
Canada & N.A.
Foodservice - 121 35.4% 40.7%
----------------------------------------------------------------------
North America $- $958 (5.8)% (3.7)%
----------------------------------------------------------------------
European Union 18 229 44.1% 47.7%
Developing Markets - 157 59.1% 57.0%
----------------------------------------------------------------------
International $18 $386 50.7% 51.4%
----------------------------------------------------------------------
Corporate Items - (60) (15.4)% (15.4)%
----------------------------------------------------------------------
Kraft Foods Operating
Income $18 $1,284 3.8% 7.2%
----------------------------------------------------------------------
Asset
Impairment, Asset
Exit and Impairments /
Implementation Other Expenses -
As Reported Costs - Non-
(GAAP) Restructuring Restructuring
------------ -------------- ----------------
2007 Reconciliation
-------------------------
U.S. Beverages $139 $3 $-
U.S. Cheese 152 12 -
U.S. Convenient Meals 109 11 -
U.S. Grocery 247 6 -
U.S. Snacks & Cereals 234 8 -
Canada & N.A. Foodservice 82 4 -
----------------------------------------------------------------------
North America $963 $44 $-
----------------------------------------------------------------------
European Union 118 37 -
Developing Markets 93 7 -
----------------------------------------------------------------------
International $211 $44 $-
----------------------------------------------------------------------
Corporate Items (52) - -
----------------------------------------------------------------------
Kraft Foods Operating
Income $1,122 $88 $-
----------------------------------------------------------------------
(Gains) / Losses Excluding
on Divestitures, Items (Non-
net GAAP)
----------------- ------------
2007 Reconciliation
--------------------------------------
U.S. Beverages $- $142
U.S. Cheese - 164
U.S. Convenient Meals - 120
U.S. Grocery - 253
U.S. Snacks & Cereals (12) 230
Canada & N.A. Foodservice - 86
---------------------------------------------------------------------
North America $(12) $995
---------------------------------------------------------------------
European Union - 155
Developing Markets - 100
---------------------------------------------------------------------
International $- $255
---------------------------------------------------------------------
Corporate Items - (52)
---------------------------------------------------------------------
Kraft Foods Operating Income $(12) $1,198
---------------------------------------------------------------------
Schedule 4
----------
Kraft Foods Inc. and Subsidiaries
Condensed Balance Sheets
($ in millions) (Unaudited)
March 31, December 31, March 31,
2008 2007 2007
--------- ------------ ---------
Assets
--------------------------------------
Cash & cash equivalents $605 $567 $251
Receivables, net 5,361 5,197 3,977
Inventory 4,667 4,096 3,881
Other current assets 1,045 877 743
Property, plant & equipment, net 11,311 10,778 9,624
Goodwill 31,459 31,193 25,411
Other intangible assets, net 12,207 12,200 10,048
Other assets 3,371 3,085 1,879
--------- ------------ ---------
Total assets $70,026 $67,993 $55,814
========= ============ =========
Liabilities & Shareholders' Equity
--------------------------------------
Short-term borrowings $4,528 $7,385 $2,046
Current portion of long-term debt 716 722 1,415
Due to Altria Group, Inc. - - 449
Accounts payable 4,157 4,065 2,574
Other current liabilities 4,853 4,914 3,943
Long-term debt 17,428 12,902 7,081
Deferred income taxes 5,081 4,876 3,824
Other long-term liabilities 5,997 5,834 5,753
--------- ------------ ---------
Total liabilities 42,760 40,698 27,085
Total shareholders' equity 27,266 27,295 28,729
--------- ------------ ---------
Total liabilities &
shareholders' equity $70,026 $67,993 $55,814
========= ============ =========
Kraft Foods Inc.
Reconciliation of GAAP & Non-GAAP Information
Condensed Statements of Earnings
For the Quarters Ended March 31,
(in millions, except per share data) (Unaudited)
2008
-----------------------------------------
Asset Asset
Impairment, Impairments/
Exit and Other
As Implementation Expenses -
Reported Costs - Non-
(GAAP) Restructuring Restructuring
---------- --------------- --------------
Net revenues $10,372 $- $-
Cost of sales 6,891 (14) -
Gross profit 3,481 14 -
Marketing, administration &
research costs 2,158 (4) (3)
Asset impairment and exit
costs 80 (80) -
(Gains) / losses on
divestitures, net 18 - -
Amortization of intangibles 7 - -
General corporate expenses 53 - -
Operating income 1,165 98 3
Interest & other debt
expense, net 305 - -
Earnings before income taxes 860 98 3
Provision for income taxes 252 29 -
Effective tax rate 29.3%
Net earnings $608 $69 $3
Earnings per share:
Basic $0.40 $0.05 $-
Diluted $0.40 $0.04 $-
Average shares outstanding:
Basic 1,518
Diluted 1,534
Gross margin 33.6%
Operating income margin 11.2%
Supplemental Data
----------------------------
Depreciation &
amortization $248
Capital expenditures 271
(Gains) / Excluding
Losses on Items
Divestitures, (Non-
net GAAP)
-------------- ---------
Net revenues $- $10,372
Cost of sales - 6,877
Gross profit - 3,495
Marketing, administration & research costs - 2,151
Asset impairment and exit costs - -
(Gains) / losses on divestitures, net (18) -
Amortization of intangibles - 7
General corporate expenses - 53
Operating income 18 1,284
Interest & other debt expense, net - 305
Earnings before income taxes 18 979
Provision for income taxes 17 298
Effective tax rate 30.4%
Net earnings $1 $681
Earnings per share:
Basic $- $0.45
Diluted $- $0.44
Average shares outstanding:
Basic 1,518
Diluted 1,534
Gross margin 33.7%
Operating income margin 12.4%
Supplemental Data
---------------------------------------------
Depreciation & amortization
Capital expenditures
2007
----------------------------------------
Asset
Impairment,
Exit and (Gains) /
As Implementation Losses on
Reported Costs - Divestitures,
(GAAP) Restructuring net
---------- --------------- --------------
Net revenues $8,586 $- $-
Cost of sales 5,535 (5) -
Gross profit 3,051 5 -
Marketing, administration &
research costs 1,822 (16) -
Asset impairment and exit
costs 67 (67) -
(Gains) / losses on
divestitures, net (12) - 12
Amortization of intangibles 2 - -
General corporate expenses 50 - -
Operating income 1,122 88 (12)
Interest & other debt
expense, net 64 - -
Earnings before income taxes 1,058 88 (12)
Provision for income taxes 356 32 (20)
Effective tax rate 33.6%
Net earnings $702 $56 $8
Earnings per share:
Basic $0.43 $0.03 $-
Diluted $0.43 $0.03 $-
Average shares outstanding:
Basic 1,627
Diluted 1,636
Gross margin 35.5%
Operating income margin 13.1%
Supplemental Data
----------------------------
Depreciation &
amortization $220
Capital expenditures 180
Altria
Group,
Inc.
Interest Excluding
from Tax Items
Reserve (Non-
Transfers GAAP)
---------- ------------
Net revenues $- $8,586
Cost of sales - 5,530
Gross profit - 3,056
Marketing, administration & research costs - 1,806
Asset impairment and exit costs - -
(Gains) / losses on divestitures, net - -
Amortization of intangibles - 2
General corporate expenses - 50
Operating income - 1,198
Interest & other debt expense, net 77 141
Earnings before income taxes (77) 1,057
Provision for income taxes (27) 341
Effective tax rate 32.3%
Net earnings $(50) $716
Earnings per share:
Basic $(0.03) $0.44 (a)
Diluted $(0.03) $0.44 (a)
Average shares outstanding:
Basic 1,627
Diluted 1,636
Gross margin 35.6%
Operating income margin 14.0%
Supplemental Data
----------------------------------------------
Depreciation & amortization
Capital expenditures
(a) Does not foot due to rounding.