Kraft Foods Inc. (KFT) reported fourth quarter results with earnings of 48 cents per share, below the Zacks Consensus Estimate of 50 cents. However, quarterly earnings were up 17.1% year-over-year.
Net revenues for the quarter increased 3.2% year-over-year to $11.0 billion, primarily due to the favorable 3.2% impact of foreign currency, partially offset by negative 0.4% impact from divestitures. However, organic revenues increased 0.4%, driven by 1.6% benefit from volume and mix, partially offset by 1.2% due to lower price levels.
By Segment
In the North American segment (KNAC), sales declined 1.5% year-over-year as gains in U.S. Convenient Meals (3.9%), U.S. Grocery (0.1%) and Canada & North American Foodservice (8.2%) were fully offset by declines in U.S. Beverages (1.9%), U.S. Cheese (13.7%) and U.S. Snacks (3.3%).
In the International segment, net revenues in the European Union increased 8.0% while the top-line in the developing markets expanded 11.2%.
Gross margins for the quarter expanded 590 basis points (bps) to 37.5% versus 31.6% in the comparable prior-year quarter. The operating margin also increased a robust 876 bps to 11.9% versus 3.1% year-over-year. The improvement was attributable to lower costs following the completion of the restructuring program, and favorable product mix.
For fiscal 2009, free cash flow increased to approximately $3.8 billion, reflecting a 35% increase compared to the prior-year quarter. The increase was primarily attributable to efficient working capital management, partially offset by incremental pension contributions.
Looking Ahead
Concurrent with the earnings release, management provided guidance for fiscal 2010. In the near term, the company targets organic net revenue growth of 4% or more and earnings are expected at the high end of its 7% to 9% long-term EPS growth objective.
In addition, the company expects incremental investment in product quality, marketing and innovation. Furthermore, Cadbury plc’s results will be consolidated with that of Kraft Foods effective February 2, 2010. The combination of Kraft Foods and Cadbury is expected to provide meaningful revenue synergies. As a result, the combined company expects long-term organic net revenue growth of more than 5%.
The combined company also expects to generate pre-tax cost savings of at least $675 million annually till the end of 2012. Total one-time implementation cash costs of approximately $1.3 billion are expected to be incurred through the end of 2012.
The combined company is expected to generate accretive earnings in 2011 of approximately $0.05 on a cash basis, which excludes one-time expenses, expenses related to the transaction and the impact of incremental non-cash items such as the amortization of intangibles related to the acquisition. Over the long-term, the combined company expects EPS growth of 9% to 11%.
Additionally, Kraft Foods’ results are also expected to be affected by the sale of its North American frozen pizza business, which is expected to close by mid-2010. The company expects earnings to be reduced by approximately 5 cents per share on an annual basis as a result of this transaction.
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