Kraft Foods reports Q4 net earnings of US$830M, up 53.7% from year-ago period, in line with Wall Street estimates; revenue up 6.6% to US$14.7B

Nevin Barich

NORTHFIELD, Illinois , February 21, 2012 (press release) – Kraft Foods Inc. (NYSE: KFT) today reported strong fourth quarter and full year 2011 results, driven by robust revenue growth, effective cost management and focused investments in the company's iconic brands.

"We delivered terrific results in 2011, and our businesses are healthier than ever due to the disciplined execution of our strategy," said Irene Rosenfeld, Chairman and CEO. "We expect to deliver top-tier growth in 2012, in line with our long-term targets, while we prepare to successfully launch the North American grocery and global snacks companies later this year."

Net revenues for the fourth quarter were $14.7 billion, up 6.6 percent. Organic Net Revenues grew 6.1 percent.

For the full year, net revenues were $54.4 billion, up 10.5 percent. Organic Net Revenues grew 6.6 percent, driven by strong growth across all geographies. Pricing contributed 6.0 percentage points of growth, and volume/mix contributed 0.6 percentage points.

Operating income for the fourth quarter was $1.5 billion, and operating income margin was 10.3 percent. Underlying Operating Income(1), which excludes acquisition-related costs(3), Integration Program costs(4), and spin-off-related costs(5), grew 7.4 percent to $1.7 billion.

Operating income for the full year was $6.7 billion, and operating income margin was 12.2 percent. Underlying Operating Income(1) grew 9.7 percent to $7.2 billion, driven primarily by effective management of input costs through pricing and productivity, favorable foreign currency and volume/mix gains. These gains were partially offset by the year-over-year change of unrealized gains/losses from hedging activities and the loss of the Starbucks CPG business(6). Underlying Operating Income margin of 13.3 percent was essentially flat versus the prior year despite the impact of the higher revenue base (from pricing) on the margin calculation.

Diluted earnings per share for the fourth quarter were $0.47, while Operating EPS(1) was $0.57, including a negative impact from foreign currency of $0.01.

Diluted EPS for the full year was $1.99. Operating EPS was $2.29, up 13.4 percent, driven primarily by operating gains, lower tax costs, and favorable foreign currency. Earnings growth was tempered by the change in unrealized gains/losses from hedging activities, higher shares outstanding, the impact of divestitures and higher interest expense.

Adjusted free cash flow(1,7) for the full year was $3.2 billion, essentially flat versus the prior year, with earnings growth offset by the impact of commodity inflation on working capital as well as higher capital expenditures.

Strong Revenue and Operating Income Growth in North America

Robust revenue growth and a continued focus on cost management fueled strong operating income gains in Kraft Foods North America.

Net revenues for the fourth quarter increased 8.9 percent, while Organic Net Revenues(1) increased 7.0 percent.

Net revenues for the full year increased 5.1 percent. Organic Net Revenues grew 4.8 percent, led by higher pricing across each business segment and significant contributions from new products.

Segment operating income increased 12.7 percent for the fourth quarter. For the full year, segment operating income grew 3.6 percent, including a negative 3.4 percentage point impact from divestitures (primarily the Starbucks CPG business). Excluding this factor, the growth in full year segment operating income reflected effective management of input costs, lower SG&A and the impact of a 53rd week of shipments, partially offset by unfavorable volume/mix.

Power Brands and Focused Cost Management Continue to Fuel Growth in Europe

Continued investment behind Power Brands and focus on cost management drove strong top- and bottom-line gains in Kraft Foods Europe in every quarter this year.

Net revenues for the fourth quarter increased 7.5 percent, while Organic Net Revenues(1) increased 3.1 percent.

For the full year, net revenues grew 14.9 percent. Organic Net Revenues increased 4.6 percent as strong brand equities enabled a positive contribution from volume/mix despite significant pricing actions. Power Brands grew more than 7 percent.

Segment operating income for the fourth quarter grew about 120 percent as sharply lower Integration Program costs versus the prior year accounted for more than 100 percentage points of the increase. Unfavorable currency had a negative 2.9 percentage point impact.

Segment operating income for the full year increased 26.1 percent, including benefits of 6.9 percentage points from lower Integration Program and acquisition-related costs versus the prior year and 5.4 percentage points from currency. Excluding these factors, the strong growth in segment operating income reflected productivity gains and cost synergies, lower SG&A and accounting calendar changes (including the impact of a 53rd week of shipments). These gains were tempered by higher raw material costs net of pricing.

Developing Markets Delivers Double-Digit Top- and Bottom-Line Growth

Kraft Foods Developing Markets delivered strong revenue and operating income growth despite volatile market conditions in each of its three regions.

Net revenues for the fourth quarter increased 2.4 percent, while Organic Net Revenues grew 7.2 percent.

Net revenues for the full year increased 16.2 percent. Organic Net Revenues grew 11.2 percent, driven by both higher pricing and volume/mix gains. Power Brands grew approximately 17 percent.

Segment operating income for the quarter increased 30.8 percent, including a favorable 16.6 percentage point impact from lower Integration Program costs versus the prior year, and a negative 2.7 percentage point impact from currency.

Segment operating income for the full year grew 30.2 percent, including benefits of 6.0 percentage points from lower Integration Program and acquisition-related costs versus the prior year, 5.2 percentage points from currency and 3.0 percentage points from the addition of Cadbury. Excluding these factors, the strong increase in segment operating income was driven by volume/mix gains and effective management of input costs, partially offset by overhead investments to support growth and higher advertising and consumer support.

OUTLOOK

In 2012, Kraft Foods expects to deliver Organic Net Revenue growth of approximately 5 percent, including a negative impact of up to one percentage point from product pruning in North America. Operating EPS is expected to grow at least 9 percent on a constant currency basis, despite a higher effective tax rate and a 4 percentage point headwind from higher pension costs.

"Our business momentum remains strong," said David Brearton, Executive Vice President and CFO. "We're confident that we can continue to deliver top-tier growth while we position ourselves to launch two industry-leading companies by the end of the year."

The company also said that it will incur one-time restructuring, transition and transaction costs of $1.6 billion to $1.8 billion as it prepares to separate into two companies later this year. In addition, the company estimates that it may incur between $400 million and $800 million of potential debt breakage and financing fees as it executes a migration of debt to the North American grocery company.

CONFERENCE CALL

The company will host an investor briefing to review its 2011 financial results, its outlook for 2012 and provide an update on its plan to create two independent companies, at the Consumer Analyst Group of New York (CAGNY) conference in Boca Raton, Fla., beginning at 10:30 a.m. EST today. Access to a live audio webcast with accompanying slides is available at www.kraftfoodscompany.com, and a replay of the event will also be available on the company's website.

ABOUT KRAFT FOODS

Kraft Foods Inc. (NYSE: KFT) is a global snacks powerhouse with an unrivaled portfolio of brands people love. Proudly marketing delicious biscuits, confectionery, beverages, cheese, grocery products and convenient meals in approximately 170 countries, Kraft Foods had 2011 revenue of $54.4 billion. Twelve of the company's iconic brands – Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oreo, Oscar Mayer, Philadelphia, Tang and Trident – generate revenue of more than $1 billion annually. On Aug. 4, 2011, Kraft Foods announced plans to divide and create two independent public companies: a high-growth global snacks business and a high-margin North American grocery business. The transaction is expected to be completed before the end of 2012. A leader in innovation, marketing, health & wellness and sustainability, Kraft Foods is a member of the Dow Jones Industrial Average, Standard & Poor's 500, Dow Jones Sustainability Index and Ethibel Sustainability Index. Visit www.kraftfoodscompany.com and www.facebook.com/kraftfoodscorporate.

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