Kraft Foods Q2 2010 Earnings Call Transcript

Kraft Foods Q2 2010 Earnings Call Transcript
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Kraft Foods (KFT)

Q2 2010 Earnings Call

August 05, 2010 5:00 pm ET

Executives

Irene Rosenfeld - Chairman and Chief Executive Officer

Christopher Jakubik -

Timothy McLevish - Chief Financial Officer and Executive Vice President

Analysts

Andrew Lazar - Barclays Capital

Alexia Howard - Bernstein Research

Vincent Andrews - Morgan Stanley

Jonathan Feeney - Janney Montgomery Scott LLC

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

Terry Bivens - JP Morgan Chase & Co

Eric Katzman - Deutsche Bank AG

Eric Larson - Soleil Securities Group, Inc.

Robert Moskow - Crédit Suisse AG

Kenneth Zaslow - BMO Capital Markets U.S.

Bryan Spillane - BofA Merrill Lynch

David Driscoll - Citigroup Inc

David Palmer - UBS Investment Bank

Edward Aaron - RBC Capital Markets Corporation

Presentation

Operator

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Good day, and welcome to Kraft Foods' Second Quarter 2010 Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Kraft's management and the question and answer session. [Operator Instructions] I'd now like to turn the call over to Mr. Chris Jakubik, Vice President, Investor Relations for Kraft. Please go ahead, sir.

Christopher Jakubik

Good afternoon, everyone, and thanks for joining us on our conference call. With me are Irene Rosenfeld, our Chairman and CEO; and Tim McLevish, our Chief Financial Officer. Our earnings release was sent out earlier today and is available on our website, kraftfoodscompany.com. We've also made available on our website a set of slides that we will refer to during our prepared remarks.

As you know, during this call we will be making forward-looking statements about the company's performance. These statements are based on how we see things today, so they contain an element of uncertainty. Actual results may differ materially due to risks and uncertainties. So please refer to the cautionary statement and risk factors contained in the company's 10-K and 10-Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements.

Also, some of today's prepared remarks will include non-GAAP financial measures. And you can find the GAAP- to non-GAAP reconciliations within our news release. We'll start today with Irene, who will provide a brief overview. Then Tim will present highlights from our second quarter results. Irene will then conclude with an update on the Cadbury integration and discuss our outlook for the year. Following that, we'll take your questions. So I'll now turn it over to Irene.

Irene Rosenfeld

Thanks, Chris, and good afternoon. As you've heard from so many companies, the global economy is tough. And the consumer environment continues to be weak in many markets. Nonetheless, we reported strong second quarter earnings. Our bottom line was high quality, driven by gross margin expansion from volume/mix and productivity as well as overhead savings. Our top line performance, however, was mixed, primarily due to softness in the United States. Our U.S. top line continued to be affected by two things: greatly reduced merchandising support from a key customer, which we foreshadowed in the first quarter; and a significant step-up in promotional activity in a few categories.

We have solid plans in place to address these issues. And that will result in sequential improvement in top line results in the second half. However, I'm very pleased with the ongoing strength in Europe and developing markets. We expect our earnings momentum to continue in the second half. This momentum will enable us to invest in the business, while still delivering at least $2 in operating EPS. These incremental investments will restore growth in North America and fuel top line momentum internationally.

Let me now turn it over to Tim to discuss the second quarter results in more detail.

Timothy McLevish

Thanks, Irene, and good afternoon. Let me start by discussing our top line, which as Irene mentioned, was a somewhat mixed performance from our perspective. Organic net revenue growth of the combined business was 2.2%. The Kraft Foods base business grew 2%. Continued focus on investments in priority brands, categories and markets drove 2.2 points of all mixed gains, while pricing was slightly negative.

In Europe and developing markets, we delivered strong volume/mix, but in the U.S, we continue to have headwinds, including a weak consumer environment, significantly lower merchandising levels and aggressive promotional activity in a few categories, mainly within our Cheese, Grocery and Snacks businesses. There were some bright spots, however. Investments in priority brands drove solid growth in our Beverage, Convenient Meals and Canadian businesses.

Our growth model leverages volume/mix as a key driver in expanding margins over time. This next slide shows the increased contribution of volume/mix to the Kraft Foods base business over the past five quarters. Our Q2 vol/mix was somewhat below Q1, but we're not satisfied with that performance. But at the same time, I'd make three observations that make us optimistic about the future: First, our brand equity investments in quality, marketing and innovation continued to drive meaningful gains versus last year. This came despite a very difficult environment in many markets. Second, we feel good about the expanding geographic footprint of our portfolio over the past several years even before the Cadbury acquisition. In fact, through the first six months of the year, the strength of our international operations drove overall vol/mix gain of 2.6 points, despite a vol/mix decline of 30 basis points in North America. And third, the majority of our key North American programs are back half-weighted. So even though we expect economic conditions to remain challenging, we're confident in our ability to continue to drive vol/mix gains for the remainder of the year.

Picking back up on Q2 revenue growth. Our Cadbury business reported organic growth of 3.3%. It was driven by very strong Gum performance in the Americas, fueled by the success of new products. Chocolate gains in the U.K. and India also contributed to the growth. Top line growth was tempered two factors: a negative impact of about 0.5 percentage point from the shift of Easter-related shipments into the first quarter, and weak economic conditions affecting the Gum category in several markets including southern Europe, Japan and South Africa.

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