Power Brands Drive Top-Tier Revenue Growth for Kraft

Concurrently, End-to-End Cost Management expands margins and generates savings that fund additional investments in marketing and innovation.

2/23/2011 --- At the 2011 conference of the Consumer Analyst Group of New York (CAGNY), executives of Kraft Foods reviewed the company's growth strategy and highlighted progress toward top-tier financial performance.

At the heart of this strategy, Chairman and CEO Irene Rosenfeld described a "virtuous cycle" in which focus on Power Brands, Categories and Markets drives top-tier revenue growth. Concurrently, End-to-End Cost Management expands margins and generates savings that fund additional investments in marketing and innovation. These investments generate further growth, which perpetuates the cycle.

"Kraft Foods is a much stronger company than it was just four years ago," Rosenfeld said, citing various actions that have positioned the portfolio for faster growth, including the acquisition of Cadbury. "Today, high-growth snacks comprise about half of our portfolio. Nearly 60 percent of our revenues are generated outside of the United States. And we've doubled our presence in fast-growing, higher-margin instant consumption channels. As a result, we're now on a new growth trajectory. I'm confident we'll deliver top-tier performance as our virtuous cycle accelerates around the globe."

Tony Vernon, President, Kraft Foods North America, noted that the company's performance in this region is gaining momentum, bolstered by sequential improvement in organic revenue growth and market share. In fact, KFNA's growth rate exceeded most of its peers' last year -- despite a sluggish economy, rising input costs and depressed categories.

Vernon outlined plans to accelerate growth by revitalizing the company's iconic brands through advertising, innovation and differentiated marketing. In addition, KFNA will increase marketing and sales excellence in grocery and instant consumption channels while delivering significant cost savings.

Vernon mentioned several exciting new products hitting the market now, including Trident Vitality and Stride Spark vitamin-fortified gums, Oreo Fudge Cremes, Philadelphia Cooking Creme and MiO liquid water enhancers, the company's largest beverage brand introduction in a decade.

David Brearton, Executive Vice President, Operations, provided a progress report on Kraft's End-to-End Cost Management, including savings from systems, manufacturing, procurement, logistics and overheads. These savings are critical to offset higher costs and fund additional brand-building investments and new product development.

Brearton reported that strong cost savings and a continuous improvement mindset have helped improve gross margin trends despite volatile input costs. Since 2008, for example, procurement and logistics savings have more than doubled, while Lean Six Sigma is stepping up manufacturing savings. As a result, productivity as a percentage of cost of goods sold rose to about 4 percent in 2010 from less than 3 percent in 2009. Kraft is targeting productivity of more than 4 percent on an ongoing basis. The company has also improved its overhead efficiency, with overheads as a percent of net revenue expected to decline from the mid-teens to 12.5-13 percent on an ongoing basis.

Chief Financial Officer Tim McLevish summarized Kraft's 2010 financial performance and outlook for the future. He described how strong growth in Kraft's Power Brands drove organic revenue growth in the top half of the company's peer group in three of the last four years. This momentum will be aided by $1 billion of targeted revenue synergies from Cadbury over the next three years as well as the company's expanding footprint in fast-growing Developing Markets.

McLevish described how End-to-End Cost Management and $750 million in cost synergies from the Cadbury integration would accelerate margin expansion. These savings also will enable the company to increase spending on advertising and consumer programs to 9-10 percent of net revenue from about 8 percent in 2010. At the same time, further investments in innovation will boost new product development as a percentage of total revenue from about 9 percent last year to 11 percent by 2013.

McLevish concluded by reiterating the company's 2011 outlook and long-term targets. Kraft expects to deliver organic net revenue growth in excess of 5 percent - or roughly 4 percent, excluding the year-over-year impact of calendar changes - operating income margins in the mid-teens and operating EPS growth of 11 to 13 percent. Over the long-term, Kraft expects organic net revenue growth of more than 5 percent, operating income margins in the mid- to high-teens and operating EPS growth of 9 to 11 percent.