Kraft Q3 Profits Reflect Price Hikes, Some Volume Gains

Californina Pizza Kitchen For OneKraft Foods Inc. had a very solid third quarter, showing a net revenue gain of 19.4% (to $10.5 billion), organic revenue gain of 7.1% and operating income gain of 17.1%.

Diluted EPS for the period more than doubled, to $0.93. The CPG giant raised its full-year 2008 guidance on organic revenue growth from 6% to 7%, and confirmed EPS full-year guidance (excluding items) of at least $1.88.

"Kraft had a strong quarter in a difficult environment," said chairman/CEO Irene Rosenfeld. "Our operating momentum continued, with solid top- and bottom-line contributions from all geographies. I am especially pleased that our volumes in the third quarter held up better than expected, despite significant cost-driven price increases and an unsettled economic environment. As family budgets are squeezed, our ongoing programs to add value to our products through investments in quality, marketing and innovation are paying off."

Kraft reported that its acquisition of Groupe Danone's global biscuits business contributed 9.3 percentage points to net revenue growth, partially offset by a 0.9 percentage-point impact from divestitures. Currency added 3.9 percentage points.

Like other F&B companies, Kraft has been challenged by dramatic rises in the costs of energy and input/commodities--particularly in this year's first half--and has raised consumer prices substantially to cover those. This has resulted in sales volume decreases in many product categories, although Kraft is positioned well because many of its core products/brands are value-oriented, points out Christopher Shanahan, research analyst, chemicals, materials and food, Frost Sullivan, a marketing research firm.

"Kraft had solid revenue growth, and although much of that was due to price increases, they are a strong brand with strong core products that do well in hard times," such as Kraft Macaroni & Cheese and Kool-Aid, he says.

Kraft's prices rose 6.7% overall, against an average overall volume decline of just 0.6%, points out Shanahan.

Noting that Kraft sold Post Cereals, Shanahan adds that he expects Kraft and other CPGs to continue to sell off less profitable brands in this calendar year's third quarter, and also expects that declines in energy costs and moderation of increases in commodities prices (although these are still at record levels) will also be beneficial to CPG's third-quarter performance.

Here's a rundown of Kraft's performance by category and geography:

  • All product categories, both North American and international, showed gains in net revenue, organic net revenue and operating income, with one exception: U.S. convenient meals showed a 2.2% loss in operating income.
  • U.S. beverages saw a 7.4% gain in organic net revenue, reflecting gains both from price hikes and volume growth across coffee, ready-to-drink beverages and powdered beverages.
  • U.S. cheese organic net revenue grew 7%, reflecting significant price hikes that were partially offset by lower volume and unfavorable product mix. Volume gains from new products such as Kraft Bagel-fuls were more than offset by price-driven volume losses on other products, as well as planned volume declines in lower-margin natural cheese products.
  • U.S. convenient meals saw an organic net revenue gain of 8.6%, again driven by price increases, plus favorable product mix. Brands showing particular strength included DiGiorno and California Pizza Kitchen pizzas (including the launch of the "For One" line of individual-size pizzas). Oscar Mayer Deli Fresh meals and Deli Creations also continued to drive revenue growth.
  • U.S. grocery organic net revenues gained 5.9%, primarily due to price increases.
  • U.S. snacks' organic net revenue grew 4.1%. Pricing more than offset lower volume and unfavorable product mix. In biscuits, investments in quality and marketing behind core brands such as Oreo, Chips Ahoy! and Ritz, as well as the success of new Kraft Macaroni and Cheese crackers, contributed to revenue gains. However, these were partially offset by revenue losses in snack bars, due in part to product pruning and to a lesser extent to price-driven volume losses in snack nuts.
  • Canadian and North America food service saw organic net revenue growth of 4.5%, driven both by price hikes and volume gains.
  • European Union organic revenue gained 1.8%, with price increases offsetting a volume decline.
  • Developing markets saw organic revenues leap 19.1%, reflecting strong revenue results across all regions. Shanahan points out that volume in these regions was essentially flat, but prices rose by an average of 19%.

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