Kraft Foods (KRFT, Financial) announced its second quarter 2014 earnings on July 30, reporting a steep fall in profit and a mild improvement in revenue. Despite such soft results, the company appears confident to register healthy earnings growth and generate substantial cash flow in the current fiscal year. Let’s take a closer look at the quarter that went by.
What Does The Revenue Say?
The company’s chief executive officer Tony Vernon expressed concern about the “economic and consumer trends” that are seen to have some effect on the top line growth. Revenue saw a nominal rise of 0.7% to $4.75 billion in the quarter. Analysts were hoping for $4.84 billion. Increased cost of inputs resulted in higher prices that adversely impacted volumes.
However, there were two things that worked in favor of the revenue. First, better product mix and pricing benefit helped improve organic net revenue by 1.5%. Second, shipments shifting with regards to Easter pulled revenue up by 2.5 percentage points.
Net revenue from the cheese segment increased 1.6% to $952 million. Increase in the prices of the product had a bearing on the volume, which was partially compensated by the Easter day sales. Refrigerated meals revenue was up 2.6% to $916 million, driven by higher prices. Beverage sales were flat at $748 million as higher volumes of coffee and ready-to-drink beverages such as Capri Sun were set off by spending in promotional activities. Meals and desserts fell 5% to $158 million for the period.
Operational Performance
Kraft registered net earnings of $482 million, which is $0.80 a share. This is a severe plunge of 42% compared with $829 million, or $1.38 a share that the company posted in the year-ago period. Earnings, too, missed Thomson Reuters analysts estimates of $0.82 a share.
Operating income also got hit by a good 38% to $0.9 billion. However, it should be noted that in the prior year quarter, Kraft had made a non-recurring gain of $604 million related to post-employment benefit that resulted in $0.62 a share jump in profit. Barring the effect of such unusual gains, the company’s operational performance remained sound.
Kraft did well with its efficiency gains and cost-saving initiatives. The company had declared in its first quarter earnings call that it was taking effective measures to compensate the increase in input prices. Finally, following the footsteps of J.M. Smucker (SJM, Financial), Kraft increased the prices of few ground coffee products for the first time in the past three years.
The company’s cash flow showed some signs of improvement. Free cash flow went up 13.8% to $454 million as pension contributions were reasonably low compared with last year’s contribution.
Looking Ahead
Kraft is focused on enhancing the value of its brands, which is why the company is stressing on branding innovation, change in marketing techniques, strengthening its channels and increasing penetration. It is also taking action to manage soaring input prices. Managing costs effectively to generate better returns from investment is of prime importance to the management. Though there are significant headwinds, Kraft is striving for better results and higher returns to its shareholders.
