"Despite a difficult environment in 2008, we delivered our commitments and made significant strides in staging the portfolio for sustainable growth," said Irene Rosenfeld, chairman and CEO. "While our 2009 earnings face a number of headwinds, particularly currency and pension costs, we will complete our turnaround in 2009 by continuing to invest in our brands, better leveraging our overhead costs and improving both market shares and profit margins from 2008 levels."
-- Net revenues: Fourth quarter net revenues increased 6.2 percent to
$10.8 billion. The LU biscuit acquisition added 8.0 percentage points
to net revenue growth that was partly offset by a negative 5.3
percentage point impact from currency and a 0.9 percentage point impact
from divestitures.
Excluding these factors, organic net revenue growth was 4.4 percent.
Input cost-driven pricing added 9.8 percentage points to growth.
Volume was down 5.2 percent reflecting the full impact of unprecedented
cost-driven pricing actions taken throughout the year in every
geography. Additionally, North American volumes were negatively
impacted by retailer inventory reductions and the company's pruning of
less profitable items.
-- Operating income: Fourth-quarter reported operating income declined
68.5 percent from the prior year to $302 million primarily due to the
final costs related to the company's restructuring program,
which was completed at the end of 2008. Operating income excluding
items(1) was down 0.8 percent versus the prior year. In fourth quarter
2008, approximately $170 million of unrealized, mark-to-market losses
related to the company's commodity hedging activities affected results.
Operating results improved as the benefits of the LU biscuit
acquisition and cost-driven pricing actions more than offset the
impacts of higher input costs, lower volume, higher marketing and the
timing of overhead costs.
-- Tax rate: Kraft's reported tax provision in the fourth quarter 2008 was
a credit of $90 million reflecting higher costs related to the
company's restructuring program and the recognition of several specific
tax benefits. Excluding items(1), the fourth quarter rate was 19.7
percent compared to 27.4 percent in fourth quarter 2007, primarily
reflecting several discrete tax benefits recognized in fourth quarter
2008.
-- Earnings per share: Fourth-quarter 2008 reported earnings per share
were $0.11, down from $0.38 in fourth quarter 2007. During the
quarter, the company incurred $0.36 per share in asset impairment, exit
and implementation costs, compared to $0.06 in the same quarter a year
ago, and recognized a $0.05 adjustment on the previously recognized
gain from the split-off of the Post cereals business.
Items(1) Affecting
EPS Comparability Fourth Quarter Full Year
---------------------- ---------------------- ----------------------
Growth Growth
2008 2007 (%) 2008 2007 (%)
------ ------ ------ ------ ------ ------
Reported Diluted
EPS $0.11 $0.38 (71.1)% $1.92 $1.62 18.5%
Asset Impairment,
Exit and
Implementation
Costs 0.36 0.06 0.52 0.22
(Gains)/Losses
on Divestitures (0.05) (0.58)
Charges for
Legal Matters 0.01 0.03
Deferred Tax
Reconciliation* (0.02)
Interest on Altria
Tax Reserve (0.03)
------ ------ ------ ------
Diluted EPS
excluding above
items $0.43 $0.44 (2.3)% $1.88** $1.82** 3.3%
* Third quarter 2008 write-down of net deferred tax liabilities due to
reconciliation of deferred tax items.
** Does not add due to rounding.
Excluding items, fourth-quarter 2008 earnings per share were $0.43,
down 2.3% from fourth quarter 2007. Compared to the prior year,
earnings per share excluding items reflected a $0.11 contribution from
operational gains, a $0.02 contribution from lower shares outstanding,
and a $0.04 benefit from a lower effective tax rate. These gains were
offset by $0.08 in unrealized, mark-to-market losses from certain
commodity hedging activities, a $0.04 negative impact from higher
interest expense, a $0.03 negative impact from currency, and a $0.03
decline in earnings from discontinued operations.
-- Discretionary cash flow(1): The company generated $2.8 billion in
discretionary cash flow during 2008, defined as cash flow from
operations less capital expenditures. This represents an increase of
19 percent compared to 2007, driven by solid earnings performance and
significant improvements in working capital management.
-- Share repurchases: In 2008, the company repurchased 25.3 million shares
of its common stock for approximately $777 million. The company
repurchased no shares in fourth quarter 2008 in light of uncertain
conditions in the economy and capital markets. Given the present
environment, the company does not expect to make further share
repurchases before its current authorization expires on March 30, 2009.
FOURTH QUARTER 2008 RESULTS, DISCUSSION BY SEGMENT*
Q4 2008
(percent growth)
------------------------------------------------
Operating
Organic Income
Net Net Operating Excluding
Revenues Revenues(1) Income Items(1)
---------- ---------- --------- ---------
Total Kraft 6.2% 4.4% (68.5)%** (0.8)%**
North America 0.4 2.4 (9.4) 10.4
U.S. Beverages (2.2) (1.7) (81.0) (49.3)
U.S. Cheese 3.3 3.3 100.0+ 100.0+
U.S. Convenient Meals 10.7 10.7 9.5 25.3
U.S. Grocery 2.0 2.0 (16.7) (6.8)
U.S. Snacks (0.7) (1.2) (52.9) (9.5)
Canada & N.A.
Foodservice (9.2) 2.0 (39.3) (9.8)
International 14.6 7.4 (100.0+) 26.9
European Union 15.8 2.3 (100.0+) 25.3
Developing Markets 12.8 15.3 (72.5) 29.6
* Please refer to the company's Form 8-K filed April 11, 2008, for
discussion of changes to reportable business segments and the company's
Form 8-K filed September 19, 2008, for discussion of Post cereals
discontinued operations.
** Includes the changes in unallocated corporate expenses, including the
impact of unrealized gains/losses related to the company's hedging
activities.
U.S. Beverages
Organic net revenues declined 1.7 percent as pricing was offset by unfavorable product mix and lower volumes, primarily in powdered beverages. Successful quality and marketing investments in Capri Sun led to solid ready-to-drink beverage growth. In coffee, continued gains in Maxwell House mainstream coffee and Tassimo on-demand coffees were offset by declines in premium coffee brands. Crystal Light powdered beverage revenue was down significantly due to a combination of retailer inventory reductions and comparisons with an exceptionally strong prior year period. Operating income excluding items declined 49.3 percent as the benefits of higher pricing and productivity were more than offset by the negative product mix from lower powdered beverage revenues as well as higher marketing spending.
U.S. Cheese
Organic net revenues grew 3.3 percent reflecting the impact of cost-driven pricing actions taken throughout the year and the associated decline in volume. Operating income excluding items more than doubled versus a weak fourth quarter in the prior year as the company better aligned pricing with input costs. During the quarter, pricing more than offset the impact of lower volume and unfavorable product mix as the benefits of past pricing actions caught up to the escalation of costs experienced during the year.
U.S. Convenient Meals
Organic net revenues grew 10.7 percent reflecting cost-driven price increases and favorable product mix. The main contributors of revenue growth were DiGiorno and California Pizza Kitchen pizzas, including the launch of the "For One" line of individual size pizzas, as well as Oscar Mayer bacon and Oscar Mayer Deli Fresh meats. Operating income excluding items increased 25.3 percent as the benefits of past pricing actions caught up to the escalation of costs experienced during the year.
U.S. Grocery
Organic net revenues grew 2.0 percent due to cost-driven pricing and favorable product mix. Further growth in Kraft macaroni and cheese dinners was partially offset by the impact to volume from cost-driven price increases and retail inventory reductions, particularly in pourable and spoonable dressings. Operating income excluding items declined 6.8 percent as lower volume was partially offset by improved pricing net of input costs.
U.S. Snacks
Organic net revenues declined 1.2 percent as pricing was more than offset by lower volume and unfavorable product mix. Volume declined significantly in Planters snack nuts as price gaps versus competition widened due to earlier pricing actions taken by the company that were not matched by competitors. Biscuit growth was driven primarily by gains in cookies, including strong momentum in Oreo, which grew more than 20 percent in the quarter. Operating income excluding items declined 9.5 percent as profit growth in biscuits was more than offset by a decline in snack nuts and snack bars.
Canada & North America Foodservice
Organic net revenues grew 2.0 percent behind cost-driven pricing and favorable product mix. Volume growth from improved customer programs in Canada was more than offset by lower Foodservice volumes due to a slowdown in casual dining traffic and the pruning of lower-margin businesses. Operating income excluding items declined 9.8 percent due to unfavorable currency. Apart from the impact of currency, the benefits of cost-driven pricing and lower overhead costs more than offset higher input costs and lower volume.
European Union
Organic net revenues grew 2.3 percent reflecting cost-driven pricing actions that more than offset a pricing-related volume decline. Further investments in marketing and innovation behind the Milka brand drove solid growth in chocolate, with particular strength in Germany, Austria and Poland. Successful investments in the Philadelphia brand partially offset pricing-related base cheese declines. Coffee gains were driven by continued growth of Tassimo on-demand coffees, a successful relaunch of Kenco in the United Kingdom and improved marketing behind Gevalia in Sweden. Operating income excluding items grew 25.3 percent, including a 42.4 percentage point contribution from the acquisition of the LU biscuit business. Overall, the benefits of the acquisition, higher pricing and favorable product mix were partially offset by higher input costs, the timing of overhead costs, pricing-related volume declines and unfavorable currency.
Developing Markets
Organic net revenues grew 15.3 percent driven by strong results in every region. Successful investments in chocolate and coffee drove revenue growth across all key markets in the Eastern Europe, Middle East & Africa region. Latin American growth was driven by pricing gains in biscuits and chocolate. Revenues in the Asia Pacific region grew due to gains in biscuits as well as improved consumer programming behind Toblerone chocolates and Tang powdered beverages. Operating income excluding items increased 29.6 percent, including a 1.7 percentage point benefit from the acquisition of the LU biscuit business. The primary drivers of the strong increase in operating income in the quarter were pricing and favorable product mix that more than offset higher input costs and the timing of overhead costs.
Outlook(1)
The company now expects 2009 organic net revenue growth of approximately 3 percent, down from a previous expectation of at least 4 percent, due to a lower-than-expected contribution from pricing as certain input costs, particularly dairy, have declined.
Additionally, the company now expects 2009 GAAP EPS of $1.88 per share versus a previous expectation of at least $2.00 per share. This change reflects a greater-than-anticipated negative impact from currency and pension costs, significantly offset by improved business performance.
2009 guidance reflects expectations of approximately $0.16 in negative impact from currency versus the prior year, $0.08 in higher pension costs and $0.03 in year-over-year dilution from the exit of the Post cereals business. In addition, the company expects a $0.09 impact from spending on cost savings initiatives in 2009 and a tax rate of approximately 31.5 percent, up from 2008, which benefitted from several discrete items.
The company continues to expect cumulative annualized savings from its restructuring program to reach approximately $1.4 billion for the total program. To date, cumulative annualized savings from this cost restructuring program totaled approximately $1.1 billion, up from approximately $0.8 billion at the end of 2007.
