Kraft Foods Group, Inc. today reported third quarter results that reflected significant cost savings that outpaced brand-building reinvestments, as well as a negative impact from comparisons with unusually high product shipments in the prior year period.
Last year, the company shipped safety stock to retailers ahead of a systems changeover as part of the spin-off from Mondelez International.
"The unusual nature of last year's Q3 results obscures our steady progress in remaking the best brand portfolio in the food and beverage industry," said Kraft CEO Tony Vernon. "There's no question it's a difficult environment for our consumers and customers. We remain confident that our disciplined approach to growing our brands and driving cost savings will enable us to continue delivering the consistent returns our shareholders expect."
Q3 FINANCIAL SUMMARY
Net revenues declined 4.2 percent to $4.4 billion.
Organic Net Revenues declined 4.1 percent from lower volume/mix of 3.1 percentage points and 1.0 percentage point due to lower pricing. The decline in volume/mix reflected a negative impact of approximately 3 percentage points from comparisons with shipments of safety stock to customers ahead of last year's spin-off from Mondelez International, an approximately 1 percentage point reduction from product line pruning, and base business gains of approximately 1 percentage point.
Operating income increased 14.9 percent to $870 million.
Operating income included a $175 million benefit from market-based impacts to post-employment benefit plans driven by higher discount rates and higher asset returns. Implementation of a voluntary early retirement program in early 2013 triggered a third quarter remeasurement of select pension plans. Excluding the market-based impacts to post-employment benefit plans, gains from overhead cost reductions and productivity were offset by unfavorable pricing net of commodity costs, lower volumes, an unfavorable year-over-year change in unrealized gains/losses from hedging activities and higher marketing investments versus the prior year.
Earnings per share were $0.83, an increase of $0.04 or 5.1 percent versus the prior year.
EPS in this quarter included an $0.18 benefit from market-based impacts to post-employment benefit plans. Excluding this benefit, EPS was lower than the prior year due to a $0.05 unfavorable year-over-year change in unrealized gains/losses from hedging activities, lower volumes, a higher year-over-year tax rate and higher interest expense.
Free Cash Flow was $745 million year-to-date.
Free Cash Flow generation reflected the negative impact of more than $600 million in pension plan contributions, partially offset by improved management of working capital.
HIGHLIGHTS BY REPORTING SEGMENT
Beverages:
Revenues declined due to lower prices from higher levels of merchandising activity for Capri Sun and Kool-Aid Jammers as well as the pass-through of lower green coffee costs versus the prior year. Improved product mix from on-demand coffee, liquid water enhancer innovations and Gevalia premium coffee more than offset a negative volume impact from comparisons with spin-off related shipments in the prior year period. Operating income declined due to unfavorable pricing net of commodity costs, unfavorable volume/mix versus the prior year and higher investments in marketing. These factors more than offset benefits from overhead savings and lower Restructuring Program3 costs.
Cheese:
Revenue performance reflected higher prices and steady growth in Kraft natural cheeses and Velveeta slices that more than offset the negative volume impact from comparisons with spin-off related shipments in the prior year period. Operating income increased due to the timing of advertising expenditures versus the prior year, overhead cost savings and productivity gains. These gains more than offset a negative impact from pricing net of commodity costs versus a strong prior year period.
Refrigerated Meals:
Continued revenue gains from Lunchables innovation, Oscar Mayer bacon and hot dog growth, as well as increased pricing to cover commodity costs were more than offset by the negative impact from comparisons with spin-off related shipments in the prior year period. Operating income declined due to a negative impact from pricing net of commodity costs versus the prior year and higher investments in marketing.
Meals & Desserts:
Revenues declined due to a negative volume impact from comparisons with spin-off related shipments in the prior year period. Excluding this factor, ongoing growth of Velveeta dinners was largely offset by softness in JELL-O desserts. Operating income declined due to lower volumes. Significant marketing investments to rebuild brand equity were largely offset by overhead cost savings.
Enhancers & Snack Nuts:
Revenues declined significantly due to volume weakness in salad dressings and mayonnaise as well as lower prices driven by lower nut costs versus the prior year. These factors more than offset solid volume growth and improved product mix from Planters snack nuts. Operating income was flat as overhead cost savings, productivity gains and improved product mix offset unfavorable pricing net of commodity costs, lower volumes and higher marketing investments versus the prior year.
Canada:
Revenues declined from the combination of a negative volume impact of approximately 4 percentage points from comparisons with spin-off related shipments in the prior year period and lower prices on Kraft peanut butter. This more than offset strong double-digit growth in Tassimo coffee and volume gains in Kraft peanut butter. Strong operating income growth primarily reflected the benefit of cost savings initiatives.
Other Businesses:
Revenues declined predominantly due to product line pruning in the Foodservice business. Double-digit operating income growth reflected better alignment of prices and input costs versus the year-ago period and lower advertising spending.
OUTLOOK
"While the impact from last year's spin-related trade inventory build was significant to our year-over-year performance this quarter, we remain on track to deliver the underlying earnings and cash flow we previously outlined," said Kraft CFO Tim McLevish.
Kraft updated its guidance for 2013, including:
Organic Net Revenue growth that, consistent with previous guidance, is expected to be in line with or slightly lower than the growth of the North American food and beverage market. EPS of approximately $3.58 versus approximately $3.40 previously, reflecting the additional $0.18 benefit from market-based impacts to post-employment benefit plans. Free Cash Flow4 of approximately $1.2 billion, consistent with previous guidance.
