Kraft Foods Inc. Reports 4.3 Percent Decline In Second Quarter Revenues, 0.3 Percent Drop In Second Half Revenues

Kraft Foods Inc. reported second quarter and first half 2012 results that reflected strong growth in Power Brands, favorable pricing, significant productivity gains and aggressive overhead cost management in each geography. The company also announced its intention to spin off the North American grocery business on Oct. 1.

"Our second quarter and first half results reflect the success of our brand-building investments over the past few years and the resilience of our businesses," said Irene Rosenfeld, chairman and CEO in a prepared statement. "As we embark on our journey as two industry-leading, independent companies, I'm confident that both companies have the brands, the executional capability, and the leadership teams to succeed in their respective missions."

Net revenues in the second quarter were $13.3 billion, down 4.3 percent due to a 5.0 percentage point headwind from currency and a negative 2.7 percentage point impact due to the benefit of accounting calendar changes in the prior year quarter. Organic net revenues increased 3.4 percent, driven by nearly 6 percent growth from Power Brands. Favorable pricing of 4.0 percentage points was partially offset by 0.6 percentage points from lower volume/mix. However, volume/mix was negatively affected by 1.2 percentage points from the shift of Easter-related shipments into the first quarter and by 0.5 percentage points from product pruning in North America.

For the first half of 2012, net revenues fell 0.3 percent, while organic net revenue increased 4.9 percent. Volume/mix contributed 0.2 percentage points despite substantial pricing and a negative 0.5 percentage point impact from product pruning. Power Brands increased more than 8 percent.

Operating income in the second quarter was $1.9 billion, and operating income margin increased 1.1 percentage points to 14.1 percent. Adjusted operating income, which excludes integration program costs, restructuring program costs and spin-off costs, grew 8.3 percent to $2.1 billion as pricing and productivity gains more than offset the impact of higher raw material costs, increased investments in advertising and consumer support and higher pension costs. A favorable impact from the year-over-year change of unrealized gains/losses from hedging activities was offset by unfavorable foreign currency and the benefit of accounting calendar changes in the prior year quarter. Adjusted operating income margin rose 1.8 percentage points to 15.8 percent.

Diluted EPS in the second quarter was $0.58. Operating EPS was $0.68, up 9.7 percent, driven primarily by operating gains, which included a $0.01 headwind from higher pension costs. Operating EPS benefited $0.05 from the year-over-year change of unrealized gains/losses from hedging activities, but this was offset by $0.03 from unfavorable foreign currency and $0.02 from accounting calendar changes. Operating EPS increased 12.9 percent on a constant currency basis.

Diluted EPS in the first half of 2012 was $1.03. Operating EPS increased 9.6 percent to $1.25, driven primarily by operating gains that included a $0.04 headwind from higher pension costs. Unfavorable impacts of $0.02 from foreign currency and $0.02 from accounting calendar changes were largely offset by a $0.03 benefit from the year-over-year change of unrealized gains/losses from hedging activities. In the first half of 2012, Operating EPS increased 11.4 percent on a constant currency basis.

Power Brands, new products and a favorable impact from carryover pricing actions drove solid organic net revenue and adjusted segment operating income growth in Kraft Foods North America.

Net revenues in the second quarter increased 1.2 percent. Organic net revenues grew 1.7 percent, led by higher pricing across each business segment. Although lower, volume/mix was negatively impacted by more than 1 percentage point from the Easter shift and by more than 1 percentage point from product pruning. Power Brands grew more than 5 percent.