Kraft Foods 2006 Annual Report |
| Tuesday, 16 June 2009 | |
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We made progress in 2006 on both our top and bottom lines, but our results were mixed. Growth in North America slowed significantly during the second half of the year, due to lower contribution from new products and declining market shares in a number of core categories. In our International business, we saw continued strength, driven by developing markets across Latin America and Eastern Europe. For the full year, our net revenues increased 0.7%, reflecting one less shipping week in 2006 compared with 2005. Full-year reported net earnings were $3.1 billion, an increase of 16.3% versus the prior year. And reported diluted earnings per share were $1.85, up 19.4% from $1.55 in 2005. In August, your Board of Directors continued to return cash to shareholders by increasing the dividend by 9%. Our 2006 results, though, were driven, in large part, by one-time, non-operational benefits. We recognize that we must fix certain aspects of the business to deliver predictable growth over the long term that meets your expectations. Kraft has many strengths, including a portfolio of iconic brands, a powerful selling and distribution network, a global presence, and considerable financial resources. The company is focused on four strategies that build on these strengths to deliver consistent predictable growth:
Rewire the organization. Rewiring the organization for growth begins with reinforcing a mindset of candor, courage and action throughout the company. A recent example is how we reassessed our Tassimo hot-beverage system. The original business assumptions for this innovative product proved too aggressive. After careful reconsideration, we took a $245 million write-down and redesigned the entire marketing plan. We now have a more realistic business plan and are excited about Tassimo’s potential. We’re also striking a better balance between globalization and centralization. We’re putting operating decisions in the hands of our local-market leaders – the people closest to our consumers – so that we can act more quickly on new ideas that will drive growth. Reframe our categories. The essence of our second strategy – reframing our categories – is about exploiting the full potential of Kraft’s unique and highly complementary portfolio. When we do this right, the breadth of our portfolio will be a competitive advantage. To begin with, we’re broadening the frame of reference for each of our categories by looking at our products through consumers’ eyes rather than through the narrow lens of our manufacturing processes. With a broader frame of reference, we can compete in larger, faster-growing categories; gain share from a wider range of quick meal and snack alternatives; drive incremental volume and mix; and better meet consumer needs. For example, cheese, our largest business, has been growing, but not fast enough. We have tended to classify our cheese business in terms of how it is made – i.e., process slices, natural chunks, sticks, shreds, and so on. By broadening our frame of reference to reflect how consumers actually eat cheese, we immediately see many growth opportunities, including cheeses for snacking, for dipping, for sandwiches and for quick meals. More specifically, when we expand our thinking from the processed cheese slices category, which is declining 2%, to the way our consumers actually use sliced cheese, we have a much larger category to consider – sandwich cheese, which is growing at 2%. Similarly, natural chunks are growing at 4%, but the broader category of snacking cheese is growing at 6%. And the premium cheese segment in which we barely participate is growing at a healthy double-digit rate. In short, by expanding our frame of reference, we’re confident that we can increase our share of the large and growing $14 billion cheese market. We’re also moving beyond meal components to create complete meal solutions. Our new Oscar Mayer Deli- Further, we’re exploring opportunities to use our broad portfolio to meet the demands of specific consumer groups for weight management, health and wellness and other benefits. This approach led us to develop our successful $250 million South Beach Diet line, which is designed for consumers looking for convenient and delicious ways to manage their weight. The strategy of reframing our categories and the belief that scale matters will not, however, act as a safe harbor for every product in the portfolio. We will continue to objectively assess the potential of each of our businesses to deliver attractive long-term value. Exploit our sales capabilities. Our third strategy is about leveraging one of the largest and most powerful sales forces in the food industry. Only Kraft has the scale to combine the executional benefits of direct store delivery with the economics of warehouse delivery. We are piloting an approach in North America that we believe will give us a competitive advantage to drive faster growth. Internationally, the company is growing and building profitable scale by expanding its distribution reach in countries with rapidly growing demand. With the right investments and application of local-market know-how, we expect to see excellent returns, as we’ve delivered in Russia and Ukraine. We will focus on a select number of developing markets where we have sufficient scale, including Brazil and Mexico. Drive down costs without compromising quality. Driving down costs has been and remains a core competency for Kraft. In the future, we’ll strike a better balance, as we invest more in growth. We will complete our $3 billion restructuring program in 2008, and we expect it to deliver a total of $1 billion in annual savings. When this program is finished, we’ll spend at a more consistent level each year to provide a steady stream of savings and more predictable earnings. We intend to lower overhead costs as a percent of sales over time, including cutting back in certain support functions by outsourcing business processes and using shared services. As our fourth strategy states, however, we will not compromise quality for the sake of cost savings. On the contrary, we will use cost savings to invest in building capabilities in areas that can drive or support growth, including R&D, marketing and sales. The prospect of independence. All of us at Kraft are excited about becoming a fully independent company. While our strategies for growth are sound, regardless of who owns our stock, the imminent spin-off of Kraft from Altria Group, Inc. will enable us to accelerate our plans and provide us with greater financial flexibility. To that end, in February, the Kraft Board of Directors approved a $5 billion share repurchase program that will become effective after the spin-off. This program enables us to repurchase a significant amount of stock over the next two years. Together with our dividend, it will help enhance shareholder returns until we fully achieve our growth targets. However, we will still have ample capacity for acquisitions. Our focus will be on building scale in key international geographies and on gaining access around the world to new categories, new capabilities and new technologies. With the spin-off, I will assume the chairmanship of Kraft from Louis Camilleri. I am delighted that Louis has graciously agreed to remain on our Board as a director and that Kraft will continue to benefit from his financial acumen and deep understanding of our business. I would like to thank Louis for his leadership over the years and for his counsel and support during this transition. The 90,000 people of Kraft and I also thank you, our shareholders, for your ongoing support. We are energized about getting your company growing again. A return to predictable growth will take time, but I am confident we are on the right path. Let me assure you that we will work tirelessly to reach our destination as quickly as possible. Irene B. Rosenfeld Download Kraft Foods 2006 Annual Report (Editorial Content Only) Kraft Foods 2007 Annual Report Kraft Foods Inc. Don't Miss Out! Kraft was incorporated in 2000 in the Commonwealth of Virginia. We manufacture and market packaged foods and beverages worldwide in more than 150 countries. We have nine brands with revenues exceeding $1 billion: Kraft cheeses, dinners and dressings; Oscar Mayer meats; Philadelphia cream cheese; Maxwell House coffee; Nabisco cookies and crackers and its Oreo brand; Jacobs coffees, Milka chocolates and LU biscuits. We have more than 50 additional brands with revenues of at least $100 million. Prior to June 13, 2001, Kraft was a wholly-owned subsidiary of Altria Group, Inc. (“Altria”). On June 13, 2001, we completed an initial public offering of 280,000,000 shares of our Common Stock at a price of $31.00 per share. In the first quarter of 2007, Altria spun off its remaining interest (89.0%) in Kraft on a pro rata basis to Altria stockholders in a tax-free transaction. Effective as of the close of business on March 30, 2007, all Kraft shares owned by Altria were distributed to Altria’s stockholders, and our separation from Altria was completed (the “Distribution”). Before the Distribution, Altria converted all of its Class B shares of Kraft common stock into Class A shares of Kraft common stock. The Distribution ratio was calculated by dividing the number of shares of Kraft Common Stock held by Altria by the number of Altria shares outstanding on the record date, March 16, 2007. The distribution ratio was 0.692024 shares of Kraft Common Stock for every share of Altria common stock outstanding. Following the Distribution, we only have Class A common stock outstanding. Because Kraft is a holding company, our principal source of funds is dividends from our subsidiaries. Our principal whollyowned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock. Bookmark
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Dear shareholder, now that you’ve seen the world through the eyes of our consumers, I’d like to share with you, how this perspective is helping us to create a new Kraft that will be better than ever before.
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