Kraft Foods Inc. (NASDAQ: KFT) reported second quarter and first half 2012 results that reflected strong growth in Power Brands, favorable pricing, significant productivity gains and aggressive overhead cost management in each geography. The company also announced its intention to spin off the North American Grocery business on Oct. 1.
"Our second quarter and first half results reflect the success of our brand-building investments over the past few years and the resilience of our businesses," said Irene Rosenfeld, Chairman and CEO. "As we embark on our journey as two industry-leading, independent companies, I'm confident that both companies have the brands, the executional capability, and the leadership teams to succeed in their respective missions."
Net revenues in the second quarter were $13.3 billion, down 4.3 percent due to a 5.0 percentage point headwind from currency and a negative 2.7 percentage point impact due to the benefit of accounting calendar changes in the prior year quarter. Organic Net Revenues increased 3.4 percent, driven by nearly 6 percent growth from Power Brands. Favorable pricing of 4.0 percentage points was partially offset by 0.6 percentage points from lower volume/mix. However, volume/mix was negatively affected by 1.2 percentage points from the shift of Easter-related shipments into the first quarter and by 0.5 percentage points from product pruning in North America.
For the first half of 2012, net revenues fell 0.3 percent, while Organic Net Revenue increased 4.9 percent. Volume/mix contributed 0.2 percentage points despite substantial pricing and a negative 0.5 percentage point impact from product pruning. Power Brands increased more than 8 percent.
Operating income in the second quarter was $1.9 billion, and operating income margin increased 1.1 percentage points to 14.1 percent. Adjusted Operating Income, which excludes Integration Program costs, Restructuring Program costs and Spin-Off Costs, grew 8.3 percent to $2.1 billion as pricing and productivity gains more than offset the impact of higher raw material costs, increased investments in advertising and consumer support and higher pension costs. A favorable impact from the year-over-year change of unrealized gains/losses from hedging activities was offset by unfavorable foreign currency and the benefit of accounting calendar changes in the prior year quarter. Adjusted Operating Income margin rose 1.8 percentage points to 15.8 percent.
Diluted EPS in the second quarter was $0.58. Operating EPS was $0.68, up 9.7 percent, driven primarily by operating gains, which included a $0.01 headwind from higher pension costs. Operating EPS benefited $0.05 from the year-over-year change of unrealized gains/losses from hedging activities, but this was offset by $0.03 from unfavorable foreign currency and $0.02 from accounting calendar changes. Operating EPS increased 12.9 percent on a constant currency basis.
Diluted EPS in the first half of 2012 was $1.03. Operating EPS increased 9.6 percent to $1.25, driven primarily by operating gains that included a $0.04 headwind from higher pension costs. Unfavorable impacts of $0.02 from foreign currency and $0.02 from accounting calendar changes were largely offset by a $0.03 benefit from the year-over-year change of unrealized gains/losses from hedging activities. In the first half of 2012, Operating EPS increased 11.4 percent on a constant currency basis.
Solid Top- and Bottom-Line Results in North America
Power Brands, new products and a favorable impact from carryover pricing actions drove solid organic net revenue and Adjusted Segment Operating Income growth in Kraft Foods North America.
Net revenues in the second quarter increased 1.2 percent. Organic Net Revenues grew 1.7 percent, led by higher pricing across each business segment. Although lower, volume/mix was negatively impacted by more than 1 percentage point from the Easter shift and by more than 1 percentage point from product pruning. Power Brands grew more than 5 percent.
Segment operating income increased 3.1 percent, including a negative 5.9 percentage point impact from Restructuring Program costs net of lower Integration Program costs versus the prior year. Excluding these factors, Adjusted Segment Operating Income increased high single digits, reflecting strong gains from pricing and productivity that more than offset the impact of higher raw material costs and lower volume/mix.
Strong performance in Europe despite Eurozone challenges
Kraft Foods Europe drove strong underlying growth in an increasingly difficult macroeconomic environment by focusing on Power Brands, driving productivity gains and aggressively managing overhead costs.
Net revenues in the second quarter decreased 14.8 percent, including negative impacts of 8.4 percentage points from currency and 7.8 percentage points from accounting calendar changes. Organic Net Revenues increased 1.4 percent, driven by the favorable carryover impact of pricing actions. Volume/mix declined 1.1 percentage points, including the negative impact of approximately 2 percentage points from the Easter shift. Power Brands grew 3 percent.
Segment operating income declined 4.6 percent, including negative impacts of 9.0 percentage points from accounting calendar changes and 8.3 percentage points from currency, and a favorable 8.1 percentage point impact from lower Integration Program costs versus the prior year. Excluding these factors, Europe's segment operating income grew as favorable pricing and productivity gains more than offset higher raw material costs and a strong increase in A&C support behind Power Brands.
Solid performance in developing markets
Focused investments in Power Brands, expanded distribution capabilities and significant productivity efforts enabled Kraft Foods Developing Markets to deliver solid organic revenue and segment operating income growth. Broad geographic diversity helped overcome challenging macroeconomic conditions in certain key countries.
Net revenues in the second quarter decreased 3.6 percent, including negative impacts of 8.7 percentage points from currency and 2.5 percentage points from accounting calendar changes. Organic Net Revenues grew 7.6 percent, driven by a balance of higher pricing and volume/mix gains, including a negative impact of approximately 1 percentage point from the Easter shift. Power Brands grew more than 8 percent.
Segment operating income increased 5.0 percent, including a positive 6.0 percentage point impact from lower Integration Program costs (net of Restructuring Program costs) versus the prior year and a negative 7.6 percentage point impact from currency. In addition, accounting calendar changes negatively affected growth by nearly 2 percentage points. Excluding these factors, effective cost management and volume/mix gains drove segment operating income growth. This was partially offset by higher SG&A, including a strong increase in A&C support.
"Our first half results are on-track with our previous annual guidance of Organic Net Revenue growth of approximately 5 percent and Operating EPS growth of at least 9 percent on a constant currency basis," said David Brearton, Executive Vice President and CFO. "As we look forward, we're confident that we're launching two industry-leading companies, each with a great future."
Spinoff of North American grocery business
The company intends to spin off to its shareholders its North American grocery business, Kraft Foods Group, Inc. The spinoff is expected to occur at 5 p.m. EDT on Oct. 1, 2012. The final effective date and terms of the spin-off of Kraft Foods Group are subject to the approval by the Kraft Foods Inc. Board of Directors and satisfaction or waiver of other conditions.
At the time of the spin-off, each of the company's shareholders entitled to receive shares of Kraft Foods Group will receive one share of Kraft Foods Group for every three shares of Kraft Foods Inc. The record date is not yet finalized, but is expected to be in mid-September. We expect the common stock for both companies to begin to trade on a "when-issued" basis shortly before the record date.
Beginning Oct. 2, 2012, Kraft Foods Group will begin to trade on The NASDAQ Global Select Market under the ticker symbol "KRFT." Kraft Foods Inc. will change its name to Mondelez International, Inc. and change its ticker symbol to "MDLZ." The current ticker symbol, "KFT," will be retired.
Both Kraft Foods Group and Mondelez International plan to host investor events in early September. The company will announce details for these events by mid-August.