Kraft Foods quarterly profit climbs 4%

by Eric Schroeder
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NORTHFIELD, ILL. — The benefits of share buybacks, a lower tax rate and the implementation of price increases helped lift earnings at Kraft Foods Inc. in the second quarter ended June 30. More importantly, Irene Rosenfeld, chairman and chief executive officer, said the implementation of the company’s transformation plan laid out in February has left her "more confident that our plan is sound and that its execution will enable us to restore Kraft to reliable growth."

During an Aug. 1 conference call with financial analysts, Ms. Rosenfeld cited three reasons for her optimism: early investments have produced sequential top-line improvement; confidence that actions already taken will lay the foundation for improved results; and lastly, efforts are in place to further enhance shareholder returns.

Net income in the quarter was $707 million, equal to 45c per share on the common stock, up 4% from $682 million, or 41c per share, in the second quarter of fiscal 2006. During the most recent quarter, Kraft incurred $157 million in asset impairment, exit and implementation costs from its restructuring program.

To date, cumulative savings from the program are about $660 million, Kraft said, up from approximately $540 million at the end of 2006. The company said it now expects to achieve cumulative savings from its restructuring program of approximately $725 million by the end of fiscal 2007, up from its earlier estimate of $700 million.

Net sales climbed 7% to $9,205 million, up from $8,619 million in the same period a year earlier. Results included a 1.4 percentage point gain from the United Biscuits Iberia acquisition and a 2.2 percentage point gain from currency.

"I am pleased to report that we made further progress in the second quarter to return Kraft to reliable growth," Ms. Rosenfeld said. "Our early investments in product quality and marketing have led to sequential improvements in top-line growth. In addition, we are encouraged by the progress in rebuilding our new product pipeline and plan to spend at the high end of the $300 million to $400 million range we previously communicated. While making these investments, we are taking other significant steps to build long-term shareholder value, including expanding our international footprint by acquiring Danone’s global biscuit business and actively repurchasing our stock."

During the conference call, Ms. Rosenfeld said strong first-half biscuit growth reported by Groupe Danone on July 30 offered further evidence that the acquisition should be an important contributor to the company’s growth strategy, which is far from complete.

"We are not finished reshaping our portfolio," she said. "We continue to evaluate our existing brands in the context of our new framework and we’ll divest those businesses that don’t fit our long-term growth plan."

In a subsequent question-and-answer session, Ms. Rosenfeld said any possible divestitures most likely would be small.

"I think we’ve got a lot of our major activity behind us," she said.

Net revenue in the North America Beverages segment rose 4% to $854 million behind favorable product mix in powdered beverages and coffee. Powdered beverages were led by the introduction of Crystal Light with antioxidants and functional benefits, while coffee benefited from pricing and continued strong performance in premium brands such as Starbucks and Tassimo. Growth was partially offset by weakness in ready-to-drink bottled beverages, Kraft said.

Operating companies income for North America Beverages was $142 million, up 14% from the second quarter of fiscal 2006. The gain reflected favorable product mix that more than offset higher input costs, primarily green coffee and packaging costs.

North America Cheese and Foodservice revenue rose 3% to $1,539 million following price increases and favorable product mix, such as the launch of Kraft Singles Select and LiveActive cottage cheese.

Operating companies income in the division fell 21% to $194 million, as improved pricing was not enough to offset commodity cost increases and higher overhead costs driven by increased marketing support.

North America Convenient Meals revenue rose 5% to $1,274 million behind product mix and volume gains from such brands as Oscar Mayer Deli Shaved meats, Kraft Easy-Mac cups and California Pizza Kitchen pizzas, as well as the successful introduction of Oscar Mayer Deli Creations sandwiches and DiGiorno Ultimate pizza.

North America Convenient Meals operating companies income fell 28% during the quarter, though, to $162 million. The decline reflected higher commodity costs, investments in growth initiatives and the absence of $9 million in prior year income from divested operations.

North America Grocery reported a decline in net revenue of 2% to $776 million. Price increases and growth in better-for-you snacks were more than offset by weakness in salad dressings and dry packaged desserts Operating companies income for the segment was $162 million, down 8% from the same period a year ago.

Net revenue in North America Snacks and Cereals grew 4% to $1,619 million. Strong product mix in cookies reflected new product successes in the Nabisco 100 Calorie Pack franchise, while bars generated a double-digit gain in volume driven by the launch of Nabisco 100 Calorie bars and Back to Nature bars. Growth in cereals benefited from pricing and a rebound in children’s cereals due to the success of recent quality improvements as well as the momentum of Post Honey Bunches of Oats.

Operating companies income for North America Snacks and Cereals was $274 million, down 3% from the same period a year ago due primarily to the absence of $22 million in income from divested operations.

For the six months ended June 30, Kraft posted net income of $1,409 million, or 88c per share, down 17% from $1,688 million, or $1.02 per share. Sales totaled $17,791 million, up 6% from $16,742 million.

As a result of the strong earnings, Kraft raised its full-year earnings per share guidance to $1.55 to $1.60 from $1.50 to $1.55. The company also raised its sales growth expectations, to better than 4% from its previous guidance of 3% to 4%.

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