Kraft Foods Group Reports Second Quarter 2014 Results
"We continue to execute our playbook and are on track to deliver another solid year of growth in earnings and cash flow," said Kraft CEO
Q2 2014 FINANCIAL SUMMARY
Net revenues in the second quarter increased 0.7 percent to
- Organic Net Revenues increased 1.5 percent from improved volume/mix and pricing benefits of 0.9 percentage points and 0.6 percentage points, respectively.
- Revenue was favorably impacted by approximately 2.5 percentage points from Easter-related shipments shifting to the second quarter of this year. Excluding this factor, volumes were negatively impacted by significant price increases in response to higher input costs.
Operating income in the second quarter decreased 37.5 percent to
- Second quarter operating income last year included a
$604 million benefit from market-based impacts to post-employment benefit plans.2 - Excluding this factor, operating income was up strongly, reflecting the benefits of lower spending on cost savings initiatives,3 lower expenditures on in-store activity, improved overhead costs and manufacturing productivity. These gains were partially offset by unfavorable pricing net of commodity costs as well as an unfavorable change in unrealized gains/losses from hedging activities.
Earnings per share in the second quarter were
- EPS in the second quarter last year was
$1.38 , which included a$0.62 benefit from market-based impacts to post-employment benefit plans. - Excluding this factor, EPS growth reflected an increase in operating income, partially offset by a higher year-over-year tax rate.
Free
- Lower pension contributions were the primary driver of the improvement in Free Cash Flow versus the first half of last year.
SECOND QUARTER BUSINESS SEGMENT HIGHLIGHTS
Cheese:
- Net revenues of
$952 million increased 1.6 percent from the prior year due to significant pricing actions in response to record-high dairy costs. Lower volume/mix versus the prior year reflected volume declines resulting from price increases that were partially offset by the benefit of Easter-related shipments shifting to the second quarter of this year. - Operating income declined 6.7 percent versus the prior year due to lower volumes and product recall costs. Lower spending on cost savings initiatives partially offset these factors.
Refrigerated Meals:
- Net revenues of
$916 million increased 2.6 percent from the prior year from a combination of price increases related to higher input costs and volume/mix gains driven by the introduction of P3 Portable Protein Packs, an Easter timing benefit in bacon and continued momentum in Lunchables. Volume gains were partially offset by lower volumes in cold cuts related to significant price increases during the quarter. - Operating income growth of 12.5 percent was driven by overhead cost savings and lower spending on cost savings initiatives.
Beverages:
- Net revenues of
$748 million were flat versus the prior year as volume gains driven by coffee andCapri Sun ready-to-drink beverages were offset by lower pricing caused by an increase in promotional spending versus prior year. - Operating income declined 10.3 percent as the benefits of volume growth and lower spending on cost savings initiatives versus the prior year were more than offset by the impact of lower pricing.
Meals & Desserts:
- Net revenues of
$518 million were 5.0 percent lower than the prior year, primarily driven by continued weakness in ready-to-eat Jell-O desserts and lower pricing due to increased promotional activity behind Kraft and Velveeta dinners. - Operating income increased 3.1 percent versus the prior year due to favorable timing of marketing expenses versus the prior year and lower spending on cost savings initiatives, which were partially offset by unfavorable pricing net of commodity costs.
Enhancers & Snack Nuts:
- Net revenues of
$600 million increased 1.4 percent from the prior year reflecting the benefit of the Easter shift as well as continued growth in Planters snack nuts. - Operating income growth of 18.2 percent reflected lower manufacturing costs as well as lower expenditures on in-store activity.
- Net revenues of
$523 million declined 3.1 percent versus last year due to an unfavorable currency impact. Excluding the currency impact, Organic Net Revenue growth of 3.6 percent reflected Easter-related shipments shifting to the second quarter of this year driving a solid increase in volume/mix. - Operating income declined 6.3 percent including an unfavorable currency impact. Excluding this factor, operating income was flat, reflecting favorable timing of marketing expenses versus the prior year and improved volume/mix that were offset by unfavorable pricing net of commodity costs.
Other Businesses:
- Net revenues of
$490 million increased 6.1 percent from the prior year as a result of price increases to offset higher commodity costs. - Operating income growth of 23.2 percent was driven by productivity gains and favorable pricing net of commodity costs.
CONFERENCE CALL
Kraft will host a conference call to discuss its second quarter 2014 results today at
The call will be hosted by:
Tony Vernon , CEOTeri List-Stoll , EVP and CFOChris Jakubik , VP, Investor Relations
United States Dial-In: 1-888-350-0137
International Dial-In: 1-970-315-0478
Access code: 24944255
To ensure timely access, participants should dial in approximately 10 minutes before the call starts. A listen-only webcast with accompanying presentation will be available in the Investor Center section of Kraft's Web site at ir.kraftfoodsgroup.com, under "Events & Presentations."
A replay of the conference call will be available until
ABOUT
FORWARD-LOOKING STATEMENTS
This press release contains a number of forward-looking statements. Words such as "focus," "create," "execute," "deliver," "drive," "will," and variations of such words and similar expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding Kraft's growth, progress, total cost management and investments. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are beyond Kraft's control. Important factors that affect Kraft's business and operations and that may cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, increased competition; Kraft's ability to maintain, extend and expand its
reputation and brand image; Kraft's ability to differentiate its products from other brands; increasing consolidation of retail customers; changes in relationships with significant customers and suppliers; Kraft's ability to predict, identify and interpret changes in consumer preferences and demand; Kraft's ability to drive revenue growth in its key product categories, increase its market share, or add products; volatility in commodity, energy and other input costs; changes in Kraft's management team or other key personnel; Kraft's geographic focus in
NON-GAAP AND OTHER FINANCIAL MEASURES
To supplement Kraft's financial statements presented in accordance with generally accepted accounting principles in
Kraft currently defines Organic Net Revenues as net revenues excluding the impact of transactions with Mondelez International, acquisitions, divestitures (including the termination of a full line of business due to the loss of a licensing or distribution arrangement, and the complete exit of business out of a foreign country), currency and the 53rd week of shipments when it occurs. Management believes that presenting Organic Net Revenues is useful to investors because it (i) provides investors meaningful supplemental information regarding financial performance by excluding certain items, (ii) permits investors to view Kraft's performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate Kraft's historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating Kraft.
Kraft defines Free Cash Flow as cash flow from operations less capital expenditures. Management believes that Free Cash Flow is useful to investors because it reflects Kraft's cash available for uses including investments in growth and product development and it reflects Kraft's ability to generate cash while maintaining its fixed assets.
See the attached schedules for supplemental financial data and corresponding reconciliations of Organic Net Revenues to net revenues for the three and six months ended
As previously announced, beginning in 2013, Kraft adopted a mark-to-market accounting policy for Kraft's post-employment benefit obligations. Kraft discloses market-based impacts in order to provide better transparency to investors in evaluating Kraft. Management currently defines market-based impacts to post-employment benefit plans as the costs or benefits resulting from the change in discount rates, the difference between Kraft's estimated and actual return on trust assets, and other assumption changes driven by changes in the law or other external factors.
1 |
Please see the discussion of non-GAAP and other financial measures and the reconciliation to GAAP at the end of this press release. | ||
2 |
Please see the discussion of non-GAAP and other financial measures at the end of this press release. | ||
3 |
Cost savings initiatives are related to reorganization activities including severance, asset disposals, and other activities. Included within cost savings initiatives are activities related to the previously disclosed multi-year |
|
|||||||
Condensed Consolidated Statements of Earnings |
|||||||
For the Three Months Ended |
Schedule 1 | ||||||
(in millions of dollars, except per share data) (Unaudited) |
|||||||
2014 |
2013 |
% Change | |||||
Net revenues |
|
|
0.7% | ||||
Cost of sales1,2 |
3,226 |
2,780 |
(16.0)% | ||||
Gross profit |
1,521 |
1,936 |
(21.4)% | ||||
Selling, general and administrative expenses1,2 |
647 |
516 |
(25.4)% | ||||
Asset impairment and exit costs1 |
- |
22 |
+100.0% | ||||
Operating income |
874 |
1,398 |
(37.5)% | ||||
Interest and other expense, net |
133 |
130 |
(2.3)% | ||||
Earnings before income taxes |
741 |
1,268 |
(41.6)% | ||||
Provision for income taxes |
259 |
439 |
41.0% | ||||
Effective tax rate |
35.0% |
34.6% |
|||||
Net earnings |
$ 482 |
$ 829 |
(41.9)% | ||||
Per share data: |
|||||||
Basic earnings per share |
$ 0.81 |
$ 1.39 |
(41.7)% | ||||
Diluted earnings per share |
$ 0.80 |
$ 1.38 |
(42.0)% | ||||
Weighted-average shares of common stock outstanding: |
|||||||
Basic |
595 |
594 |
(0.2)% | ||||
Diluted |
600 |
599 |
(0.2)% | ||||
1 In the second quarter of 2014, Kraft recorded expenses of | |||||||
2 There were no post-employment benefit plan remeasurements in the second quarter of 2014. In the second quarter of 2013, Kraft recorded |
|
||||||||||||||||
Reconciliation of GAAP to Non-GAAP Information |
||||||||||||||||
Net Revenues |
Schedule 2 | |||||||||||||||
For the Three Months Ended |
||||||||||||||||
(in millions of dollars) (Unaudited) |
||||||||||||||||
% Change |
Organic Growth Drivers | |||||||||||||||
Reported (GAAP) |
Impact of Currency |
Sales to Mondelez International |
Organic |
Reported (GAAP) |
Organic |
Vol / Mix |
Price | |||||||||
|
||||||||||||||||
Cheese |
$ 952 |
$ - |
$ (14) |
$ 938 |
1.6% |
2.3% |
(5.4)pp |
7.7pp | ||||||||
Refrigerated Meals |
916 |
- |
- |
916 |
2.6% |
2.6% |
1.2pp |
1.4pp | ||||||||
Beverages |
748 |
- |
- |
748 |
0.1% |
0.1% |
6.7pp |
(6.6)pp | ||||||||
Meals & Desserts |
518 |
- |
- |
518 |
(5.0)% |
(5.0)% |
(2.4)pp |
(2.6)pp | ||||||||
Enhancers & Snack Nuts |
600 |
- |
- |
600 |
1.4% |
1.9% |
4.6pp |
(2.7)pp | ||||||||
|
523 |
35 |
(4) |
554 |
(3.1)% |
3.6% |
4.0pp |
(0.4)pp | ||||||||
Other Businesses |
490 |
4 |
(22) |
472 |
6.1% |
5.1% |
(0.6)pp |
5.7pp | ||||||||
|
$ 4,747 |
$ 39 |
$ (40) |
$ 4,746 |
0.7% |
1.5% |
0.9pp |
0.6pp | ||||||||
|
||||||||||||||||
Cheese |
$ 937 |
$ - |
$ (20) |
$ 917 |
||||||||||||
Refrigerated Meals |
893 |
- |
- |
893 |
||||||||||||
Beverages |
747 |
- |
- |
747 |
||||||||||||
Meals & Desserts |
545 |
- |
- |
545 |
||||||||||||
Enhancers & Snack Nuts |
592 |
- |
(3) |
589 |
||||||||||||
|
540 |
- |
(5) |
535 |
||||||||||||
Other Businesses |
462 |
- |
(13) |
449 |
||||||||||||
|
$ 4,716 |
$ - |
$ (41) |
$ 4,675 |
||||||||||||
|
||||||
Operating Income |
Schedule 3 | |||||
For the Three Months Ended |
||||||
(in millions of dollars) (Unaudited) |
||||||
Reported (GAAP) |
||||||
2014 |
2013 |
% Change Fav / (Unfav) |
||||
Operating Income: |
||||||
Cheese |
|
$ 150 |
(6.7)% |
|||
Refrigerated Meals |
117 |
104 |
12.5% |
|||
Beverages |
113 |
126 |
(10.3)% |
|||
Meals & Desserts |
166 |
161 |
3.1% |
|||
Enhancers & Snack Nuts |
169 |
143 |
18.2% |
|||
|
105 |
112 |
(6.3)% |
|||
Other Businesses |
69 |
56 |
23.2% |
|||
Unrealized gains / (losses) on hedging activities |
(19) |
2 |
||||
Certain post-employment benefit plan income |
32 |
567 |
||||
General corporate expenses |
(18) |
(23) |
||||
|
|
|
(37.5)% |
|||
Note: In the second quarter of 2014, Kraft recorded net expenses of |
|
|||||||
Condensed Consolidated Statements of Earnings |
|||||||
For the Six Months Ended |
Schedule 4 | ||||||
(in millions of dollars, except per share data) (Unaudited) |
|||||||
2014 |
2013 |
% Change Fav / (Unfav) | |||||
Net revenues |
|
|
(1.3)% | ||||
Cost of sales1,2 |
6,028 |
5,823 |
(3.5)% | ||||
Gross profit |
3,081 |
3,406 |
(9.5)% | ||||
Selling, general and administrative expenses1,2 |
1,305 |
1,115 |
(17.0)% | ||||
Asset impairment and exit costs1 |
(2) |
84 |
+100.0% | ||||
Operating income |
1,778 |
2,207 |
(19.4)% | ||||
Interest and other expense, net |
249 |
253 |
1.6% | ||||
Earnings before income taxes |
1,529 |
1,954 |
(21.8)% | ||||
Provision for income taxes |
534 |
669 |
20.2% | ||||
Effective tax rate |
34.9% |
34.2% |
|||||
Net earnings |
$ 995 |
|
(22.6)% | ||||
Per share data: |
|||||||
Basic earnings per share |
$ 1.67 |
$ 2.16 |
(22.7)% | ||||
Diluted earnings per share |
$ 1.65 |
$ 2.14 |
(22.9)% | ||||
Weighted-average shares of common stock outstanding: |
|||||||
Basic |
595 |
593 |
(0.3)% | ||||
Diluted |
600 |
598 |
(0.3)% | ||||
1 In the first six months of 2014, Kraft recorded net expenses of |
2 In the first six months of 2014, Kraft recorded |
|
|||||||||||||||||
Reconciliation of GAAP to Non-GAAP Information |
|||||||||||||||||
Net Revenues |
Schedule 5 | ||||||||||||||||
For the Six Months Ended |
|||||||||||||||||
(in millions of dollars) (Unaudited) |
|||||||||||||||||
% Change |
Organic Growth Drivers | ||||||||||||||||
Reported (GAAP) |
Impact of Currency |
Sales to Mondelez International |
Organic (Non-GAAP) |
Reported (GAAP) |
Organic (Non-GAAP) |
Vol / Mix |
Price | ||||||||||
|
|||||||||||||||||
Cheese |
|
$ - |
|
|
1.8% |
2.3% |
(3.6)pp |
5.9pp | |||||||||
Refrigerated Meals |
1,732 |
- |
- |
1,732 |
1.3% |
1.3% |
0.6pp |
0.7pp | |||||||||
Beverages |
1,422 |
- |
- |
1,422 |
(2.5)% |
(2.5)% |
2.8pp |
(5.3)pp | |||||||||
Meals & Desserts |
1,016 |
- |
- |
1,016 |
(6.4)% |
(6.4)% |
(5.7)pp |
(0.7)pp | |||||||||
Enhancers & Snack Nuts |
1,103 |
- |
- |
1,103 |
(1.9)% |
(1.4)% |
0.8pp |
(2.2)pp | |||||||||
|
950 |
74 |
(8) |
1,016 |
(7.0)% |
0.2% |
0.7pp |
(0.5)pp | |||||||||
Other Businesses |
927 |
9 |
(40) |
896 |
2.4% |
1.9% |
(2.0)pp |
3.9pp | |||||||||
|
|
|
|
|
(1.3)% |
(0.4)% |
(0.9)pp |
0.5pp | |||||||||
|
|||||||||||||||||
Cheese |
|
$ - |
|
|
|||||||||||||
Refrigerated Meals |
1,710 |
- |
- |
1,710 |
|||||||||||||
Beverages |
1,459 |
- |
- |
1,459 |
|||||||||||||
Meals & Desserts |
1,085 |
- |
- |
1,085 |
|||||||||||||
Enhancers & Snack Nuts |
1,124 |
- |
(5) |
1,119 |
|||||||||||||
|
1,022 |
- |
(8) |
1,014 |
|||||||||||||
Other Businesses |
905 |
- |
(26) |
879 |
|||||||||||||
|
|
$ - |
|
|
|
||||||
Operating Income |
||||||
For the Six Months Ended |
Schedule 6 | |||||
(in millions of dollars) (Unaudited) |
||||||
Reported (GAAP) |
||||||
|
|
% Change Fav / (Unfav) |
||||
Operating Income: |
||||||
Cheese |
$ 327 |
$ 322 |
1.6% |
|||
Refrigerated Meals |
213 |
201 |
6.0% |
|||
Beverages |
244 |
251 |
(2.8)% |
|||
Meals & Desserts |
308 |
331 |
(6.9)% |
|||
Enhancers & Snack Nuts |
317 |
301 |
5.3% |
|||
|
171 |
189 |
(9.5)% |
|||
Other Businesses |
128 |
103 |
24.3% |
|||
Unrealized gains / (losses) on hedging activities |
23 |
(3) |
||||
Certain post-employment benefit plan income |
92 |
568 |
||||
General corporate expenses |
(45) |
(56) |
||||
|
|
|
(19.4)% |
|||
Note: In the first six months of 2014, Kraft recorded expenses of |
|
||||
Condensed Consolidated Balance Sheets |
||||
(in millions of dollars) (Unaudited) |
Schedule 7 | |||
|
|
|||
ASSETS |
||||
Cash and cash equivalents |
$ 1,370 |
$ 1,686 |
||
Receivables (net of allowances of |
1,186 |
1,048 |
||
Inventories |
2,024 |
1,616 |
||
Deferred income taxes |
339 |
360 |
||
Other current assets |
192 |
198 |
||
Total current assets |
5,111 |
4,908 |
||
Property, plant and equipment, net |
4,130 |
4,115 |
||
Goodwill |
11,510 |
11,505 |
||
Intangible assets, net |
2,235 |
2,229 |
||
Other assets |
359 |
391 |
||
TOTAL ASSETS |
|
$ 23,148 |
||
LIABILITIES |
||||
Current portion of long-term debt |
$ 1,404 |
$ 4 |
||
Accounts payable |
1,606 |
1,548 |
||
Accrued marketing |
577 |
685 |
||
Accrued employment costs |
143 |
184 |
||
Dividends payable |
313 |
313 |
||
Accrued postretirement health care costs |
196 |
197 |
||
Other current liabilities |
557 |
479 |
||
Total current liabilities |
4,796 |
3,410 |
||
Long-term debt |
8,604 |
9,976 |
||
Deferred income taxes |
653 |
662 |
||
Accrued pension costs |
414 |
405 |
||
Accrued postretirement health care costs |
3,039 |
3,080 |
||
Other liabilities |
376 |
428 |
||
TOTAL LIABILITIES |
17,882 |
17,961 |
||
EQUITY |
||||
Common Stock, no par value (5,000,000,000 shares authorized; 599,955,433 shares issued at |
- |
- |
||
Additional paid-in capital |
4,587 |
4,434 |
||
Retained earnings |
1,648 |
1,281 |
||
Accumulated other comprehensive losses |
(483) |
(499) |
||
Treasury stock, at cost |
(289) |
(29) |
||
TOTAL EQUITY |
5,463 |
5,187 |
||
TOTAL LIABILITIES AND EQUITY |
|
$ 23,148 |
||
Reconciliation of GAAP to Non-GAAP Information Free Cash Flows Schedule 8 For the Six Months Ended (in millions of dollars) (Unaudited) Net earnings $ 995 Depreciation and amortization 191 204 Receivables, net (151) (111) Inventories (349) 16 Accounts payable 44 (62) Other (90) (721) Operating cash flow 640 611 Capital expenditures (186) (212) Free cash flow $ 454 $ 399
2014
2013
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