Kraft Foods Inc. reported strong second quarter revenue growth in each geography. This strong top-line increase, coupled with aggressive cost management, also fueled solid operating income growth.
"Our second quarter results reflect the benefits of our virtuous cycle," said Irene Rosenfeld, Chairman and CEO in a prepared statement. "Consumers are responding well to our investments in marketing and innovation, and our focus on end-to-end cost management is paying off. As a result, we're successfully managing higher input costs through pricing and productivity, and we're well-positioned to continue our momentum and take the next step in our transformation."
Net revenues for the second quarter were $13.9 billion, up 13.3 percent, including a 2.1 percentage point benefit from accounting calendar changes. Organic net revenues grew 7.1 percent, driven by robust growth in all geographies. Pricing, which accounted for 5.5 percentage points of growth, was up strongly in each geography as pricing actions announced earlier in the year continued to be implemented. Market share performance was solid despite the company's pricing actions. Volume/mix contributed 1.6 percentage points to growth, including an approximately 1.5 percentage point benefit from the shift of Easter-related shipments into the quarter.
Operating income was $1.8 billion, and operating income margin was 13.0 percent. Underlying operating income, which excludes acquisition-related and integration program costs, grew 4.4 percent to $1.9 billion. Pricing essentially offset the impact of higher raw material costs, excluding the unrealized losses on hedging activities. The increase in underlying operating income was driven by the impact of favorable currency, volume/mix gains, lower overheads and the benefit of accounting calendar changes. Unrealized losses on hedging activities and the impact from the Starbucks CPG business tempered income growth in the quarter. Underlying operating income margin declined 120 basis points from peak levels in the prior year quarter to 14.0 percent, essentially due to the negative impact of pricing on the margin calculation.
Diluted earnings per share were $0.55. Operating EPS increased 3.3 percent to $0.62, driven primarily by currency and operating gains (including the benefit from accounting calendar changes), partially offset by unrealized losses from hedging activities.
Broad-based pricing and focused investments in Power Brands and new products drove strong revenue growth and solid operating income performance in Kraft Foods North America.
Net revenues increased 2.5 percent. Organic net revenues increased 4.0 percent, led by higher pricing across each business segment. Higher pricing was partially offset by lower volume/mix, including an Easter shift benefit of approximately 1.5 percentage points, which was consistent with the company's expectations. Power Brands grew approximately 4 percent.
Segment operating income declined 4.0 percent, including a negative 3.1 percentage point impact from the Starbucks CPG business and a 0.6 percentage point impact from integration program costs. Excluding these factors, segment operating income was essentially flat versus peak profitability levels in the prior year quarter. This performance reflected the benefits of pricing and lower SG&A offsetting higher raw material costs and lower volume/mix.
Kraft Foods Europe continued to generate strong top- and bottom-line momentum in the quarter.
Net revenues increased 26.2 percent, including a favorable 6.3 percentage point impact from accounting calendar changes. Organic net revenues increased 6.4 percent, including an approximately 2.5 percentage point benefit from the Easter shift. Power Brands grew nearly 8 percent.
Segment operating income increased 23.9 percent. Currency added 12.5 percentage points to growth, and was partially offset by a negative 4.6 percentage point impact from integration program costs. Excluding these factors, the strong increase in segment operating income was driven by lower SG&A and the benefit of accounting calendar changes, while pricing and productivity fully offset the increase in raw material costs in the quarter.
Kraft Foods Developing Markets drove strong top- and bottom-line growth across each region.
Net revenues increased 22.3 percent, including a favorable 2.3 percentage point impact from accounting calendar changes. Organic net revenues grew 13.5 percent, driven by strong volume/mix growth and favorable pricing. Power Brands grew nearly 20 percent. The Easter shift benefited growth by approximately 0.5 percentage points. The Latin America and Asia Pacific regions each grew double-digits, while the CEEMA region grew nearly 10 percent behind improving economic conditions.
Segment operating income increased 20.7 percent, including a favorable 17.2 percentage point impact from currency and a negative 4.1 percentage points from Integration Program and acquisition-related costs. Excluding these factors, the increase in segment operating income was driven by higher pricing and volume/mix gains, partially offset by higher input costs, a double-digit increase in advertising and consumer support and higher overheads.