Kraft Foods 3Q Profit Drops 20 Percent

By ASHLEY M. HEHER

CHICAGO – Kraft Foods Inc. said Wednesday that soaring dairy prices weighed down its third quarter profit, which fell 20 percent from year-ago results that included a one-time gain.

Despite results that were also affected by investments in new products, the nation’s biggest food and beverage maker posted better-than-expected revenue, sending shares up in morning trading.

Executives said the costs to make its products are expected to climb nine percent this year.

Meanwhile, costs associated with making dairy products in North America – including Kraft’s popular namesake cheeses – are up 40 percent in the third quarter.

"We’re in a much tougher input environment than we had expected," said Kraft’s Chairman and Chief Executive Irene Rosenfeld.

For the quarter ending Sept. 30, net income fell to $596 million, or 38 cents per share, down from $748 million, or 45 cents per share, a year ago.

Northfield-based Kraft, which sells everything from Maxwell House coffee to Oscar Mayer deli meat, said the results included asset impairments and charges of 6 cents per share. Excluding the charges, the company earned 44 cents per share, beating Wall Street forecasts.

Revenue rose 10 percent to $9.05 billion from $8.24 billion in the third quarter of 2006.

Analysts polled by Thomson Financial expected earnings per share of 42 cents on revenue of $8.68 billion. Those estimates typically exclude one-time charges.

"It’s kind of a mixed bag," said Morningstar analyst Greggory Warren. "The revenue is good, but the problem is, I can grow revenue all day being heavily promotional, but it’s going to have an impact on the operating income."

The company’s operating income, excluding special items, fell six percent.

Kraft said a one-time gain of 9 cents per share in the 2006 third quarter contributed to the decline it reported in this year’s period.

The growing cost of dairy has outpaced rising sales, streamlined costs and higher grocery store prices, cutting into profits, which fell nearly 32 percent in the company’s North American cheese unit.

Officials said they expect higher input costs – which include everything from energy to raw materials – to continue to be a challenge in 2008.

Kraft has already raised prices on about 80 percent of its cheese products at least once this year, charging consumers between 2 and 13 percent more, depending on the product.

"Dairy costs are (at) unprecedented levels," said Tim McLevish, Kraft’s CFO. "No question, this is going to provide headwind in 2008 and certainly in the earlier part of the year."

The company blamed an Australian drought, a weakened U.S. dollar that favors U.S. dairy exports and increased use of powdered milk in other areas of the world for the rising dairy costs that are putting pressure on the entire packaged food industry.

Also Thursday, Rosenfeld said the company’s massive restructuring plan continues ahead of schedule. The program is expected to save $775 million by the end of the year – up from the $700 million executives had anticipated earlier. Meanwhile, costs associated the program are below expectations.

Kraft also maintained its outlook for 2007 earnings per share of $1.60 to $1.62, or $1.80 to $1.82 excluding items.

Kraft shares climbed 67 cents, or 2.1 percent, to $33.27 in afternoon trading.

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On the Net:

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