Kraft Foods Reports Progress on Growth Strategy

19/04/07 Kraft Foods Inc. has reported solid first quarter revenue growth as the company began implementing its growth strategy. Earnings excluding items affecting comparability declined reflecting investments in growth, including product quality, new business initiatives, systems and distribution infrastructure.

"The first quarter of 2007 was an eventful one for Kraft as we became independent from Altria and began executing the strategic plan we announced in February," said Irene Rosenfeld, Chairman and Chief Executive Officer. "While our first quarter results reflect improvement in several core categories, we still face many challenges. We expect to see further progress, particularly in the second half of the year, as we set the stage for Kraft's return to consistent growth."

First quarter 2007 net revenues increased 5.7% to $8.6 billion reflecting a favorable 1.2 percentage point impact from the United Biscuits Iberia acquisition and a favorable 2.1 percentage point impact from currency. Divested businesses reduced net revenues 1.2 percentage points. Organic net revenues grew 3.6% reflecting volume growth of 1.2 percentage points led by North America Snacks & Cereals and Convenient Meals, European Union and Developing Markets, as well as favorable product mix of 2.2 percentage points from solid gains across most businesses.

First quarter 2007 diluted earnings per share were $0.43, down 29.5% from $0.61 in 2006. During first quarter 2007, the company incurred $0.03 per diluted share ($88 million before taxes) in asset impairment, exit and implementation costs against its cost restructuring program, which was offset by the recognition of one-time interest income of $0.03 per diluted share ($77 million before taxes) from tax reserve transfers of $375 million from Altria Group, Inc. primarily related to the spin-off from Altria.

North America Beverages organic net revenues grew 3.9% primarily driven by favorable product mix in powdered beverages and coffee. The introduction of Crystal Light with antioxidants and functional benefits as well as the continued success of single-serve sticks led to strong powdered beverage growth. Coffee benefited from continued strong performance in premium brands including Starbucks, Gevalia and Tassimo partially offset by volume declines in mainstream coffee. Operating income excluding items declined 5.3% as revenue growth from favorable product mix was offset by incremental investments behind new products and higher green coffee costs.

North America Cheese & Foodservice organic net revenues grew 0.5% reflecting solid cheese volume gains and Foodservice price increases that were partially offset by lower Foodservice volume from the discontinuation of lower margin product lines. Cheese gains were driven by growth in cream cheese, including the introduction of Philadelphia Ready-to-Eat Cheesecake, gains in snacking cheese as well as topping cheese from the introduction of Grate It Fresh. Operating income excluding items declined 2.8% as the contribution from organic revenue growth was offset by higher marketing support.

North America Convenient Meals organic net revenues grew 4.8% from a combination of favorable product mix from new product introductions, higher volume driven by quality improvements and market share gains in the deli meats and macaroni and cheese categories. New product gains reflected the ongoing success of Kraft Easy-Mac cups and new varieties of California Pizza Kitchen pizzas, the introduction of Oscar Mayer Deli Creations sandwiches and the recent launch of DiGiorno Ultimate pizza. Strong volume gains were driven by recent quality investments in Kraft macaroni and cheese and DiGiorno and Tombstone pizzas. Operating income excluding items declined 9.2% as gains from organic revenue growth were offset by investments in quality, manufacturing capacity and marketing support as well as $12 million in prior year income from divested operations.

North America Grocery organic net revenues were flat compared to prior year. Growth and market share gains in better-for-you snacks such as Jell-O sugar-free ready-to-eat pudding and sugar-free Cool Whip topping were offset by category weakness and share declines in Kraft salad dressings. Operating income excluding items declined 2.8% due to unfavorable product mix and lower volume.

North America Snacks & Cereals organic net revenues grew 4.1% behind solid volume and mix gains primarily in cookies and crackers. Cookie growth reflected new product successes in the Chips Ahoy! and Newtons franchises that were partially offset by lower Oreo volume due to a recent price increase. Strong cracker growth was driven by new products in Wheat Thins and Triscuit. Operating income excluding items declined 2.0% as gains from organic revenue growth and lower manufacturing costs were offset by $24 million in prior year income from divested operations as well as investments in quality and growth initiatives.

European Union organic net revenues grew 2.9% reflecting strong chocolate revenues across most markets behind new Milka and Freia Marabou products as well as growth in premium offerings such as Cote d'Or. In coffee, increased promotional spending to counter price-based competition in mainstream roast and ground coffee offset growth in Tassimo. The addition of the United Biscuits businesses contributed 6.6 percentage points to reported net revenue growth and favorable currency added 9.8 percentage points. Operating income excluding items increased 3.3% as revenue growth was partially offset by higher promotional and marketing expenses as well as higher green coffee costs.

Developing Markets organic net revenues grew 8.9% led by double-digit growth in Eastern Europe, Middle East & Africa (EEMA) and Latin America. Gains in EEMA were driven by Jacobs and Carte Noire soluble coffee. In Latin America, strong revenue growth was driven by new products and increased marketing support in all three core categories: chocolate, biscuits and powdered beverages. These gains were partially offset by lower revenue in Asia Pacific due to volume declines in Australia, primarily in cheese. Operating income excluding items was up 13.6% as the contribution from strong revenue growth was partially offset by incremental investments in marketing and distribution as well as higher input costs.

The company confirmed its guidance for 2007. The company expects organic net revenue growth of 3%-4% for the full year and fully diluted EPS in the range of $1.50 to $1.55, or $1.75 to $1.80 excluding items.

Reflected in this guidance, the company expects to incur costs of approximately $625 million in 2007, or $0.25 per fully diluted share, under its previously announced cost restructuring program. Additionally, the company continues to expect cumulative savings from the program to reach approximately $700 million by year-end. To date, cumulative savings from this cost restructuring program on an annualized basis to date totaled approximately $615 million, up from approximately $540 million at the end of 2006.

Also reflected in its guidance, the company continues to expect its 2007 full-year effective tax rate excluding items to average 35.5%. The company's effective tax rate was 32.3% in first quarter 2007 reflecting the benefit of consolidation with Altria Group, Inc. during the quarter.