Kraft Foods Inc today posted a 27 per cent decrease in operating profit for the third quarter, blaming high dairy and other commodity costs for the tumble.
For the third quarter ending 30 September 2007, net sales increased 9.8 per cent to hit $9.05bn, Kraft said, but operating income decreased 27.6 per cent to $1bn from the same period in 2006
Operating margins decreased 6.2 percentage points to 10.2 per cent, from 16.4 per cent for third quarter last year.
The world's second largest food company said that it had increased prices to cope with rising ingredient costs, as well as boosting marketing spend.
"Although we face a difficult input cost environment, we are making the necessary investments to strengthen our brand equity," said Kraft chief executive officer Irene Rosenfeld. "These investments are driving accelerated volume growth despite having taken significant price increases."
Total costs for the quarter, including cost of sales and marketing and administration spend, increased 13.6 per cent to $8,054m, from $7,092 in the third quarter 2006.
In the European Union division, which involves Kraft's confectionery brands, net sales grew 4.9 per cent.
"Chocolate revenues grew double-digit due to broad-based growth from increased marketing investment and new product activity under core brands Milka, Cote d'Or, and Toblerone as well as the effects of unseasonably cool weather across the EU," the company said.
Growth was also aided by the recent acquisition of United Biscuits business in Southern Europe, the company said, which added 8.2 percentage points to net revenue growth.
However, operating income in the region decrease 4.4 per cent, attributed to high dairy and coffee costs.
In the developing markets region - Latin America, Eastern Europe, Middle East and Africa - both net sales and operating profit increased, Kraft said.
Net sales grew 12.8 per cent and operating income went up 22 per cent, led by regional growth in Lacta chocolate, Jacob's coffee, Tang powdered beverages and Oreo biscuits, as well as especially strong chocolate and biscuit sales in Latin America.
Chocolate was also a strong seller in the Middle East and Africa, as was coffee and biscuits, the company said.
In the North America snacks and sales division were up 4.6 per cent, led by strong product innovation, strong growth in crackers and double digit gains in snack bars.
Net sales in the North America beverage division grew 5.3 per cent, with strong coffee sales and price hikes offsetting poor bottled beverage sales.
Increasing dairy costs hit Kraft's North America cheese and foodservice division the hardest, as operating income for this sector went down 30.8 per cent.
"The contribution from pricing was more than offset by higher input costs, including an approximate 40 per cent increase in dairy costs, and increased marketing investment," the company said.
High commodity costs also hit the convenient meal division, albeit to a lesser extent, and operating profit declined by 6.7 per cent.
Sales grew 8 per cent thanks to popular brands such as DiGiorno Ultimate pizza, Easy-Mac cups and Oscar Mayer Deli shaved meats, the company said.
Despite the profit difficulties experienced over the last quarter, the company said it still expects full year growth of four per cent in 2007.
Kraft also plans to spend $500m on restructuring over the course of the year, down from previous estimates of $575m.
Net profits dropped 20 per cent for the third quarter.