Kraft Profit Drops as Dairy Prices Rise

Kraft Foods Wednesday posted a 20-percent drop in quarterly profit, hit by soaring dairy costs, though sales and earnings still beat analysts' estimates.

The largest North American food company, which derives almost one-fifth of its sales from cheese, has boosted spending on marketing and has seen sales lifted by new products, even as it raised prices to cope with rising ingredient costs.

"They are getting a really good return on the huge investment they are putting out there," Matt Arnold, an analyst at Edward Jones, said.

Sales are growing better than expected at this point, Irene Rosenfeld, chairman and chief executive, said during a conference call with analysts.

"At the same time, higher input costs and the impact on our margins are a bigger challenge than I would have anticipated," she said.

The company said profit was $596 million, or 38 cents a share, in the third quarter, compared with $748 million, or 45 cents a share, a year earlier.

Excluding one-time items, earnings were 44 cents a share for the company, whose broad portfolio of products includes Oscar Mayer deli meats, Oreo cookies and DiGiorno pizza.

Analysts on average forecast 41 cents a share.

Sales rose 9.8 percent to $9.05 billion, besting the average analyst estimate of $8.7 billion. Excluding acquisitions and a 2.5 percentage point boost from the weak dollar, sales still rose 6.2 percent. Volume, a measure of products shipped, rose 2 percent, despite price increases.

About 47 percent of Kraft's North American sales came from products whose market share is increasing, up from 38 percent a year earlier. The company expects that to reach 50 percent in the near term and at least two-thirds in the longer term, Rosenfeld said.

Kraft , which was spun off from Altria Group on March 30, said it still expects full-year earnings of $1.80 to $1.82 a share, excluding one-time items. Analysts on average forecast $1.81 a share, according to Reuters Estimates.

The company plans to spend $500 million, or 20 cents a share on restructuring in 2007, down from its previous estimate of $575 million, or 23 cents a share.

Dairy costs were up about 40 percent, leading to a 30.8 percent drop in profit in the company's North American cheese and food service unit, Kraft said.

Dairy prices have remained high as the weakened dollar makes U.S. dairy exports attractive, while a drought in Australia and global demand for milk powders has also kept prices unusually high, Kraft said.

While the company has increased prices to cover costs, some consumers are moving to lower-priced store brands, the company said.

Kraft said it expects margins in the business to be under pressure for the rest of 2007 and into early next year.

Overall, the company still expects margins to increase in 2008, despite higher input costs, Rosenfeld said.

The company also said it repurchased 30.2 million shares in the quarter for a total of $1 billion. As of Sept. 30, $3 billion had been spent under the company's $5 billion share repurchase plan, Kraft said.

Kraft shares rose 52 cents, or 1.6 percent, to $33.09 in early New York Stock Exchange trading.

At Tuesday's close, the stock traded at about 16.8 times estimated 2008 earnings, toward the middle of the Standard & Poor's packaged foods index.