Kraft attributes strong first quarter to Cadbury buy

Posted by Josette Dunn on 10th May 2010

Kraft Foods Inc. on Friday reported strong first quarter 2010 results driven by good operating momentum in every geography. Volume/mix improved sequentially from the fourth quarter 2009 and contributed significantly to income growth and margin expansion for Kraft Foods’ base business.

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“Our first quarter results are early evidence of our future potential in combination with Cadbury,” said Irene Rosenfeld, Chairman and CEO. “We demonstrated strong momentum in our Kraft Foods’ base business, including high-quality top-line growth and strong operating gains. In addition, our Cadbury business delivered solid financial results.”

Rosenfeld continued, “Our integration is progressing extremely well. We moved quickly to name our leadership teams, and I’m pleased that about a third of our top 50 executives are from Cadbury. We’ve confirmed our synergy targets and the specific initiatives that will drive future margin expansion and accelerate our growth.”

Net revenues from continuing operations in the first quarter increased 26.0 percent to $11.3 billion, including the favorable impact of 18.9 percentage points from the Cadbury acquisition, 4.2 percentage points from currency and a negative 0.4 percentage point impact from divestitures.

The benefit of earlier shipments of Easter products versus the prior year added approximately one-half percentage point to the combined company’s organic growth.

Operating income margin declined 240 basis points year-over-year to 10.7 percent, including a negative 300 basis point impact due to acquisition-related costs and integration costs and a positive 20 basis point impact due to the addition of Cadbury operations. Excluding these factors, Kraft Foods’ base business operating income margin expanded to 13.5 percent. The improvement reflected an increase from operations, driven primarily by volume/mix gains and productivity improvements, that was partially offset by a negative impact due to the change in unrealized gains and losses from hedging activity.

Operating EPS in the first quarter was $0.49, up 19.5 percent over EPS from continuing operations in the prior year. This was driven by $0.08 of operating gains from Kraft Foods’ base business and $0.07 of operating earnings from Cadbury.

OUTLOOK

The company expects Combined Organic Net Revenue growth of at least 4 percent in 2010, driven by approximately 4 percent organic net revenue growth of Kraft Foods’ base business and approximately 5 percent organic net revenue growth of Cadbury.

Diluted EPS is expected to be at least $2.35 in 2010. This includes:

* Operating EPS of at least $2.00;
* Integration costs of approximately $0.30;
* Acquisition-related costs and financing fees of approximately $0.22;
* U.S. health care legislation charge of $0.08; and
* Earnings and gain on the sale of the Pizza business of $0.95.

Operating EPS reflects strong EPS growth of the Kraft Foods’ base business at the high end of the company’s 7 percent to 9 percent long-term EPS growth target, solid earnings performance from Cadbury as it benefits from past cost savings initiatives and a modest contribution from cost synergies. Earnings growth will be tempered in the near term by stepped-up levels of brand support across the portfolio, as well as incremental interest and shares outstanding as a result of the Cadbury acquisition.

For 2011, the company expects to deliver its long-term target of at least 5 percent organic net revenue growth and mid-teens growth in Operating EPS. Growth in Operating EPS is consistent with the previous Kraft Foods’ base business EPS growth target.

“The Cadbury acquisition is transformational for Kraft Foods, both strategically and financially, and this is reflected in our long-term outlook for the combined company,” said Rosenfeld. “We have a strong track record of successfully integrating acquired companies and we are on track to continue that with Cadbury.”