Kraft Foods 2007 Annual Report

Friday, 12 June 2009

Dear Fellow Shareholder:
Welcome to the New Kraft.

Kraft Foods 2007 Annual Report We’re now a fully independent company. Our employees are energized and passionate to grow our business. Our brands are getting stronger every day. Our insights about consumers are deeper and richer than ever before. And our new product pipeline is flowing with exciting ideas that will accelerate our growth and improve our margins. I’m pleased to tell you, the new Kraft is taking shape.

Yes, things are definitely changing. But one thing remains the same—our commitment to returning Kraft to reliable growth and to returning value to you, our shareholders.

Last year, we laid out our three-year growth plan. We said 2007 would be an investment year—a time to step back and rebuild our brands and our infrastructure and set the stage for reliable growth—and that’s largely how 2007 played out.

We said we were going to strengthen our senior leadership… and we did.
We said we were going to invest in our brands… and we did.
We said we were going to improve our product quality… and we did.
We said we were going to rebuild our product pipeline… and we did.
And we said we were going to grow… and we did.

Progress in 2007
Over the past 12 months, we proved that we can grow our top line much faster. We grew net revenue by 8.4%, delivering our best top-line performance since going public in 2001.

We invested an incremental $375 million in our business to improve product quality, drive innovation and increase marketing support. And where we’ve invested, we’ve seen results. We took several actions to strengthen our portfolio—acquiring Groupe Danone’s global biscuit business, selling Veryfine and Fruit2O and announcing the merger of the Post cereal business into Ralcorp.

We continue to make progress on the restructuring program that we began in 2004. And we’ve returned value to you—increasing our dividend rate by 8% and buying back our stock. In the first nine months following our spin-off from Altria, we repurchased 6.5% of our outstanding shares—$3.5 billion of the $5 billion share repurchase plan authorized by our board.

Addressing challenges
Our bottom-line results, however, were not where we wanted them to be. And so, as we committed last year, our focus in 2008 is to build on our top-line momentum while getting the bottom line growing again.

The biggest challenge we encountered last year was unprecedented high input costs— which impacted everyone in the industry—and the fact that they remained at those levels for an extended time. Because input costs, particularly dairy, stayed so high for so long, our pricing actions did not keep pace with our cost increases. That hurt our gross margins, and as a result, our profits.

We can and will be more aggressive with pricing in 2008. Our ability to charge higher prices —and the willingness of consumers to pay them—depends on the strength of our brands and the value they offer consumers. As a result of our investments, we believe we have improved both. And so, we expect to see progressive improvement in our profit margins as 2008 unfolds.

Now I’d like to tell you about the progress we’ve made on our four growth strategies.

Rewiring the organization for growth
Rewiring is our first strategy for a very good reason—because having the right people, processes and structure is critical to all of our other strategies.

We made terrific progress in 2007 by:

Strengthening our senior talent—three of the nine members of our executive team are new to Kraft or new to their jobs. We’ve combined exceptional new talent and fresh thinking with the strongest Kraft veterans.
Tying our annual bonuses and long-term incentive plan more directly to measures that investors value and our people can control—revenue, operating income and cash flow.
Improving our organizational structure and processes by creating business units that are more self-contained and have broader accountability for total business results in distinct product categories or geographies.

Reframe our categories
This strategy has focused our teams on the key consumer trends driving our growth and has given them the freedom to look at our categories more broadly. We’re creating product platforms that we can apply across multiple brands or categories. These are big ideas— most with the potential to be $100 million businesses—such as LiveActive products with probiotic cultures and prebiotic fiber, Cakesters snack cakes and Oscar Mayer Deli Creations hot sandwiches.

Exploit our sales capabilities
In the U.S., our Wall-to-Wall initiative is working. Having one sales person covering the entire store has driven incremental growth.

We also made significant progress in expanding our reach to traditional trade in key developing markets. For example, millions of consumers in Mexico and Brazil can now find Kraft products in more affordable package sizes in the places they like to shop. Our products are now in 40,000 more stores in Brazil and 45,000 additional stores in Mexico.

And our Danone Biscuit acquisition is a quantum leap forward in our efforts to expand our sales reach in developing markets, such as China, Russia, Indonesia and Malaysia.

Drive down costs without compromising quality
We continue to make progress on our restructuring program. We’re achieving faster savings at lower costs and expect to complete the program in 2008 with total annualized savings reaching $1.2 billion by the end of 2009—up $200 million from last year. And we’ll do it at a cost of no more than $2.8 billion—$200 million less than we had planned.

Beyond 2008, our efforts to contain and reduce overhead costs will be an essential element of our profit model, and we will move away from non-GAAP reporting in our earnings releases and EPS guidance.

On the quality side, our shift from “good enough” to “truly delicious” has had a measurable impact. In 2006, only 44% of our global revenue came from products that consumers preferred to the competition. In 2007, that number jumped to 55%. We plan to be at 60% by the end of this year and 65% in 2009.

We’re investing another $100 million in quality upgrades in 2008. This will further strengthen our brands and improve our pricing power.

The new Kraft
To help guide us as we execute our growth plan, we strengthened our corporate governance by adding six new independent directors to our board and appointing a lead director.

Now, 11 of our 12 directors are independent.
To sum up—in 2007, we did what we said we would do. It’s working. And, we’re going to keep on doing it.

I want to thank you for your support of our company. Because we know that our actions speak louder than our words, I encourage you to visit www.newkraft.com, our special website that accompanies this report, to see for yourself some of the exciting things going on at the new Kraft. And, I invite you to keep an eye on us as we build on our momentum and get growing on both the top and bottom lines in 2008.

Sincerely,
Irene B. Rosenfeld
Chairman and Chief Executive Officer
March 25, 2008

Download Kraft Foods 2007 Annual Report

PDF format, 2.3MB, 108Pages.

Kraft Foods Inc.
Three Lakes Drive
Northfield, IL 60093-2753
www.kraft.com

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Kraft Foods Magazine

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.

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