-- 2009 net revenues declined 3.7% to $40.4 billion due primarily to currency; organic net revenues(1) grew 1.5%
-- 2009 operating income margin expanded 450 basis points to 13.7%
-- 2009 diluted EPS was $2.03, up 7%
-- Free cash flow grew 35% to $3.8 billion
-- Q4 net revenues increased 3.2% to $11.0 billion due primarily to currency; organic net revenues increased 0.4%
-- Q4 diluted EPS was $0.48
NORTHFIELD, Ill., Feb 16, 2010 /PRNewswire via COMTEX/ -- Kraft Foods Inc. (NYSE: KFT) today reported 2009 results that demonstrated strong earnings and free cash flow growth in a continuing difficult global economic environment. Volume/mix improved sequentially throughout the year, and was a significant contributor to income growth and margin expansion.
"2009 was a strong finish to our three-year turnaround and gave us excellent momentum heading into 2010," said Irene Rosenfeld, Chairman and CEO. "Despite the challenging economic environment, we generated exceptional profit and free cash flow. We continue to benefit from investments in our iconic brands. This is driving volume/mix gains and leveraging our cost structure to deliver sustainable, profitable growth. And our top line reflected our resolve to avoid chasing unsustainable, promoted volume."
Rosenfeld continued: "We're ready to begin an exciting new chapter at Kraft Foods, with Cadbury's brands as a valuable addition to our portfolio. Together, we'll remain focused on driving sustainable top-line growth, while delivering against our cost savings and synergy opportunities. As a combined entity, we are well positioned to deliver top-tier performance and accelerate our long-term growth."
Net revenues in the fourth quarter increased 3.2 percent to $11.0 billion, including the favorable impact of 3.2 percentage points from currency and a negative 0.4 percentage point impact from divestitures.
Organic net revenues(1) grew 0.4 percent driven by 1.6 percentage points from volume/mix, partially offset by negative 1.2 percentage points from lower price levels. Volume/mix gains were negatively impacted by approximately 0.4 percentage points due to the discontinuation of less-profitable product lines. The lower price levels included the unfavorable impact of approximately 1.5 percentage points in response to lower dairy costs, consistent with the company's adaptive pricing model for its cheese business in the United States.
Operating income in the fourth quarter nearly quadrupled from the prior year to $1,306 million. Lower costs due to the completion of the Restructuring Program(2) in fourth quarter 2008 accounted for most of this increase.
Operating income margin increased 870 basis points year-over-year to 11.8 percent. Approximately 760 basis points was driven by lower costs due to the completion of the Restructuring Program and lower asset impairment costs. The remainder of the margin increase largely reflected an improved alignment of prices with input costs, including net unrealized gains from hedging activities, and improved volume/mix. These gains were partially offset by significant investments in cost savings initiatives and marketing.
The tax rate in the fourth quarter was 27.7 percent and included certain one-time benefits. In the prior year quarter, the company's reported tax provision was a credit, reflecting higher costs related to the company's Restructuring Program and the recognition of several specific tax benefits.
Earnings per share from continuing operations in the fourth quarter were $0.48, up $0.41 from the fourth quarter 2008.
Q4 Full Year
---- ---------
2008 Diluted EPS $0.12 $1.90
Gain from Discontinued Operations (0.05) (0.69)
----- -----
2008 Diluted EPS from Continuing $0.07 $1.21
Operations
Increase/(Decrease) from Operations (0.05) 0.15
Lower Restructuring Program Costs and
Asset Impairment Charges 0.37 0.55
Change in Unrealized Gains/Losses from
Hedging Activities 0.11 0.18
Gain and/or Lower Losses on
Divestitures, net 0.05 0.08
Absence of Brazilian VAT Credit - (0.03)
Favorable/(Unfavorable) Foreign Currency 0.01 (0.14)
Higher Interest Expense (0.01) -
Changes in Taxes (0.07) (0.01)
Fewer Shares Outstanding - 0.04
--- -----
2009 Diluted EPS $0.48 $2.03
The decrease in earnings from operations of $0.05 versus fourth quarter 2008 was due to investments in cost savings initiatives of approximately $0.11 in fourth quarter 2009 as the company accelerated plans related to its European reorganization and overhead cost reduction initiatives.
Free cash flow(1) for 2009 increased 35 percent to approximately $3.8 billion. The increase primarily reflects gains from working capital efficiency programs and improved earnings, partially offset by incremental pension contributions.
FOURTH QUARTER 2009 RESULTS, DISCUSSION BY SEGMENT(3)
Changes in:
----------------------------------------------------------------------
Organic Net Operating
Net Revenues Revenues(1) Income(4)
------------ ----------- ---------
Total Kraft Foods 3.2% 0.4% 100.0%+
Kraft Foods North America (1.5) (2.7) 49.9
U.S. Beverages (1.9) (1.9) 100.0+
U.S. Cheese (13.7) (13.7) 7.4
U.S. Convenient Meals 3.9 3.9 57.8
U.S. Grocery 0.1 0.1 25.9
U.S. Snacks (3.3) (2.8) 82.1
Canada & N.A. Foodservice 8.2 0.1 100.0+
Kraft Foods Europe 8.0 (0.3) nm
Kraft Foods Developing Markets 11.2 10.4 91.0
U.S. Beverages
Organic net revenues declined 1.9 percent as higher price levels were more than offset by unfavorable volume/mix. Strong growth in Capri Sun ready-to-drink beverages and Crystal Light powdered beverages was more than offset by weakness in Maxwell House and Starbucks coffee. A significant portion of the decrease in volume/mix was due to the decision to forego unprofitable volume.
Segment operating income nearly quadrupled as an improved alignment of prices with input costs and lower costs due to the completion of the Restructuring Program were partially offset by investments in cost savings initiatives and unfavorable volume/mix.
U.S. Cheese
Organic net revenues declined 13.7 percent largely due to a 12.8 percentage point reduction from lower price levels. This price decline was in response to significantly lower dairy costs, consistent with the company's adaptive pricing model. Incremental marketing investments behind more profitable priority brands, including Kraft Singles processed slices, Philadelphia cream cheese and Velveeta processed cheese, drove gains in volume/mix and market share. However, volume/mix gains in priority brands were more than offset by declines in natural cheese.
Segment operating income grew 7.4 percent primarily driven by lower costs due to the completion of the Restructuring Program. Lower overheads, an improved alignment of prices with input costs and favorable volume/mix were more than offset by incremental marketing investments and cost savings initiatives.
U.S. Convenient Meals
Organic net revenues increased 3.9 percent as strong volume/mix gains were partially offset by lower price levels in response to lower input costs. Oscar Mayer Deli Fresh meats delivered strong double-digit growth behind improved distribution and new product offerings, while strong growth of Oscar Mayer bacon was driven by successful holiday merchandising programs. Oscar Mayer Lunchables also had solid growth. Pizza generated strong growth behind double-digit increases in base DiGiorno and Tombstone pizza and momentum of new product platforms launched earlier in the year.
Segment operating income increased 57.8 percent as strong volume/mix gains, improved alignment of prices with input costs and lower costs due to the completion of the Restructuring Program more than offset incremental marketing investments and cost savings initiatives as well as higher overheads.
U.S. Grocery
Organic net revenues increased 0.1 percent including a negative 0.6 percentage point impact from the discontinuation of less-profitable product lines. The increase was driven by strong gains in Kraft macaroni and cheeseand in seasonal products, such as Stove-Top stuffing and Jet-Puffed marshmallows.
Segment operating income increased 25.9 percent as improved alignment of prices with input costs, together with lower costs due to the completion of the Restructuring Program, more than offset investments in cost savings initiatives and incremental marketing as well as unfavorable volume/mix.
U.S. Snacks
Organic net revenues declined 2.8 percent reflecting weaker trends in the biscuit category in the second half of the year as a result of reduced merchandising opportunities. Although biscuit revenue declined modestly in the fourth quarter, the top five biscuit brands collectively achieved solid net revenue growth behind strong performances by Ritz crackers and Oreo cookies. Snack nuts revenue declined as a result of highly aggressive promotional activity by competitors.
Segment operating income increased 82.1 percent driven by lower costs due to the completion of the Restructuring Program, lower marketing costs and a gain on the divestiture of the Balance bar operation, partially offset by increased investments in cost savings initiatives. Segment operating income also benefited from an improved alignment of prices with input costs and favorable volume/mix.
Canada & North America Foodservice
Organic net revenues increased 0.1 percent as strong volume/mix gains and higher price levels in Canada were partially offset by lower revenues in North America Foodservice. Growth in Canada was broad-based across both customers and categories, driven by marketing investments and successful customer programs. North America Foodservice declined due to the continuing industry-wide weakness in casual dining traffic.
Segment operating income more than doubled. Excluding the impact of currency, the increase in segment operating income was driven by lower costs due to the completion of the Restructuring Program, the improved alignment of prices with input costs and favorable volume/mix. Investments in cost savings initiatives partially offset these gains.
Kraft Foods Europe
Organic net revenues declined 0.3 percent as management's decision to forego unprofitable volume and the discontinuation of less-profitable product lines slowed growth by approximately 2 percentage points. Continued weak economic conditions in the region, particularly in Iberia and France, also negatively impacted revenue growth.
Chocolate grew despite the weak economic conditions. Strong in-store marketing activities and holiday programs drove solid growth in Milka. Growth was also driven by the solid performance of Freia and Marabou in Scandinavia.
Coffee declined as a result of foregoing less profitable volume. This decline was partially offset by double-digit growth of Tassimo.
Biscuits declined as the impact of weak economic conditions, particularly in Iberia and France, were partially offset by strong growth by Oreo, TUC and Mikado.
Cheese rose as strong growth in Philadelphia cream cheese was driven by the introduction of new packaging and successful new product launches.
Segment operating income increased by $386 million to $220 million from a loss of $166 million in the prior year. Lower costs due to the completion of the Restructuring Program accounted for most of this increase. Improved alignment of prices with input costs, volume/mix gains, lower asset impairment costs and lower overheads, offset by investment in cost savings initiatives and incremental marketing, also contributed to this increase.
Kraft Foods Developing Markets
Organic net revenues increased 10.4 percent driven by strong growth in volume/mix and higher price levels.
In Latin America, double-digit organic revenue growth was driven by higher price levels and strong volume/mix gains. The priority brands collectively grew 25 percent, led by Tang powdered beverages.
In Asia Pacific, double-digit organic revenue growth was driven by strong volume/mix gains, partially offset by lower price levels. The priority brands collectively grew nearly 30 percent, led by Oreo cookies, Philadelphia cream cheese and Tang powdered beverages.
In Central and Eastern Europe, Middle East & Africa, strong organic revenue growth was driven by both higher price levels and improved volume/mix, despite weak economic conditions. The priority brands collectively grew double-digit, including more than 20 percent growth in Jacobs coffee.
Segment operating income increased 91.0 percent. The impact from currency was neutral. Growth was driven by a combination of lower costs due to the completion of the Restructuring Program, favorable volume/mix, an improved alignment of prices with input costs and lower asset impairment costs. These gains more than offset higher investments in marketing, higher overheads and investments in cost savings initiatives.
OUTLOOK
Kraft Foods expects the strong operating momentum of its base business to carry forward into coming years. In the near term, for its base business, the company continues to target organic net revenue growth of 4 percent or more and the high end of its 7 to 9 percent long-term EPS growth objective.
The company expects to deliver this performance while:
investing incrementally in product quality, marketing and innovation;
raising productivity as a percentage of cost of goods sold to greater than 4 percent by 2011;
leveraging overhead costs by reducing overhead as a percentage of net revenue to approximately 12.5 percent by 2011; and
restoring operating income margins to industry benchmarks in the mid-teens by 2011.
In addition, Cadbury plc's results will be consolidated with those of Kraft Foods from February 2, 2010, onwards.
The combination of Kraft Foods and Cadbury is expected to provide the potential for meaningful revenue synergies over time from investments in distribution, marketing and product development. As a result, the combined company is targeting long-term organic net revenue growth of 5 percent or more.
Opportunities for significant synergies from the combination have also been identified. The combined company continues to expect that pre-tax cost savings of at least $675 million annually can be realized by the end of 2012. Total one-time implementation cash costs of approximately $1.3 billion are expected to be incurred through the end of 2012.
The combined company is targeting accretion to earnings per share in 2011 of approximately $0.05 on a cash basis, which excludes one-time expenses to achieve cost savings, expenses related to the transaction and the impact of incremental non-cash items such as the amortization of intangibles related to the acquisition. Over the long-term, the combined company is targeting EPS growth of 9 to 11 percent.
Kraft Foods' results will also be affected by the sale of the assets of its North American frozen pizza business, which is expected to close in mid- 2010. The company expects earnings to be reduced by approximately $0.05 per diluted share on an annual basis as a result of the frozen pizza business transaction.(5)
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