Kraft Foods Reports Strong Q3 Results and Raises 2011 Guidance

Pricing contributed 7.0 percentage points of growth as the company continued to successfully implement pricing actions to recover higher input costs.

Nov 3 2011 --- Kraft Foods Inc. has reported third quarter results driven by strong organic revenue growth and operating income gains in each geographic region.

"Our investments in marketing and new products continue to drive high quality growth and solid market shares. And we've accomplished this despite having taken significant price increases to offset record-high input costs," said Irene Rosenfeld, Chairman and CEO. "Together with substantial savings opportunities, we expect to deliver top-tier results in 2011 and remain on track to launch two industry-leading companies with strong operating momentum in the coming year."

Net revenues for the third quarter were $13.2 billion, up 11.5 percent. Organic Net Revenues grew 8.4 percent, driven by strong growth in all geographies. Pricing contributed 7.0 percentage points of growth as the company continued to successfully implement pricing actions to recover higher input costs. Despite these pricing actions, volume/mix contributed 1.4 percentage points to growth.

Operating income was $1.7 billion, and operating income margin was 12.8 percent. Underlying Operating Income, which excludes acquisition-related(2) and Integration Program(3) costs, grew 12.2 percent to $1.8 billion. The increase in Underlying Operating Income was driven by effective management of input costs through pricing and productivity, favorable foreign currency and growth from volume/mix. These gains were partially offset by the negative impacts from the Starbucks CPG business(4) and the timing of SG&A expenses. While profit growth was strong, Underlying Operating Income(1) margin increased only 10 basis points due to the impact of the higher revenue base (from pricing) on the margin calculation.

Diluted earnings per share were $0.52. Operating EPS increased 23.4 percent to $0.58 driven by operating gains, favorable foreign currency and discrete tax items.

Improved marketing and successful new products enabled the continued implementation of broad-based pricing, while a strong focus on cost management drove operating income growth in Kraft Foods North America.

Net revenues increased 4.4 percent. Organic Net Revenues increased 5.9 percent, led by higher pricing across each business segment and contributions from new products. Volume/mix was modestly lower, but in line with the company's expectations.

Segment operating income increased 3.3 percent, including a negative 3.6 percentage point impact from the Starbucks CPG business and a negative 0.5 percentage point impact from Integration Program costs. Excluding these factors, strong growth in segment operating income reflected effective management of input costs and lower SG&A that was partially offset by lower volume/mix.

The ongoing focus on Power Brands and cost management drove strong top- and bottom-line results in Europe for the seventh consecutive quarter.
 
Net revenues increased 16.1 percent. Organic Net Revenues increased 5.2 percent with pricing in coffee and favorable volume/mix driving significant gains in the quarter. Power Brands grew approximately 13 percent.

Segment operating income was essentially flat. Integration Program costs negatively impacted growth by 17.2 percentage points, and were partially offset by a positive 10.9 percentage point impact from currency. Excluding these factors, growth in segment operating income reflected volume/mix gains and lower overheads, that more than offset higher input costs net of pricing and higher A&C investments.

Kraft Foods Developing Markets delivered double-digit revenue and operating income growth, reflecting the continued benefits of focusing on Power Brands, core categories and key markets.

Net revenues increased 20.3 percent. Organic Net Revenues grew 15.3 percent, driven by favorable pricing and strong volume/mix growth. All three regions grew double-digits, fueled by aggregate Power Brand growth of approximately 17 percent.

Segment operating income increased 57.3 percent, including a favorable 12.4 percentage point impact from lower Integration Program costs versus the prior year, and a positive 8.0 percentage point impact from currency. Excluding these factors, the strong increase in segment operating income reflected effective management of input costs and volume/mix gains that were partially offset by overhead investments to support growth opportunities.

As a result of the strong results in the third quarter, the company revised its organic revenue guidance for 2011 to at least 6 percent from at least 5 percent and increased its Operating EPS guidance to at least $2.27 from at least $2.25.

"We've raised our outlook for the year due to the strong business momentum in each of our geographies," said David Brearton, Executive Vice President and CFO. "While we expect strong operating momentum to continue, our earnings guidance excludes any potential impact from currency in the fourth quarter, as recent volatility has made such forecasts difficult."