Kraft Foods Q4 2012 Net Revenue Lower Than Previously Anticipated

Kraft Foods Group, Inc. has updated its financial outlook for fourth quarter 2012 and full year 2013. Fourth quarter results will reflect the impact of greater-than-anticipated trade inventory reductions, offset by strong gains from cost-savings measures.

18 Feb 2013 --- The company also announced a new, comprehensive strategy for post-employment benefits designed to improve transparency, simplify accounting, and reduce funding volatility.

"We continue to make important changes to re-make Kraft into an industry leader that delivers steady, growing shareholder returns," said Tony Vernon, CEO of Kraft. "While we weren't satisfied with our revenue in the fourth quarter, our innovation, productivity and overhead cost reduction programs are paying off. This enabled a double-digit increase in advertising, solid profit from operations and sizable cash flow. We're off to a strong start so far this year and we remain well-positioned to drive profitable growth in 2013 and beyond."

Fourth quarter 2012 net revenue is expected to be 10.7 percent lower than the prior year; lapping 9.2 percent growth in fourth quarter 2011. The decline includes a negative impact of 4.2 percentage points due to a 53rd week of sales in the prior year as well as a 0.7 percentage point positive net impact from currency and sales to Mondelez International, Inc.

Organic Net Revenue is expected to have declined 7.2 percent versus the prior year quarter, lapping 7.8 percent Organic Net Revenue growth in fourth quarter 2011. The decline was due to a negative 6.8 percentage point impact from reductions in trade inventories, as well as a 1.2 percentage point impact from product pruning.

Fourth quarter operating income is expected to be approximately $260 million including a negative impact of approximately $225 million of market-based impacts from post-employment benefits[3] as well as approximately $135 million of Restructuring Program[4] charges and $46 million of unrealized losses from hedging activities.

Excluding these factors, the company expects to report solid gains from operations versus the prior year quarter. The gains from operations will reflect a reduction in ongoing post-employment benefit costs together with strong gains from productivity and overhead cost reductions that more than offset the impact of lower sales volumes due to retail trade destocking, incremental costs of being an independent public company and a double-digit increase in advertising investment.

The company expects to report earnings of approximately $0.15 per diluted share in fourth quarter 2012 including a one-time, non-cash charge of approximately $0.24 per share due to the market-based impact from post-employment benefits, approximately $0.14 per share of Restructuring Program charges and $0.04 per share of unrealized losses from hedging activities.

The company expects to report final 2012 results, including gross profit, SG&A and segment operating income details, as well as updated historical financial results reflecting the post-employment benefit changes for 2011 and 2010 no later than March 29, 2013.

Kraft also updated its guidance for 2013. Consistent with previous guidance, Organic Net Revenue growth is expected to be in line with the growth of the North American food and beverage market despite a negative impact of approximately one percentage point from product pruning.

Earnings per share are expected to be approximately $2.75, up from the previous guidance of approximately $2.60. The adjustment to guidance reflects:

• an anticipated non-cash benefit of approximately $0.22 per share from the company's change in post-employment benefit accounting; and
• $0.07 per share increase in expected Restructuring Program costs due to a shift in expenses from 2012 to 2013.

Total Restructuring Program costs in 2013 are now expected to be approximately $300 million, or $0.33 per share, up from approximately $240 million previously. Total expected costs over the life of the Restructuring Program remain approximately $650 million.

The company is executing a four-part strategy to better manage and reduce the volatility of expenses and cash outlays related to its post-employment benefit obligations.

• Moving to Mark-to-Market Accounting. The company has adopted a mark-to-market accounting policy for its post-employment benefit obligations and is in the process of reflecting the new accounting in its historical financial statements. This change eliminates the deferral and subsequent amortization of historic gains and losses on plan assets and reflects those gains and losses as part of an annual "market-based impact." Other benefit costs, including service costs, interest costs and expected return on assets will continue to be expensed within operating results.
• Adjusting Actuarial Assumptions. Management has made a one-time adjustment to the actuarial assumptions used to value plan obligations in the areas of retirement, mortality and medical cost trend rates to reflect the population now covered under its plans, including the addition of the North American retirees of Mondelez International assumed as part of its separation agreement with that company. The effect of these changes will be an increase to ongoing expenses.

• Phasing in a Liability-Driven Investment Structure. Management is taking actions to migrate pension plan assets toward a mix of approximately 80% fixed income and 20% equities to better align plan assets with the demographics of plan participants. As a result, the company now expects returns on assets to be approximately 5.50%, down from a previous expectation of approximately 7.75%.

• Executing a Level Funding Strategy. Kraft's funding strategy has been modified to align future cash flows with expenses and reduce cash flow volatility for the company as a whole. To accomplish this strategy, the company will make a pension contribution of approximately $600 million in 2013 and anticipates level, annual pension contributions of approximately $225 million thereafter.

The company expects the 2013 contributions to be funded from cash on hand, as it delivered strong cash flow in 2012 and ended the year with approximately $1.3 billion in net cash and cash equivalents. It expects contributions thereafter to be funded through cash flow from operations. None of the actions outlined today is expected to adversely affect the company's standing with regard to its debt covenants or its ability to grow its dividend.

"The changes we're implementing will provide greater transparency to Kraft's underlying operating results and increase the reliability of future cash generation for shareholders," said Tim McLevish, EVP and CFO.