Kraft Enters 2008 with Good Momentum

04/02/08 Kraft Foods Inc. has reported fourth-quarter and full-year 2007 results that reflect accelerated revenue growth in the first year of its three-year transformation plan. Volume growth improved as the year progressed due to the company's investments in quality, innovation and brand building. However, volume and pricing gains were not able to fully offset significantly higher input costs, primarily dairy, and the company's investments, resulting in earnings declines for fourth quarter and full year.

"We are off to an excellent start in our efforts to return Kraft to reliable growth," said Irene Rosenfeld, Chairman and Chief Executive Officer. "We've shown that our investments in product quality, marketing and innovation lead to accelerated volume growth, better product mix and improved market share trends. At the same time, we've significantly reduced our cost structure and strengthened our portfolio with the acquisition of Danone's global biscuit business and the announcement to exit the Post cereal business. While we face an unprecedented input cost environment, we enter 2008 with good momentum and remain confident that we will deliver reliable growth over the long term."

Fourth-quarter 2007 net revenues increased 10.9% to $10.4 billion with a favorable 5.3 percentage point impact from currency and an unfavorable 0.6 percentage point impact from divestitures. Excluding these items, organic net revenues grew 6.2%. Investments in product quality, new products and marketing contributed to volume gains of 2.7 percentage points and favorable product mix of 1.5 percentage points, despite higher pricing which contributed 2.0 percentage points to organic revenue growth.

Reported operating income in the quarter increased 6.9% from the prior year to $1.0 billion. Operating income excluding items declined 10.9% versus the prior year and operating income margin excluding items decreased to 11.4% in fourth quarter 2007 from 14.2% in fourth quarter 2006. The benefits of strong revenue growth and cost savings were more than offset by significantly higher input costs, primarily dairy, as well as investments in product quality and new products.

Fourth-quarter 2007 diluted earnings per share were $0.38, flat versus 2006. Full-year 2007 diluted earnings per share were $1.62, down 12.4% from $1.85 in 2006 primarily due to the absence of a $0.24 one-time gain from the favorable resolution of the Altria Group, Inc. 1996-1999 IRS Tax Audit in 2006. During the quarter, the company incurred $0.07 per diluted share in asset impairment, exit, implementation and other costs.

Fourth-quarter diluted earnings per share excluding items declined 13.7% to $0.44 in 2007 mainly due to the decline in operating income. Diluted earnings per share excluding items also included a $0.02 contribution from lower shares outstanding and a $0.04 negative impact from higher interest expense related to the previously announced Danone biscuit acquisition and the company's share repurchase plan.

Kraft's reported tax rate in fourth quarter 2007 was 28.1%. The company's effective tax rate excluding items was 28.4% for the quarter compared to 29.8% in fourth quarter 2006, reflecting lower foreign tax expense including the impact of various foreign tax law changes.

During the fourth quarter, the company repurchased 14.8 million of its shares at a total cost of $500 million, or an average price of $33.79 per share. As of December 31, 2007, $3.5 billion had been spent under the company's $5.0 billion share repurchase plan.

North America Beverages organic net revenues grew 6.7% driven by volume gains and favorable product mix from better-for-you and premium offerings. Powdered beverages revenue grew double-digits due to the continued success of the powdered beverage stick platform and the recent introduction of Crystal Light functional beverages. Ready-to-drink beverage growth was driven by the continued success of Capri Sun beverages with antioxidants. Growth in coffee was led by continued gains in premium brands such as Starbucks and the expansion of the Tassimo hot beverage system, with improved trends in Maxwell House mainstream coffee from the recent rollout of product quality upgrades. Operating income excluding items doubled as strong volume and mix, lower overhead spending, and a more targeted strategy for the Tassimo system more than offset higher input costs, primarily coffee.

North America Cheese & Foodservice organic net revenues grew 8.4% reflecting significant price increases and volume growth partially offset by unfavorable product mix. Innovations such as LiveActive snacking and cottage cheeses, Singles Select cheese slices, and Philadelphia ready-to-eat cheesecake contributed to volume growth, which was partially offset by weak market shares. Operating income excluding items declined 53.5% as the contribution from pricing and volume growth was more than offset by record high input costs, including a more than 40% increase in dairy costs.

North America Convenient Meals organic net revenues grew 6.8% driven by strong volume growth from base business as well as new products, favorable product mix and selective price increases. Volume gains and favorable product mix were seen across all key businesses. Quality improvements and the continued success of Kraft Easy Mac cups led to double-digit gains in macaroni and cheese. The continued success of other new product platforms like Oscar Mayer Deli Fresh meats, Oscar Mayer Deli Creations sandwiches, and DiGiorno Ultimate and California Pizza Kitchen premium pizzas were also key growth drivers in the quarter. Operating income excluding items increased 14.8% as strong revenue growth, manufacturing savings, and lower overhead costs more than offset higher commodity costs.

North America Grocery organic net revenues declined 3.5% as price increases and growth in better-for-you snacks, such as Jell-O sugar-free ready-to-eat pudding, were more than offset by volume weakness in salad dressings and unfavorable product mix. Operating income excluding items declined 12.4% as a result of lower volumes coupled with higher input costs and investments to reverse long-standing declines in salad dressings.

North America Snacks & Cereals organic net revenues grew 4.7% primarily due to volume gains and favorable product mix. Biscuit growth was driven by key new product platforms, including Nabisco 100 Calorie Packs, Toasted Chips and the recent introduction of Oreo Cakesters snack cakes. Double-digit growth in bars, led by the Nabisco 100 Calorie Pack and Back to Nature brands, also contributed to volume growth in the quarter. Post cereal continued its solid performance driven by Honey Bunches of Oats adult cereal and the kids' cereal portfolio, while the Planters salted snacks business also contributed to revenue growth in the quarter behind new marketing initiatives. Operating income excluding items increased 8.4% as the benefits of volume gains and productivity more than offset higher input costs, increased marketing investment, and the absence of income from divested operations.

European Union organic net revenues grew 4.4% from solid growth in chocolate, coffee and cheese. New product activity and successful promotions under core chocolate brands Milka, Toblerone and Cote d'Or, drove higher volume and favorable product mix. Gains in coffee were driven by successful marketing programs and new offerings under Jacobs brand and the Tassimo hot beverage system. Operating income excluding items was essentially flat as the combination of volume growth, improved product mix, favorable currency, and a more targeted strategy for the Tassimo system were offset by increased investments in promotion as well as higher input costs, particularly dairy.

Developing Markets organic net revenues grew 12.4% driven by solid gains in pricing, product mix and volume. Core brands, including Jacobs coffee, Oreo biscuits, Tang powdered beverages, and Lacta chocolate, continue to grow behind focused investment. In Eastern Europe, Middle East & Africa, investments in marketing drove strong growth in coffee and chocolate, particularly in Russia. Latin American growth reflected double-digit gains in Venezuela and Argentina. Asia Pacific revenues grew due to strength in Oreo cookies and Kraft cheese. Operating income excluding items decreased 19.5% as the benefits of strong organic net revenue growth and favorable currency were more than offset by higher input costs and investments in marketing, selling and distribution.

In anticipation of higher pricing, favorable product mix and improved market share in 2008, Kraft has raised its outlook for organic net revenue growth to at least 4%, up from a previous expectation of 3%-4%. Consistent with prior guidance, operating income excluding items is expected to grow faster than revenue.

2008 fully diluted EPS are expected to be at least $1.56 per share, or $1.90 excluding $0.34 per diluted share in costs related to the final year of the company's restructuring program. The full-year effective tax rate excluding items is expected to average 33.5%, up from 31.2% in 2007; resulting in a negative $0.06 impact to diluted EPS versus 2007.

Guidance also reflects the company's expectation for greater savings at a lower cost from its restructuring program. Cumulative annualized savings will reach approximately $1.2 billion, of which $1.0 billion will be realized by the end of 2008. Additionally, total costs for the full program are expected to be $2.8 billion, down from a previous expectation of $3.0 billion as a result of program changes and better execution of several initiatives.

Since the inception of its cost restructuring program in 2004, the company has incurred total costs of $2.1 billion. This program will be completed in 2008, although the full annualized impact of savings will be realized thereafter.