Earnings decline at Kraft, but sales volume grows

by Editorial Staff
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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 million equal to $1.64 per share on the common stock, down from $3,060 million, or $1.86 per share, during fiscal 2006. Sales for the year were $37,241 million, up 8% from $34,356 million for the previous fiscal year.

Results over the two years included more than $1.5 billion in asset impairment and exit 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."

In a conference call with financial analysts on Jan. 30, Ms. Rosenfeld shared a few category highlights that illustrate how Kraft’s strategy has been successful.

"In our mac and cheese business we invested in quality upgrades to our base products and rolled out Easy Mac Cups," she said. "The result, we posted double-digit organic growth and gained half a point of market share in 2007. This followed three years of essentially no growth and more than a point of share loss.

"Our pizza business finished the year absolutely on fire. It posted double-digit volume growth and gained over 4 market share points in the fourth quarter."

In the European Union, Ms. Rosenfeld said Kraft’s Jacobs coffee and Milka chocolate brands delivered a fourth consecutive quarter of organic revenue growth.

"For a business that had been flat to down for the past four years, the 3.5% organic growth in 2007 is no small feat," she said.

At the same time, she said, Kraft has reduced its cost structure and strengthened its 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," Ms. Rosenfeld said.

Tim McLevish, Kraft Foods’ executive vice-president and chief financial officer, highlighted the significance of the input cost increases Kraft faces in the coming year.

"With the exception of almonds and lean hogs, we’re starting the year at record cost levels, and in the cases of cocoa, wheat and soybean oil, we’re starting 2008 at significantly higher levels than the average 2007 costs," he said. "Because of this, we have taken and are taking pricing actions as well as focusing on overhead costs to ensure the expansion of operating margins in 2008."

Looking ahead, Kraft Foods announced it expects net revenue to grow at least 4% during fiscal 2008, 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 share, a 6% decline from $624 million, or 38c per share, for the previous year. Sales for the quarter were $10,396 million, an increase of 11% compared with fiscal 2006 fourth-quarter sales of $9,371 million. 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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