Kraft Beats, Raises Guidance

Kraft Foods (KFT - Analyst Report) reported strong second-quarter results with earnings of 55 cents per share, above the Zacks Consensus Estimate of 48 cents. Quarterly earnings were also up 61.8% year-over-year.

However, net revenues for the quarter declined 5.7% year-over-year to $9.8 billion, primarily due to the unfavorable negative 5.6% impact of foreign currency and a negative 0.6% impact from divestitures. Organic revenues increased 0.5%, driven by a 0.7% gain from volume and mix, which was partially offset by negative 0.2% from pricing.

In the North American segment (KNAC) sales declined 2.5% year-over-year as gains in U.S. Convenient Meals (5.0%), and U.S. Beverages (1.5%) were fully offset by the declines in U.S. Cheese 10.3%, U.S. Grocery 3.0%, U.S. Snacks 3.3% and Canada & North American Foodservice 4.9%.

In the International segment, net revenues in the European Union decreased 11.5% while the top-line in developing markets contracted 8.4%.

Gross margins for the quarter expanded 434 basis points (bps) to 36.1% versus 31.8% in the comparable prior-year quarter. The increase was primarily due to cost saving programs undertaken by the company. The operating margin for the quarter also expanded 464 bps to 14.5%.

Year-to-date, free cash flow was $2.7 billion, up 67% compared to the prior-year quarter. The increase was primarily attributable to efficient working capital management and lower capital expenditures.

Based on the strong year-to-date performance, management has raised guidance for fiscal 2009. The company now expects annual earnings of at least $1.97 per share compared to $1.93 guided earlier. This guidance reflects strong year-to-date profit performance and a reduction in its full-year effective tax rate to approximately 30.0%.

The new guidance also reflects further investments in marketing to drive future growth and an estimate for certain costs in connection with the company's possible combination with Cadbury plc (CBY - Snapshot Report).

The organic net revenue growth is now expected to be 2% compared to 3% stated earlier. The change in outlook primarily reflects a lower contribution from pricing due to lower-than-expected input costs.

Driven by the company's increased profit guidance, and the benefit of improved working capital management, the company raised its outlook for full-year free cash flow to approximately $3.0 billion versus the previous estimate of $2.6 billion.

In Sept. 2009, Kraft had proposed a takeover of Cadbury for $16.2 billion (£10.2 billion). However, Cadbury rejected the offer. However, the company has little time left to make a firm offer for Cadbury. British regulators have set a deadline of Nov. 9 for Kraft to make a formal bid or the company will have to wait for 6 months.