Kraft Foods Reports Q1 EPS from Continuing Operations Up 29% to $0.45, Driven by Strong Operating Gains

Net revenues declined 6.5% due to currency; organic net revenues up 2.3%, operating income was up 18.8%; margin expanded 290 bps to 13.5%, company reaffirmed 2009 EPS guidance of $1.88.

06/05/09 Kraft Foods Inc., reported first quarter 2009 results driven by strong gains from operations. Organic net revenue growth reflected the impact of cost-driven pricing actions taken in 2008, together with better-than-expected volume/mix. Operating gains across nearly all business segments drove operating income growth, margin expansion and higher earnings per share.

"We've had a very solid start to the year, and we're on track to deliver our 2009 commitments," said Irene Rosenfeld, Chairman and CEO. "Our business momentum remains strong despite a challenging consumer environment. We are intensely focused on investing our cost savings to build our core brands, improve our product mix and drive superior retail execution. This will further enhance our profit margins and improve market shares as the year unfolds."

* Net revenues declined 6.5 percent to $9.4 billion, including the unfavorable impact of 7.9 percentage points from currency and 0.9 percentage points from divestitures.

* Organic net revenues grew 2.3 percent, driven by 5.7 percentage points from pricing that was partially offset by negative 3.4 percentage points from volume/mix.  During the quarter, net revenues were negatively impacted by approximately 1.6 percentage points from the shift of Easter-related shipments into second quarter 2009 and from the planned discontinuation of less profitable product lines.

* Operating income increased 18.8 percent from the prior year to $1,268 million.  Currency translation negatively impacted operating income growth by 10.3 percentage points, essentially offsetting 9.8 percentage points of growth from the absence of Restructuring Program charges.

* Operating income margin increased 290 basis points year-over-year to 13.5 percent.  Approximately 90 basis points of the increase were attributable to the absence of Restructuring Program charges, while product mix improved margins significantly. This positive development reflects the discontinuation of less profitable product lines and strategic investments in priority categories, core brands and key markets.  In addition, the combination of cost-driven price increases taken over the past year and successful cost savings initiatives more than offset higher input costs.  The results also include the benefit of approximately $87 million of unrealized, mark-to-market gains related to the company's commodity hedging activities, compared to an approximately $25 million benefit in the prior year.

* The tax rate of 33.0 percent was up from 28.2 percent in the prior year period.  The first quarter 2009 rate is higher than the company's full-year guidance of 31.5 percent due to the timing of discrete items.

* Earnings per share were $0.45, up from $0.39 in first quarter 2008.

 U.S. Beverages

Organic net revenues increased 1.4 percent as volume/mix growth was partially offset by lower prices. Net revenues for coffee declined due to a combination of the Easter shift and the rollback of 2008 price increases to reflect lower green coffee costs. Ready-to-drink beverages grew at a double-digit rate behind successful quality and marketing investments in Capri Sun. Value-oriented marketing behind Kool-Aid continued to drive solid growth in powdered beverages.

Operating income increased 11.7 percent driven by lower overhead costs, the timing of marketing spending, the absence of Restructuring Program charges and volume/mix improvement.

U.S. Cheese

Organic net revenues declined 6.6 percent as volume/mix was unfavorably impacted by higher price levels and the Easter shift.

Operating income grew 59.8 percent as the benefits of improved alignment of prices with costs more than offset the impact of a decline in volume/mix.

U.S. Convenient Meals

Organic net revenues increased 8.2 percent reflecting the impact of higher price levels and improved volume/mix. Growth was driven by the continued success of DiGiorno, California Pizza Kitchen and Jack's pizza, Oscar Mayer Deli Fresh meats, Oscar Mayer bacon and Oscar Mayer Lunchables.

Operating income increased 51.6 percent. The benefits of higher price levels, improved volume/mix and the absence of Restructuring Program charges more than offset significantly higher input costs.

U.S. Grocery

Organic net revenues increased 3.3 percent as the effect of higher price levels and double-digit volume growth in Kraft macaroni and cheese dinners more than offset the impact of unfavorable volume/mix in other parts of the business. Volume/mix was unfavorably impacted by the Easter shift and the third quarter 2008 exit of Handi-Snacks ready-to-eat desserts as part of the company's initiative to discontinue less profitable product lines.

Operating income increased 9.6 percent as the benefits of higher price levels and improved product mix more than offset the impact of higher input costs and lower volume.

U.S. Snacks

Organic net revenues increased 0.6 percent as higher price levels were largely offset by unfavorable volume/mix. Net revenue growth was also negatively impacted by approximately two percentage points from the Easter shift and the recall of certain products containing pistachios. Solid growth in both cookies and crackers was driven by approximately 10 percent growth in the top five brands.

Operating income increased 7.5 percent due to solid profit growth in biscuits. Overall, operating income benefited from higher price levels, the timing of marketing costs and the absence of Restructuring Program charges. These benefits were partially offset by unfavorable volume/mix, higher input costs and the decline in snack nuts, which included a $17 million charge related to the pistachio recall.

Canada & North America Foodservice

Organic net revenues increased 0.8 percent as solid growth in Canada was offset by declines in North America Foodservice. Double-digit growth in Canada was driven by continued volume/mix gains from marketing investments and improved customer programs. Unfavorable volume/mix in Foodservice reflected a slowdown in casual dining traffic and the discontinuation of lower-margin product lines.

Operating income declined 20.6 percent primarily due to an unfavorable currency impact of approximately 16 percentage points. Excluding the currency impact, higher input costs and the volume impact of a challenging Foodservice environment were partially offset by higher pricing, the absence of Restructuring Program charges and solid operating performance in Canada.

Kraft Foods Europe

Organic net revenues declined 3.3 percent reflecting higher price levels that were more than offset by unfavorable volume/mix. The volume/mix declines were attributable to higher price levels, the Easter shift and the discontinuation of less profitable product lines. The unfavorable volume/mix also reflected a difficult comparison to the prior year period that included a pre-price increase inventory build by retailers. Biscuits showed solid net revenue growth led by several of the region's priority brands, including Oreo, Mikado and Ourson. Net revenues for chocolate were unfavorably impacted by the Easter shift and by the slowdown in volume sold through travel-related retail outlets. Coffee revenues were similarly impacted by the Easter shift, but were partially offset by ongoing gains from Kenco in the U.K., strong performance in France and the continued growth of Tassimo.

Operating income increased 17.7 percent despite an unfavorable impact from currency of approximately 25 percentage points. Excluding the currency impact, higher price levels, improved product mix and the absence of Restructuring Program charges and divestiture-related losses drove gains in the quarter. These gains more than offset the unfavorable impact of lower volume and investments in building a category-led, European operating company structure.

Kraft Foods Developing Markets

Organic net revenues increased 12.0 percent driven by solid gains in each region. Growth in the Latin America region was largely due to higher price levels as well as strength in powdered beverages. The Asia Pacific region grew due to gains in several key brands, particularly Oreo, Tiger/Biskuat and Tang. Growth in the Central and Eastern Europe, Middle East & Africa region was fueled by higher price levels and favorable volume/mix despite retailer inventory reductions in Poland and Ukraine.

Operating income increased 8.9 percent despite an unfavorable currency impact of approximately 30 percentage points. Excluding currency, a combination of higher price levels and substantially better product mix more than offset higher input costs, investments in marketing and selling, and lower volume.