Kraft Highlights Growth Strategy, Reconfirms 2008 Guidance

20/02/08 At the Consumer Analyst Group of New York (CAGNY) Conference, Irene Rosenfeld, Chairman and Chief Executive Officer, Kraft Foods Inc. reviewed the company's progress after the first year of its three-year growth plan. The company also reaffirmed its 2008 guidance and outlined how it will build on the momentum created in 2007.

Rick Searer, Executive Vice President and President, North America, and Tim McLevish, Executive Vice President and Chief Financial Officer, also presented. "In 2007, we made real strides by investing in our brands, improving product quality, rebuilding our new product pipeline and strengthening our management team. As a result, we delivered the best top-line performance since going public in 2001," said Rosenfeld. "Put simply, we've done what we said we would; it's working; and we're going to keep doing it. We will continue to build on this momentum in 2008 to deliver value to our shareholders."

Rosenfeld continued, "Unprecedented input costs are impacting Kraft and the entire food industry. Therefore, we have redoubled our efforts to reduce overhead and other costs, while continuing to make the necessary investments in our brands. I'm confident that we have the right strategy, clear operational focus and the financial discipline to fuel Kraft's return to reliable growth. We're getting more competitive in the marketplace and learning how to better use our scale to our competitive advantage. In 2008, we'll grow on both the top and bottom lines."

Searer spotlighted several new product successes, such as DiGiorno Ultimate pizza and Oscar Mayer Deli Fresh cold cuts, and the expansion of various product platforms, such as Cakesters snack cakes into other cookie brands, LiveActive and South Beach Living into beverages and 100 calorie packs into Candy Bites. Searer also unveiled new Kraft Bagel-fuls hand-held breakfast sandwiches, DiGiorno and California Pizza Kitchen single-serve premium pizzas and an entirely rejuvenated line of Kraft salad dressings with no artificial preservatives.

"Clearly, our iconic brands resonate with consumers," said Searer, who noted that where the company invested in quality, innovation and marketing, organic net revenues grew and accelerated throughout 2007 - rising 4 percent in the first half, 7 percent in the third quarter and 10 percent in the fourth quarter.

"Going forward, we expect our investments to result in improved pricing power, stronger volume growth and product mix gains, which will lead to improved margin performance in 2008 and beyond," Searer said.

During the presentation, McLevish reconfirmed Kraft's full-year guidance. For 2008, the company projects organic net revenue growth of at least 4 percent and earnings per share, excluding items, of at least $1.90. He also reinforced that the company's advertising and consumer spending will be in the mid-7 percent of revenue range and that operating income will grow faster than organic revenue. The company also reaffirmed guidance for its 2008 tax rate, excluding items, of 33.5 percent. In addition, McLevish indicated confidence that the company's tax rate could be reduced over time to at least peer averages.

"We will use a combination of price increases and supply chain productivity improvements to cover input cost inflation while our volume growth and product mix gains will leverage our overhead costs and increase operating margins," McLevish said. Using this model, the company projects long-term EPS growth of 7 to 9 percent.

"We are redoubling our efforts to further leverage our scale and drive overhead cost reductions," McLevish continued. "We're streamlining headquarters and moving from an operating model to a strategy-and-oversight model. This change is a key driver in our ability to deliver higher savings at a lower cost from our restructuring program. Over time, we intend to reduce overheads as a percent of revenue by at least one percentage point." Beginning in 2009, the company expects to reduce the cash used for restructuring by approximately $300 million a year, down from about $500 million in 2008.

McLevish also outlined targeted improvements in several financial metrics. Specifically,
• Improve annual discretionary cash flow by $1 billion in the next few years, delivering cash flow equal to 100 percent of net income as a long-term goal.
• Reduce primary working capital to 11 percent of net revenue, from 14 percent today.
• Reduce capital spending to below 3 percent of net revenue from 3.3 percent in 2007.
• Improve return on invested capital by an average of 80 basis points per year.