Kraft 2013 Third Quarter Revenue Drops 4.2 Percent

Kraft Foods Group, Inc. reported third quarter results with net revenues declining 4.2 percent. Last year, the company shipped safety stock to retailers ahead of a systems changeover as part of the spin-off from Mondelez International.

"The unusual nature of last year's Q3 results obscures our steady progress in remaking the best brand portfolio in the food and beverage industry," said Kraft CEO Tony Vernon, in a prepared statement. "There's no question it's a difficult environment for our consumers and customers. We remain confident that our disciplined approach to growing our brands and driving cost savings will enable us to continue delivering the consistent returns our shareholders expect."

Third quarter reports showed net revenues declined 4.2 percent to $4.4 billion. Organic net revenues declined 4.1 percent from lower volume/mix of 3.1 percentage points and 1.0 percentage point due to lower pricing. The decline in volume/mix reflected a negative impact of approximately 3 percentage points from comparisons with shipments of safety stock to customers ahead of last year's spin-off from Mondelez International, an approximately 1 percentage point reduction from product line pruning, and base business gains of approximately 1 percentage point.

Operating income increased 14.9 percent to $870 million. Operating income included a $175 million benefit from market-based impacts to post-employment benefit plans driven by higher discount rates and higher asset returns. Implementation of a voluntary early retirement program in early 2013 triggered a third quarter re-measurement of select pension plans. Excluding the market-based impacts to post-employment benefit plans, gains from overhead cost reductions and productivity were offset by unfavorable pricing net of commodity costs, lower volumes, an unfavorable year-over-year change in unrealized gains/losses from hedging activities and higher marketing investments versus the prior year.

Earnings per share were $0.83, an increase of $0.04 or 5.1 percent versus the prior year. EPS in this quarter included an $0.18 benefit from market-based impacts to post-employment benefit plans. Excluding this benefit, EPS was lower than the prior year due to a $0.05 unfavorable year-over-year change in unrealized gains/losses from hedging activities, lower volumes, a higher year-over-year tax rate and higher interest expense.

Beverage revenues declined due to lower prices from higher levels of merchandising activity for Capri Sun and Kool-Aid Jammers as well as the pass-through of lower green coffee costs versus the prior year. Improved product mix from on-demand coffee, liquid water enhancer innovations and Gevalia premium coffee more than offset a negative volume impact from comparisons with spin-off related shipments in the prior year period. Operating income declined due to unfavorable pricing net of commodity costs, unfavorable volume/mix versus the prior year and higher investments in marketing.

Refrigerated meals continued revenue gains from Lunchables innovation, Oscar Mayer bacon and hot dog growth, as well as increased pricing to cover commodity costs were more than offset by the negative impact from comparisons with spin-off related shipments in the prior year period. Operating income declined due to a negative impact from pricing net of commodity costs versus the prior year and higher investments in marketing.

Meals and desserts revenues declined due to a negative volume impact from comparisons with spin-off related shipments in the prior year period. Excluding this factor, ongoing growth of Velveeta dinners was largely offset by softness in JELL-O desserts. Operating income declined due to lower volumes. Significant marketing investments to rebuild brand equity were largely offset by overhead cost savings.

Enhancers and snack nut revenues declined significantly due to volume weakness in salad dressings and mayonnaise as well as lower prices driven by lower nut costs versus the prior year. These factors more than offset solid volume growth and improved product mix from Planters snack nuts. Operating income was flat as overhead cost savings, productivity gains and improved product mix offset unfavorable pricing net of commodity costs, lower volumes and higher marketing investments versus the prior year.

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