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Kraft Foods Group, Inc.'s (KRFT) CEO William Anthony Vernon on Q1 2014 Earnings - Call Transcript

Kraft Foods Group, Inc. (KRFT) Q1 2014 Earnings Call Corrected Transcript: 01-May-2014


PARTICIPANTS

Corporate Participants

Christopher M. Jakubik - Vice President-Investor Relations, Kraft Foods Group, Inc.

William Anthony Vernon - Chief Executive Officer & Director, Kraft Foods Group, Inc.

Teri L. List-Stoll - Chief Financial Officer & Executive Vice President, Kraft Foods Group, Inc.

Other Participants

Matthew C. Grainger - Analyst, Morgan Stanley & Co. LLC

Bryan D. Spillane - Analyst, Bank of America/Merrill Lynch

Christopher R. Growe - Analyst, Stifel, Nicolaus & Co., Inc.

Jason M. English - Analyst, Goldman Sachs & Co.

John J. Baumgartner - Analyst, Wells Fargo Securities LLC

Alexia J. Howard - Analyst, Sanford C. Bernstein & Co. LLC

Andrew Lazar - Analyst, Barclays Capital, Inc.

Kenneth B. Goldman - Analyst, JPMorgan Securities LLC

Robert B. Moskow - Analyst, Credit Suisse Securities (USA) LLC (Broker)

David S. Palmer - Analyst, RBC Capital Markets LLC

Eric R. Katzman - Analyst, Deutsche Bank Securities, Inc.

Diane R. Geissler - Analyst, CLSA Americas LLC

Kenneth B. Zaslow - Analyst, BMO Capital Markets (United States)

Cornell R. Burnette - Analyst, Citigroup Global Markets Inc. (Broker)

MANAGEMENT DISCUSSION SECTION

Operator: Good day, ladies and gentlemen, and welcome to the Kraft Foods Group First Quarter Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

I would now like to turn the call over to your host, Chris Jakubik, Head of Investor Relations. Please go ahead.

Christopher M. Jakubik, Vice President-Investor Relations

Good afternoon, and thanks for joining our business update for the first quarter of 2014. I'd like to start by apologizing for the delay here. We used to only get about 100 or 150 people dialing in to this. It looks like we got about more or like 300, 400 people dialing in. So we figured it was either because Teri is arrived or because we've made everybody a shareholder in the company. Either way, we're happy with that.

So, with me today are Tony Vernon, our CEO; and Teri List-Stoll, our CFO.

During our remarks, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties. These are discussed in our press release. We'll also be discussing some non-GAAP financial measures during the call today, and you can find the GAAP to non-GAAP reconciliations within our press release and in the Investor Center of kraftfoodsgroup.com.

Now, I'll hand it over to Tony and Teri to discuss our first quarter results, as well as the current state of our business.

William Anthony Vernon, Chief Executive Officer & Director

Thanks, Chris, and thanks to everyone for joining us to discuss our results. For those of you on Twitter, a 140 character version of our business update can be found in the three bullets on slide three of today's presentation. First, as expected, and as we flagged last quarter, 2014 got off to a soft start for both Kraft and our industry. Second, our first quarter financial results were largely driven by the timing of certain factors, including a shift of shipments into Q2 for the Easter holiday and costs related to our brand building investments. Frankly, there is quite a bit of noise in the analysis of our financial performance versus the prior year, noise that Teri will cover in a minute.

And third, but most importantly, we continue to make headway in executing against our playbook, the same playbook we laid out at CAGNY in February. As we said before, we are managing our business for the long-term and not quarter-by-quarter. We expect that you'll see the benefits of our investments and our efforts as the year unfolds and our comparisons get cleaner.

Now, that's the short form of our quarter, but no doubt you're interested in a little more color on each aspect of what we've been up to. So, let me first talk about some of the marketplace and timing dynamics that affected sales and consumption in the first quarter of 2014 and what we can expect to see in the coming months.

As we said on the fourth quarter call, we expected to see some of the same headwinds that impacted the North American food and beverage market in 2013 continue as we enter 2014. And what we saw in quarter one was indeed consistent with our expectations; industry consumption growth, lagged population growth both of the U.S and Canada and we would expect unit growth to remain below population growth in the near-term. The causes and the state of the consumer are much the same as we've talked about of late.

The impact of reductions to the SNAP program continue to be significant for the many American families receiving those benefits, and the employment ratio and under employment continued to lag the improvement in the headline unemployment rate. More recently, we've even seen evidence of cost pressures on lower and middle income households due to higher heating bills and even middle and upper middle income consumers incrementally impacted by larger 2013 tax bills, and this was most visible as we got into March and April. But we would expect these more recent factors to fade as we move forward into the remainder of the year.

Our retail customers also continued to cope with the effects of decreased traffic. If you recall from our fourth quarter commentary, we believed our retail customers ended the year with upwards of one more day of inventory than they normally carry, because of a weaker holiday sell through. During the first quarter of this year, we believe retail customer inventories returned to more normal levels versus the higher than normal yearend levels. And this adversely affected our shipments in quarter one.

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