Tax Refunds Help Kraft to 41% Earnings Growth

20/04/06 Kraft Foods Inc. has reported solid first quarter 2006 results reflecting gains in net revenues and progress on cost and business simplification initiatives. First quarter 2006 reported net earnings were $1.0 billion, an increase of 41% versus last year, while reported diluted earnings per share were $0.61, up 45%. Excluding asset impairment, exit, and implementation costs; the gains/losses on the sales of businesses; the impacts of the favorable tax resolution; and earnings from discontinued operations, net earnings for the quarter grew 1.6% and diluted earnings per share increased 2.3% to $0.45.

"Our year is off to a good start," said Roger K. Deromedi, Chief Executive Officer of Kraft Foods. "Our Brand Value propositions strengthened with successful new products, quality enhancements and marketing initiatives. We continued to drive out costs and simplify our business. While input costs and the EU remain challenging, I'm confident that our momentum will continue to build as 2006 progresses."

Net revenues for the first quarter grew 0.8% to $8.1 billion, including a negative 1.6 percentage point impact from divestitures and an unfavorable foreign exchange impact of 1.2 percentage points. Organic net revenue growth, which excludes acquisitions; the impact of divestitures; currency impacts; and asset impairment, exit, and implementation costs, was 3.6% led by growth in North America and double-digit gains in Russia, Ukraine, and the Middle East. Organic net revenue growth was driven by positive product mix of 3.0 percentage points and a 1.7 percentage point benefit from pricing, partially offset by a negative 1.1 percentage point impact from lower volume, particularly in ready-to-drink beverages and the EU. The volume decline includes the impact of product item pruning and discontinuation of select product lines that represented approximately 2% of prior year volume. The shift in Kraft's calendar, including the later timing of Easter, did not materially impact first quarter volume results in aggregate, although certain North American categories, such as Cheese and some Grocery items, were negatively impacted.

During the quarter, the Company incurred $215 million ($152 million after-tax or $0.09 per diluted share) in asset impairment, exit, and implementation costs and $3 million ($2 million after-tax) in losses on sales of businesses. Included in the asset impairment, exit, and implementation costs are $105 million of pre-tax charges for the Company's restructuring program, $86 million related to announced divestitures, and a $24 million impairment charge for the Company's assessment of long-lived assets. In the first quarter 2005, the Company incurred $169 million ($112 million after-tax or $0.07 per diluted share) in asset impairment, exit, and implementation costs and realized $116 million ($67 million after-tax or $0.04 per diluted share) in gains/losses on sales of businesses.

Also during the quarter, the favorable resolution of the Altria Group, Inc. 1996-1999 IRS Tax Audit resulted in the reimbursement to Kraft of federal tax reserves in the amount of $337 million, net state tax reversals of $39 million, and pre-tax interest of $46 million ($29 million after tax). The total net earnings benefit of these items was $405 million or $0.24 per diluted share.
Operating income decreased 12.0% to $1.0 billion. Excluding the asset impairment, exit, and implementation costs; and gains/losses on sales of businesses, operating income increased 2.1%, and operating income margin was essentially flat at 15.2%, benefiting from favorable product mix, price increases, and overhead cost savings initiatives. These benefits were largely offset by higher commodity costs of approximately $100 million, primarily packaging, energy and coffee, as well as actions taken to address price gap issues in select categories.

The Company's tax rate in first quarter 2006 was negative 9.2%. Excluding the tax effects of asset impairment, exit, and implementation costs; gains/losses on sales of businesses; and the favorable resolution of the IRS Tax Audit, the effective tax rate in the first quarter 2006 was 30.9%. This compares to an effective tax rate of 28.0% in the first quarter last year, which excludes the tax effects of asset impairment, exit, and implementation costs and gains/losses on the sales of businesses.

The Company continues to make progress on its cost restructuring program. Year-to-date, six facility closures have been announced, including two during the month of April, as well as headquarters overhead reduction programs and various initiatives to simplify internal business practices. Savings in the first quarter totaled approximately $100 million for the Company's restructuring program, an increase of approximately $50 million versus the first quarter last year.

During the quarter, the Company repurchased 10.5 million Class A shares at a total cost of $312 million. As of March 31, 2006, $1.9 billion remained under the Company's new $2 billion share repurchase plan.

The Company set its guidance for organic net revenue growth at 3% or greater in 2006 on a comparable 52-week basis (approximately 1% including the impact of one less week) and continues to expect its full year effective tax rate to average 33% excluding charges for asset impairment, exit, and implementation costs; and the impacts of the IRS tax audit resolution.