Kraft grain-based foods portfolio strong in quarter

by Josh Sosland
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NORTHFIELD, ILL. — Strong gains in a number of grain-based foods categories helped shore up financial results of Kraft Foods Inc. in the first quarter ended March 31.

Net income of Kraft in the first quarter was $608 million, equal to 40c per share on the common stock, down 13% from $702 million, or 43c per share, in the second quarter last year. Earnings per share were unchanged from last year when one-time items are excluded, Kraft said.

Net sales in the quarter were $10,372 million, up 21% from $8,586 million in January-March 2007. Organic sales, excluding the international biscuit business acquired from Groupe Danone S.A., grew 8%.

Cutting across several Kraft categories, cookies, crackers, pizza and macaroni and cheese all enjoyed sales growth during the period.

Operating earnings of the U.S. Snacks and Cereals business of Kraft were $168 million, down 28% from $234 million in the first quarter of 2007. Sales were $1,430 million, up 2.4%.

Kraft attributed the earnings decline to higher input costs, particularly for grain and oils, more than offsetting the benefits of lower trade spending and price increases.

The sales gain reflected both the higher prices and volume gains in cookies, driven by double-digit gains in Nabisco 100 Calorie Packs as well as successful new products such as Oreo Cakesters and Oreo snack ‘n seal reclosable packaging. Double-digit gains in Ritz cracker sales bolstered cracker revenues. By contrast, the company suffered a decline in sales of snack bars, attributed by Kraft "largely to new product timing."

In the Kraft U.S. Grocery division, results were helped by double-digit revenue growth in sales of macaroni and cheese, extending momentum established a year earlier. The Grocery business also was bolstered by the relaunch of Kraft pourable salad dressings.

Similarly, in its U.S. Convenient Meals business, sales growth of 7.5% was attributed in part to volume growth, "primarily driven by ongoing success in pizza, where all brands grew in the quarter, including double-digit volume and revenue growth in premium brands such as DiGiorno and California Pizza Oven." Kraft said the division also benefited from further success in new platforms such as Oscar Mayer Deli Fresh meat and Oscar Mayer Delis Creations sandwiches.

Irene Rosenfeld, chairman and chief executive officer of Kraft, described the quarter as an "excellent start" for 2008.

In its U.S. Beverages business, 2.4% sales growth reflected gains in coffee sales offset by a decline in ready-to-drink beverages, especially Kool-Aid. Maxwell House mainstream coffee was successfully relaunched with upgrades in product quality and packaging, Kraft said.

In U.S. Cheese, volumes were lower because of significant price increases. Declines were partly offset by gains from value-added new products such as LiveActive snacking and cottage cheeses as well as Singles Select cheese slices. Operating income fell 24% largely because of an increase of roughly 30% in dairy costs as well as significant investments in marketing, Kraft said.

"We expect our results to continue to strengthen as the year progresses," she said. "Our investments in product quality, marketing and innovation are leading to better price realization, stronger top-one results and sequential improvement in margins from the fourth quarter of 2007. Our newly-acquired international biscuit business is performing well and integration is on track. And, while input costs remain high, I am confident that our ongoing programs to lower overhead costs and invest in our brands will enable us to deliver our targeted earnings in 2008 and beyond."

Kraft affirmed earnings guidance of $1.56 per share, or $1.90 excluding special items. The company raised its sales growth forecast for the year to 5% from 4%.

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