Price increases help Kraft Foods lift profits

CHICAGO Mon Jul 28, 2008 1:00pm EDT

Price tags and a stack of Kraft Foods Inc. ''Velveeta Slices'' and ''Singles'' can be seen in a supermarket in New York April 29, 2008. REUTERS/Lucas Jackson

Price tags and a stack of Kraft Foods Inc. ''Velveeta Slices'' and ''Singles'' can be seen in a supermarket in New York April 29, 2008.

Credit: Reuters/Lucas Jackson

CHICAGO (Reuters) - Kraft Foods Inc KFT.N posted higher-than-expected quarterly profit on Monday as price increases and gains on hedging positions offset rising costs for energy and commodities like wheat.

The largest North American food maker also raised its full-year earnings and sales forecast and its shares rose 4.6 percent.

Kraft is reaping the benefits from major cost-cutting efforts over the past several years, while investments in marketing and product development have helped it raise prices to offset rising commodity costs, analysts said.

"They are getting the pricing and cost savings in tandem they need to offset the cost pressures," said Matt Arnold, analyst at Edward Jones.

The maker of Oreo cookies, Kraft cheese and Oscar Mayer lunch meat said second-quarter profit rose to $732 million, or 48 cents a share, from $707 million, or 44 cents a share, a year earlier.

Excluding one-time items, Kraft earned 58 cents a share, up from 50 cents a share a year earlier.

Analysts on average forecast 50 cents a share on that basis, according to Reuters Estimates.

Kraft also posted $150 million in gains on commodity hedging positions, or about 6 cents a share, essentially booking those gains in the second quarter instead of later in the year, the company said.

But booking the gains in the second quarter will also cut into earnings later this year, said Tim McLevish, Kraft's chief financial officer.

Kraft, like most food companies, has been hit by soaring commodity costs as it pushes to develop new products and take other steps to boost sales.

Kraft said it now expects commodity costs to rise $2 billion, or 13 percent, in 2008 over 2007.

The company has raised prices to offset some of the costs, just as other food companies have, though Kraft lost market share in some categories as its price increases occurred before those of some competitors.

The company said its competitors are catching up with price increases of their own and that Kraft's market share improved during June, though Kraft is increasing some prices again in the third quarter.

"Everybody is dealing with the same input costs and I think they are all coming to understand that this isn't going away any time soon," Irene Rosenfeld, Kraft chief executive, said during a conference call with analysts.

During the call, Rosenfeld also said the company has emphasized the value of brands like Kool-Aid drink mixes and Jell-O powdered gelatin for consumers looking to stretch their dollar.

"As a result, we've seen renewed growth of these high-margin businesses," Rosenfeld said.

Sales rose 21.4 percent to $11.2 billion, with 9.6 percentage points of the increase coming from an acquisition and 5.6 percentage points due to the weaker dollar, which boosts the dollar value of overseas sales.

Organic sales, which excludes the effects of currency changes, acquisitions and divestitures rose 6.9 percent due to higher prices.

But volume, a measure of products shipped, fell 1 percent as some customers were pushed away by the price increases.

For the year, the company expects earnings before one-time items to be at least $1.92 a share, up from its previous forecast of $1.90. It also forecast an organic sales increase of at least 6 percent, up from its previous forecast of 5 percent.

Kraft shares traded up $1.36 at $30.74 on Monday on the New York Stock Exchange close of $29.38. The stock is down 5.8 percent this year, compared with the Standard & Poor's U.S. food index, which is about flat.

(Reporting by Brad Dorfman; Editing by Steve Orlofsky and Derek Caney)

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