Earnings decline for Kraft, but sales volume grows

by Josh Sosland
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NORTHFIELD, ILL. – During fiscal 2007, and one year into its three-year transformation plan, Kraft Foods, Inc. achieved volume growth but faced headwinds because of higher input costs that resulted in earnings declines for the full year and fourth quarter.

Net income during fiscal 2007, which ended Dec. 31, 2007, declined 15% to $2,590,000,000 or $1.64 per common share, from $3,060,000,000 or $1.86 per common share, during fiscal 2006. Sales for the year were $37,241,000,000, up 8% from $34,356,000,000 for the previous fiscal year.

Results over the two years included more than $1.5 billion in asset impairment and exist costs, a gain on the reduction of an investment in United Biscuits and net gains on divestitures. Excluding these items, net income in 2007 would have been down 9% from 2006, rather than the 15% decline reported.

Pressuring results in the fourth quarter were surging dairy costs. Results were in line with analysts’ estimates, and Kraft shares declined fractionally in early trading after announcing results.

"We are off to an excellent start in our efforts to return Kraft to reliable growth," said Irene Rosenfeld, chairman and chief executive officer. "We’ve shown that our investments in product quality, marketing and innovation lead to accelerated volume growth, better product mix and improved market share trends.

"At the same time, we’ve significantly reduced our cost structure and strengthened our portfolio with the acquisition of Danone’s global biscuit business and the announcement to exit the Post cereal business. While we face an unprecedented input cost environment, we enter 2008 with good momentum and remain confident that we will deliver reliable growth over the long term."

Looking ahead to fiscal 2008, Kraft Foods announced it expects net revenue to grow at least 4%, up from the company’s previously announced expectation of 3% to 4%. Earnings per share are expected to be at least $1.56 per share, or $1.90 excluding 34c in costs related to the company’s restructuring program.

For the fourth quarter, Kraft Foods had net income of $585 million, or 38c per common share, a 6% decline from $624 million, or 38c per common share, for the previous year. Sales for the quarter were $10,396,000,000, an increase of 11% compared to fiscal 2006 fourth-quarter sales of $9,371,000,000. Excluding non-recurring items, quarterly income was down 18%.

On a business segment basis, Kraft’s North America Beverages, North America Convenient Meals, and North America Snacks & Cereals businesses experienced both revenue and operating income growth during the quarter. The North America Cheese & Foodservice, North America Grocery, European Union and Developing Markets segments faced more difficult challenges.

Most notably, the Cheese & Foodservice segment saw its operating income decline more than 50% due to record input costs, including a 40% increase in dairy costs. Within the Grocery segment, operating income declined 12% as a result of lower sales volumes combined with higher input costs and investments to improve the company’s salad dressings business.

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