Kraft net falls 30% in first quarter

by Eric Schroeder
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NORTHFIELD, ILL. — Reporting results as an independent company for the first time, Kraft Foods Inc. posted a 30% decline in first-quarter earnings as the company continues to face challenges in its turnaround efforts.

In the first quarter ended March 31, net income was $702 million, equal to 43c per share on the common stock, down 30% from $1,006 million, or 61c per share, in the same period a year ago.

"The first quarter of 2007 was an eventful one for Kraft as we became independent from Altria and began executing the strategic plan we announced in February," said Irene B. Rosenfeld, chairman and chief executive officer. "While our first-quarter results reflect improvement in several core categories, we still face many challenges. We expect to see further progress, particularly in the second half of the year, as we set the stage for Kraft’s return to consistent growth."

Net revenues for the first quarter totaled $8,586 million, an increase of 6% from $8,123 million in the year-ago period. Kraft said revenues reflected a favorable 1.2 percentage point impact from the United Biscuits Iberia acquisition and a favorable 2.1 percentage point impact from currency.

Net revenue in the North America Beverages segment rose 4% to $826 million behind favorable product mix in powdered beverages and coffee. Kraft said the introduction of Crystal Light with antioxidants and functional benefits as well as the continued success of single-serve sticks led to strong powdered beverage growth, while coffee benefited from continued strong performance in premium brands, including Starbucks, Gevalia and Tassimo.

Operating companies income for North America Beverages was $139 million, down 5% from the first quarter of fiscal 2006. Partially responsible for the decline was incremental investments behind new products and higher green coffee costs, Kraft said.

North America Cheese and Foodservice revenue rose 1% to $1,468 million, reflecting solid cheese volume gains and food service price increases that were partially offset by lower food service volume from the discontinuation of lower margin product lines.

Operating companies income in the division, though, fell 3% to $193 million, as organic revenue growth was not enough to overcome higher marketing support.

North America Convenient Meals revenue rose 5% to $1,246 million behind new product introductions, higher volume driven by quality improvements and market share gains in the deli meats and macaroni and cheese categories. Kraft noted particular success in Kraft Easy-Mac cups and new varieties of California Pizza Kitchen pizzas, the introduction of Oscar Mayer Deli Creations sandwiches and the recent launch of DiGiorno Ultimate pizza.

North America Convenient Meals operating companies income fell 9% during the quarter, though, to $183 million. Revenue growth was more than offset by investments in quality, manufacturing capacity and marketing support as well as $12 million in prior-year income from divested operations.

North America Grocery revenues were flat in the quarter at $623 million. Operating companies income for the segment was $200 million, down 3% from the same period a year ago.

Net revenue in North America Snacks and Cereals grew 4% to $1,539 million behind solid volume and mix gains primarily in cookies and crackers.

"Cookie growth reflected new product successes in the Chips Ahoy! and Newtons franchises that were partially offset by lower Oreo volume due to a recent price increase," Kraft said. "Strong cracker growth was driven by new products in Wheat Thins and Triscuit."

Operating companies income for North America Snacks and Cereals was $248 million, down 2% from the same period a year ago.

During the quarter, Kraft incurred $88 million in asset impairment, exit and implementation costs against its cost restructuring program, which was offset by the recognition of one-time interest income of $77 million from tax reserve transfers of $375 million from Altria Group, Inc. related to Kraft’s spin-off from Altria.

Also during the quarter, Kraft repurchased 5.9 million of its shares at a total cost of $187 million. A new $5 billion share repurchase plan went into effect immediately following the company’s spin-off from Altria.

Kraft confirmed its guidance for 2007, with expected revenue growth of 3% to 4% for the fully year and earnings per share in the range of $1.50 to $1.55.

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