Cadbury Acquisition Hits Kraft Profits
Kraft Foods' outlook for 2011 reflects confidence in continuing its strong business momentum in a challenging environment of weak consumer and category growth as well as significant input cost inflation.
2/11/2011 --- Kraft Foods Inc. has reported fourth quarter and full year 2010 results that were driven primarily by strong volume/mix gains in each geography.
"We delivered solid financial results in 2010, and finished the year with good momentum," said Irene Rosenfeld, Chairman and CEO. "We're realizing the benefits of increased investments behind our Power Brands, strong productivity and disciplined cash management, while making good progress in capturing the synergies from the Cadbury acquisition."
Rosenfeld continued, "Looking ahead, we expect the operating environment to remain challenging, with significant input cost inflation and persistent consumer weakness in many markets. Given our strong business fundamentals, however, we remain confident that we will deliver earnings growth in 2011 that's both ahead of our long-term targets and within the top tier of our peer group."
Net revenues in the fourth quarter increased 30.0 percent to $13.8 billion, including a 26.2 percentage point impact from the Cadbury acquisition, a negative 2.6 percentage points from currency and a negative 0.1 percentage points from divestitures.
Combined Organic Net Revenues grew 5.7 percent, including a favorable impact of approximately 1 percentage point from the accounting calendar change for certain operations in Asia Pacific and Latin America.
Kraft Foods' base business organic net revenues grew 6.5 percent, driven by 4.6 percentage points from volume/mix and 1.9 percentage points from pricing. Volume/mix growth benefitted by 1.2 percentage points from the favorable impact of accounting calendar changes.
Cadbury organic net revenues grew 2.2 percent. Actions taken to normalize Cadbury trade inventories during the quarter tempered growth by 0.6 percentage points.
Operating income in the fourth quarter increased 2.2 percent to $1,240 million, including a favorable impact of 30.4 percentage points from Cadbury, partially offset by a negative 26.9 percentage point impact from Integration Program(2) and acquisition-related costs(3). Currency had a negative impact of 3.1 percentage points. Excluding these factors, the increase in Kraft Foods' base business operating incomewas primarily driven by lower overheads, higher pricing, and favorable volume/mix. These benefits more than offset higher input costs.
Operating income margin was 9.0 percent, 240 basis points lower than the prior year, driven by 230 basis points of Integration Program and acquisition-related costs. Excluding these costs, operating margins were essentially flat as higher pricing as well as marketing and overhead efficiency gains offset the impact of input cost inflation.
The tax rate in the fourth quarter was 23.2 percent compared to 26.8 percent last year, reflecting the impact of 2010 year-end tax legislation and discrete items.
Diluted earnings per share in the fourth quarter were $0.31, including a negative $0.15 impact related to Integration Program costs.
Operating EPS was $0.46, reflecting strong gains from operations and lower taxes that were offset by several factors. These factors included higher asset impairment and exit costs primarily related to two small regional biscuit brands; lower gains on divestitures compared to the prior year quarter; as well as higher interest expense and the impact of more shares outstanding primarily related to the Cadbury acquisition. Higher interest expense in the quarter included a negative $0.03 per share impact from costs and fees related to the repurchase of approximately $1.5 billion of long-term debt securities.
Kraft Foods North America net revenues increased 12.2 percent. This included favorable impacts of 7.8 percentage points from the Cadbury acquisition and 0.6 percentage points from currency, partially offset by a negative 0.3 percentage point impact from divestitures.
Kraft Foods' base business organic net revenues grew 4.1 percent. Growth was broad-based, with revenue increasing in nearly every business segment. Volume/mix contributed 2.4 percentage points of the increase, reflecting the benefits from higher levels of merchandising activity and successful multi-brand marketing campaigns, such as Huddle to Fight Hunger. Pricing in response to rising input costs accounted for 1.7 percentage points of the increase.
Combined Organic Net Revenues increased 3.3 percent. Power Brands grew approximately 5 percent, fueled by solid market share gains across several categories as well as double-digit growth in Maxwell House coffee, Planters nuts and Kraft Macaroni & Cheese dinners. In addition, Oreo cookies, Capri Sun and Kool-Aid ready-to-drink beverages, Philadelphia cream cheese and KraftSingles processed cheese each grew high-single-digits.
Cadbury organic net revenues declined 6.1 percent reflecting lower sales of Trident and Stride gum, as well as a difficult comparison against strong shipments of Halls cough drops in the prior year quarter. The decline was partially offset by double-digit growth of Dentyne gum and early shipments of new products.
Segment operating income declined 5.8 percent. The addition of Cadbury had a favorable impact of 7.2 percentage points, including the impact of Integration Program costs, while currency added 0.5 percentage points to growth. Excluding these factors, segment operating income declined largely due to a steep increase in input costs that more than offset the benefits of higher pricing, lower overheads, favorable volume/mix and productivity.
Kraft Foods Europe net revenues increased by 28.6 percent, including a 33.3 percentage point impact from the Cadbury acquisition and a negative 6.9 percentage point impact from currency.
Kraft Foods' base business organic net revenues grew 2.2 percent, driven by volume/mix gains of 2.0 percentage points and 0.2 percentage points from pricing. Net revenues increased in each major category.
• Chocolate grew low-single digits, driven by strong in-store marketing activities, promotional programs and the introduction of new products. Toblerone and Milka each delivered high-single-digit growth.
• Biscuits increased from strong growth of Power Brands, including double-digit growth by both Oreo and Belvita, while strong momentum in the chocobakery platform drove volume/mix gains. These gains were partially offset by weak economic conditions, particularly in Benelux and Southern Europe, and lower pricing.
• Coffee grew low-single digits, driven by higher pricing in response to higher input costs. On-demand market expansion and increased brewer placement drove mid-teens growth in Tassimo.
• Cheese grew high-single digits, primarily reflecting a successful marketing campaign and new product launches of Philadelphia.
Combined Organic Net Revenues increased 1.6 percent, driven by approximately 6 percent growth in Power Brands.
Cadbury organic net revenues were essentially flat, as solid growth in the UK was offset by weaker gum and candy markets in Southern Europe.
Segment operating income declined 27.7 percent, reflecting negative impacts of 101.3 percentage points from Integration Program costs and 6.4 percentage points from currency, while Cadbury operating earnings added 59.1 percentage points to growth. Excluding these factors, segment operating income increased significantly, driven by lower overheads, productivity improvements and favorable volume/mix. These gains were partially offset by sharply higher input costs.
Kraft Foods Developing Markets net revenues increased 73.5 percent, including a favorable impact of 61.0 percentage points from the Cadbury acquisition. Currency had a negative 4.8 percentage point impact.
Kraft Foods' base business organic net revenues grew 17.3 percent, driven by 12.8 percentage points from volume/mix gains and 4.5 percentage points from pricing. The volume/mix gains include a favorable 5.6 percentage point impact from accounting calendar changes for certain operations in Asia Pacific and Latin America.
• In Latin America, organic revenues grew more than 20 percent due to higher pricing and strong volume/mix gains, particularly in Brazil and the Andean countries. Power Brands collectively grew more than 25 percent, led by Oreo cookies, Club Social crackers, Lacta chocolate and Tang powdered beverages.
• In Asia Pacific, organic revenues grew 30 percent due to strong volume/mix gains, particularly in China, Indonesia and the Philippines. Power Brands collectively grew more than 50 percent, led by Oreo and Biskuat/Tiger cookies and Tang powdered beverages.
• Central and Eastern Europe, Middle East & Africa (CEEMA) organic revenues increased high single digits driven primarily by volume/mix gains, particularly in Ukraine, Russia, the Middle East and Africa. Although economic conditions and category trends in the region remained weak, share gains in key markets and categories more than offset market weakness. Power Brands collectively grew 8 percent, led by Tang powdered beverages and Milka chocolate.
Combined Organic Net Revenues increased 13.6 percent, fueled by growth in Power Brands of approximately 18 percent. The accounting calendar changes added 3.7 percentage points to the Combined Organic Net Revenues growth rate, while normalizing Cadbury trade inventories negatively impacted growth by approximately 0.5 percentage points.
Cadbury organic net revenues grew 6.7 percent, including a negative 1.4 percentage point impact from normalizing trade inventories. Growth was driven by gains across all categories.
Segment operating income more than doubled, reflecting a positive impact of 54.5 percentage points from the Cadbury acquisition, net of Integration Program costs, and a negative 15.2 percentage point impact from currency. Excluding these factors, segment operating income grew substantially as strong volume/mix gains, higher pricing and lower overheads more than offset sharply higher input costs.
Kraft Foods' outlook for 2011 reflects confidence in continuing its strong business momentum in a challenging environment of weak consumer and category growth as well as significant input cost inflation.
The company expects to deliver organic net revenue growth of at least 5 percent, or approximately 4 percent excluding the impact of accounting calendar changes, and Operating EPS growth of 11 to 13 percent.
