Kraft Foods Inc. Reports Strong First Quarter

Kraft Foods Inc. reported strong first quarter 2011 results, driven by continued investments in marketing and innovation combined with aggressive cost management.

"We're off to a stronger-than-anticipated start to the year as our teams around the world execute our growth strategy," said Irene Rosenfeld, Chairman and CEO in a prepared statement. "Our business fundamentals are solid, and we continue to benefit from brand-building investments which allowed us to successfully deliver net pricing to offset commodities increases and drive top-tier growth. At the same time, we're generating cost savings to reinvest in further growth and expand margins."

Net revenues for the first quarter were $12.6 billion. Organic net revenues grew 4.6 percent, driven by solid top-line growth in all regions. Pricing, which accounted for 3.7 percentage points of growth, was higher in each geographic region. Volume/mix contributed 0.9 percentage points. The shift of Easter-related shipments into the second quarter tempered growth by approximately 1.5 percentage points.

Operating income was $1.6 billion, and operating income margin was 13.1 percent. Underlying operating income, which excludes acquisition-related and integration program costs, grew 16.0 percent to $1.8 billion. Underlying operating income margin expanded 60 basis points versus the prior year to 13.9 percent. Key drivers of margin expansion were lower SG&A, despite a significant increase in advertising and consumer (A&C) support, and the benefit of unrealized gains from hedging activities.

Diluted earnings per share were $0.45. Operating EPS increased 6.1 percent to $0.52, driven by solid operating performance and unrealized gains from hedging activities. Earnings growth was tempered by the impact of higher shares outstanding and higher interest expense related to the February 2010 Cadbury acquisition.

Kraft Foods North America continued to build momentum in the quarter by increasing A&C support behind power brands.

Net revenues in North America increased 4.4 percent. Organic net revenues increased 2.2 percent. Revenue growth was broad-based, driven by power brand growth of nearly 4 percent. The Easter shift tempered volume/mix growth by approximately 1.5 percentage points.

Segment operating income increased 5.4 percent. The addition of Cadbury had a favorable impact of 2.5 percentage points, net of integration program and acquisition-related costs. However, this was largely offset by a negative 2.0 percentage point impact from divestitures and the Starbucks CPG business. Excluding these factors, segment operating income increased. Higher pricing and productivity more than offset higher raw material costs and unfavorable mix due to the Easter shift, while a significant increase in A&C support more than offset other SG&A cost reductions.

Solid execution of Kraft Foods developing markets' strategy, which focuses on 5 key categories, 10 priority markets and 10 power brands, continued to deliver strong operating results.

Net revenues increased 24.0 percent. Organic net revenues grew 9.6 percent, driven by power brand growth of 16 percent. The Easter shift tempered growth by more than one-half percentage point. The Latin America and Asia Pacific regions each grew double-digits, while the CEEMA region posted mid-single-digit growth despite weak economic conditions.

Segment operating income increased 12.8 percent, reflecting a positive impact of 12.5 percentage points from the Cadbury acquisition, net of integration program and acquisition-related costs, and a negative 1.5 percentage point impact from currency. Excluding these factors, segment operating income increased modestly as higher pricing and volume/mix gains more than offset higher input costs and a strong double-digit increase in A&C.

"First quarter results bolster our confidence in our 2011 outlook," said Tim McLevish, executive vice president and CFO. "We're realizing better alignment between pricing and input costs, and volumes to date have held up well.

"At the same time, raw material costs continue to escalate and the economic environment remains unsettled," he continued. "Our updated earnings guidance reflects this strong business momentum, consistent with our previous guidance of 11 to 13 percent Operating EPS growth, while recognizing recent changes in the U.S. premium coffee business."

Specifically, the company now expects to deliver organic net revenue growth of at least 4 percent, excluding the impact of accounting calendar changes, and Operating EPS of at least $2.20.

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