Kraft Profit Down on Dairy Prices

CHICAGO – Kraft Foods Inc. (KFT), the largest North American food maker, on Monday reported lower quarterly profit and cut its full-year forecast, hurt by higher costs for dairy products and increased marketing costs.

Kraft, the maker of Oreo cookies and Oscar Mayer (search) meats, earned $698 million, or 41 cents a share in the second quarter, compared with $949 million, or 55 cents, a year-earlier.

Excluding costs related to a restructuring program announced in January in response to declining market share, earnings were 46 cents a share. Analysts had expected earnings of 46 cents a share before items, on average, and 40 cents after items, according to Reuters Estimates.

The average cost of the cheese used in Kraft products rose 70 percent in the quarter over the prior-year period, though prices moderated at the end of the quarter. Kraft raised prices on various cheese products in the United States, which offset about half of the higher costs.

"Significantly higher costs for our key commodities, especially dairy, drove both the earnings decline in the quarter and the need to revise our 2004 full-year guidance," Chief Executive Officer Roger Deromedi said in a statement.

Kraft said it now expects full-year profit of $1.55 to $1.62 a share, including 30 cents a share in restructuring costs. That is down from its February forecast of $1.63 to $1.70 share.

The restructuring program includes the reduction of about 6,000 jobs over a three-year period and closing some 20 manufacturing plants.

In the second quarter, revenue rose 4.6 percent to $8.21 billion, largely due to the weakness of the dollar, which boosts the value of overseas sales when they are converted into dollars.

Sales by volume rose 3.6 percent, largely due to acquisitions. Volume rose 4.9 percent in North America, as growth in categories with increased marketing was partially offset by significant declines in cereal and confections, which have been hit by the popularity of low carbohydrate diets and other factors.

In February, Kraft unveiled plans for a range of health-oriented foods and other new products to help drive sales.

In the first half of the year, the company worked to remove artery-clogging trans fats from many of its baked goods, with trans-fat-free versions of some Triscuit and Wheat Thins crackers and Oreo cookies.

It also introduced CarbWell (search) salad dressings and barbecue sauce for low-carb dieters, and a convenience-oriented coffee machine that makes coffee, cafe crema, espresso and other drinks.

The company maintained its outlook for full-year constant currency net revenue growth excluding divestitures of around 3 percent, and raised its volume growth to around 3.5 percent from a previous forecast of 2 percent to 3 percent.

Kraft said it expects to incur $650 million to $700 million in higher commodity costs in the year. It also expects to spend an additional $500 million to $600 million this year, compared with 2003, on marketing and to help reduce the gap in prices between its products and those of competitors.

Kraft shares closed 83 cents higher at $31.13 on the New York Stock Exchange.