Kraft Foods Group Reports Third Quarter 2014 Results

31 Oct 2014 --- Kraft Foods Group, Inc. announced financial results for the third quarter of 2014 that reflected significant pricing actions to offset higher commodity costs as well as lower volume/mix versus the prior year quarter.

"We remain on track to deliver earnings growth consistent with the expectations we laid out at the start of the year, despite a rapidly changing consumer environment," said Kraft CEO Tony Vernon.  "To date, our implementation of commodity-based pricing has been successful.  But in other areas, our execution has been mixed.  We will continue to apply our playbook, improve our execution, and proactively adapt to drive profitable growth now and in the future."

Q3 2014 FINANCIAL SUMMARY
Net revenues in the third quarter increased 0.1 percent to $4.4 billion.
- Organic Net Revenues increased 0.9 percent as pricing to offset significant rises in commodity costs contributed 2.1 percentage points of growth.
- A volume/mix decline of 1.2 percentage points reflected the impact of significant price increases in cheese, meats and coffee, as well as category softness in meals and desserts.

Operating income in the third quarter decreased 16.6 percent to $0.7 billion.
- The reduction in operating income was driven by a $26 million negative impact from market-based impacts to post-employment benefit plans this year compared to a $175 million benefit in the prior year quarter.
- Excluding this factor, operating income grew at a mid-single digit rate, reflecting lower marketing expenditures, improved manufacturing productivity, the benefits of lower spending on cost savings initiatives,2 and reduced overhead costs. These gains were partially offset by the impacts of pricing lagging commodity cost increases, lower volume/mix and an unfavorable change in gains/losses on commodity hedging activity.

Earnings per share in the third quarter were $0.74.
- EPS included a $0.03 negative impact from market-based impacts to post-employment benefit plans and a $0.01 unfavorable impact due to unrealized gains/losses from hedging activities. EPS of $0.83 in the third quarter last year included an $0.18 benefit from market-based impacts to post-employment benefit plans and a $0.01 favorable impact due to unrealized gains/losses from hedging activities.
- Excluding this factor, EPS was up strongly reflecting the growth from operations as well as a net benefit of approximately $0.05 from a lower tax rate versus the prior year quarter.

Free Cash Flow1 was $554 million year-to-date.
- A combination of higher inventory levels as well as a reduction in accrued liabilities held back Free Cash Flow versus the first nine months of last year.

Q3 2014 BUSINESS SEGMENT HIGHLIGHTS
Cheese:
- Net revenues of $937 million increased 1.6 percent reflecting higher price levels partially offset by lower volume/mix. Revenue growth was behind overall cheese category growth as Kraft increased prices ahead of competition to offset an unrelenting dairy cost environment.
- Operating income declined 15.8 percent as lower spending on cost savings initiatives was more than offset by price realization running behind higher input costs, lower volume/mix as well as executional missteps that impacted manufacturing productivity.

Refrigerated Meals:
- Net revenues of $908 million increased 3.4 percent reflecting a combination of price increases related to higher input costs and volume/mix gains. Balanced growth was achieved through continued momentum in Lunchables and bacon as well as gains from innovation, including P3 Portable Protein Packs and Oscar Mayer Deli Fresh BOLD cold cuts.
- Operating income growth of 20.5 percent was driven by favorable pricing net of commodity costs and manufacturing productivity gains that were partially offset by increased advertising support to drive category growth.

Beverages:
- Net revenues of $628 million increased 0.5 percent reflecting gains from coffee pricing and growth in on-demand coffee that more than offset an unfavorable volume/mix. Lower volume/mix reflected a combination of strong volume growth in Capri Sun ready-to-drink beverages and Kool-Aid powdered beverages offset by lower volumes of roast-and-ground coffee.
- Operating income more than doubled, driven by lower marketing spending, favorable pricing net of commodity costs and improved manufacturing productivity.

Meals & Desserts:
- Net revenues of $512 million declined 6.7 percent reflecting a combination of category softness in both meals and desserts, as well as incremental promotional spending to defend market share.
- Operating income decreased 8.2 percent due to a combination of unfavorable pricing net of commodity costs and the impact of lower volumes. These declines were partially offset by lower spending on marketing initiatives as brand-building activities are being reassessed.

Enhancers & Snack Nuts:
- Net revenues of $471 million declined 2.5 percent. The decline was driven by lower net pricing and lower sales to Mondelez that were partially offset by favorable volume/mix. The decline in Organic Net Revenues reflected growth in Planters snack nuts that was more than offset by declines in salad dressings and peanut butter.
- Operating income growth of 14.0 percent reflected lower advertising and consumer support as well as improved manufacturing productivity. These gains were partially offset by the impact of lower pricing net of commodity costs.

Canada:
- Net revenues of $454 million declined 4.2 percent due to an unfavorable currency impact. Organic Net Revenue growth of 0.4 percent reflected gains from significant pricing to offset higher input costs in cheese and coffee as well as the successful launch of McCafe coffee. These gains were tempered by lower volume/mix.
- Operating income increased 1.2 percent including an unfavorable currency impact. Excluding currency, operating income grew at a mid-single digit rate reflecting lower consumer incentives versus the prior year quarter in the Tassimo business and manufacturing productivity gains that were partially offset by lower volume/mix.

Other Businesses:
- Net revenues of $490 million increased 5.8 percent. Organic Net Revenue growth was 8.2 percent reflecting a combination of significant price increases to offset higher input costs and solid volume growth.
- Operating income declined 1.6 percent as volume/mix gains and lower spending on cost savings initiatives were more than offset by investments in marketing and unfavorable pricing net of commodity costs.