Kraft Profits Strong in Second Quarter

25/07/06 Kraft Foods Inc. has reported steady progress with second-quarter 2006 results driven by favorable product mix, the benefits of a strong increase in advertising and continued cost savings. Second-quarter 2006 reported net earnings were $682 million, an increase of 44.5% versus last year, while reported diluted earnings per share were $0.41, up 46.4%. Excluding asset impairment, exit, and implementation costs; the gains/losses on the sale of businesses; and earnings from discontinued operations, net earnings for the quarter grew 7.0% and diluted earnings per share increased 8.5% to $0.51.

Net revenues for the second quarter grew 3.4% to $8.6 billion despite a negative 1.1 percentage point impact from divestitures and an unfavorable currency impact of 0.4 percentage points. Organic net revenue growth was 4.9% led by double-digit gains in Eastern Europe and Latin America as well as solid growth in North America. Product mix contributed 3.6 percentage points to organic net revenue growth behind brands such as Wheat Thins, South Beach Diet, Jacobs coffee and Cote d'Or chocolate. The impact of price increases added 0.4 percentage points to growth while ongoing volume added 0.9 percentage points.

The ongoing volume growth of 0.9% included gains in Oscar Mayer meats and Maxwell House coffee. Volume growth also included an estimated one percentage point benefit from the shift in timing of Easter shipments versus last year. In addition, the impact of product item pruning and the discontinuation of select product lines represented approximately 2% of prior year volume.

"Second-quarter results reflect further improvements in Kraft's business fundamentals," said Irene B. Rosenfeld, Chief Executive Officer. "We're making good progress focusing and strengthening the portfolio, which will set the stage for accelerating our growth."

During the quarter, $243 million ($162 million after-tax or $0.10 per diluted share) in asset impairment, exit, and implementation costs were incurred primarily related to the announced closure of three manufacturing facilities and ongoing streamlining efforts. For comparison, in the second quarter 2005, the Company incurred $55 million ($37 million after-tax or $0.02 per diluted share) in asset impairment, exit, and implementation costs.

Operating income decreased 5.8% to $1.2 billion. However, excluding the asset impairment, exit, and implementation costs; and gains/losses on the sale of businesses, operating income increased 9.3% and operating income margin increased to 16.6% from 15.7%. These gains were driven by net revenue growth and cost savings. Higher packaging and energy costs partially offset the expansion in operating income margins.

The Company's tax rate in the second quarter 2006 was 33.7%. Excluding the tax effects of asset impairment, exit, and implementation costs; and gains/losses on the sale of businesses, the effective tax rate in the second quarter 2006 was 33.4%. This compares to an effective tax rate of 29.5% in the second quarter last year.

The Company continues to make progress on its cost restructuring program. Year-to-date, seven facility closures have been announced and various headquarter overhead reduction programs and initiatives to simplify internal business practices have been implemented. By the end of the second quarter, ongoing savings for the program to date totaled approximately $385 million, up from approximately $260 million at the end of 2005.

During the quarter, the Company repurchased 9.9 million Class A shares at a total cost of $313 million, bringing year-to-date share repurchases to 20.5 million Class A shares at a total cost of $625 million. As of June 30, 2006, $1.6 billion remained under the Company's $2.0 billion share repurchase plan.

Kraft increased its EPS guidance for 2006 to $1.78 to $1.83, or by $0.23 per diluted share, to reflect a projected third quarter $0.13 one-time gain related to Kraft's pending redemption of its interest in United Biscuits and $0.10 in lower asset impairment, exit, and implementation costs. In addition, the Company confirmed its guidance for organic net revenue growth at 3% or greater in 2006 on a comparable 52-week basis, or approximately 1% reflecting the impact of one less week.