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Kraft's tax rebate strengthens finances

By Anita Awbi , 20-Apr-2006

Kraft Foods has recorded stable first quarter results, masking falling operating income with a favourable tax settlement and raising prices to combat spiralling production costs.

First quarter earnings for 2006 were up a massive 41 per cent to $1bn, bolstered by tax repayments, while net earnings for the quarter grew only 1.6 per cent.

The world's second largest food producer was reimbursed a total of $405m from the Altria tax audit, which showed favourably on the earnings sheet and softened the blow of falling operating income.

 

The operating income fell 12 per cent to $1bn, which was largely attributed to the sale of non-core businesses and an increase in commodity costs by $100m on last year.

 

Net revenues for the first quarter of 2006 grew a nominal 0.8 per cent to $8.1bn, including unfavourable foreign exchange rates and the impact of divestures.

 

The American firm, famous for Philadelphia cheese and Jacob's crackers, recorded a $3m pre-tax loss compared to last year's $116 gain, though the 2005 result was largely attributed to the sale of the UK desserts business.

 

Areas hardest hit were in the EU market, which reported a 9.1 per cent fall in net revenues to $1.47bn, but increased 0.4 per cent excluding impacts of unfavourable currency rates and divestures.

 

Kraft attributes this rise to price increases, a favourable product mix and a cost reduction scheme.

 

Jim Dollive, the firm's chief financial officer, said in a statement: "Price realisation and our ability to recover increasing costs improved in many of our businesses.

 

"But the aggregate benefit of our price increases and productivity gains did not fully offset our higher costs of goods."

 

The convenience meals division and snacks and cereals showed positive changes in increased sales volume - 3.1 per cent and 2.2 per cent respectively - while all other sectors recorded a fall in sales volume.

 

Grocery division sales fell 21.5 per cent while beverages and cheese suffered sales losses of around 5.5 per cent on last year.

 

But revenue growth in Russia, Ukraine and the Middle East hit 13.6 per cent to $1.01bn, offsetting poor Western European performance.

 

Jacob's crackers, Carte Noire coffee and Milka chocolate enjoyed strong sales in Russia and Ukraine. And double-digit gains in the Middle East were driven by the Tang beverages line and Kraft cheese.

 

In February Kraft announced a massive extension to its existing three-year restructuring plan, to get rid of 8,000 jobs and 20 production plants.

 

The manufacturer said the restructuring drive will be led by a "fewer, bigger, better" policy, concentrating on crucial brands in key areas as the firm suffers from lagging performance.

 

CEO Roger Deromedi said the company will focus innovation efforts on areas that yield higher revenue-per-pound, such as wellness, value-added and on-the-move products.

 

The firm will spend much of 2006 working on the efficiency drive, and claims the financial outlook is stable.

 

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