KRAFT FOODS BACK-TO-SCHOOL September 2008
Irene Rosenfeld Chairman and CEO 2
Forward Looking Statements This presentation contains forward-looking statements regarding our four strategies to get Kraft growing, specifically rewiring the organization for growth, reframing our categories, exploiting our sales capabilities and balancing cost and quality; our belief that input costs will be at least $3.3 billion, or 23%, higher in 2008 than 2006; that we're doing what we said we would and building momentum; that we ll deliver GAAP EPS of at least $2.00 in 2009; our belief that we re rebuilding our brand equities, and in particular, that our investments are paying off, we are reframing value proposition and leveraging our portfolio breadth; that the integration of our LU biscuits business is on track, growing strongly and accretive to EPS in 2008; that we are benefiting from decentralized structure and tightly controlling costs; that we are delivering improved financial results and improving profitability while we invest; our belief regarding our long-term EPS growth; our plan to rewire Kraft International by winning locally, leveraging globally, building management depth and focusing on specific categories, brands and markets where we believe we can win; how we plan to leverage our biscuits and snacks businesses for growth; our plan to build Oreo as a global icon, market by market and extending the brand into all channels and new countries; that we are trading up our power brands such as Milka, improving quality, increasing marketing, moving from mainstream to upper mainstream and obtaining higher margins from trading up consumers; that we are growing our Carte Noire brand and expanding into new segments and geographies and enhancing the mix of our coffee business; our belief that the best is yet to come and our long-term organic net revenue growth and margin targets; that our international business is key to our growth; our belief of what drives long-term and near-term EPS growth and our long-term EPS growth expectation; our estimates for restructuring, specifically that our savings will reach $1.1 billion in 2008 and $1.4 billion total and spending will be approximately $900 million in 2008 and $3.0 billion total; our expectation that we will continue to optimize our manufacturing network and reduce overhead costs by at least 1% of net revenue over the next few years; our 2008 guidance, in particular organic net revenue growth of at least 6%, EPS excluding items of at least $1.88 and effective tax rate of approximately 33%; our 2009 guidance, in particular organic net revenue growth of at least 4% and GAAP EPS of at least $2.00; our belief that we are improving cash flow with a $1 billion opportunity; and our expectation for additional cash flow improvements and our long-term target expectations for primary working capital and capital spending. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statements. Such factors, include, but are not limited to, continued higher input costs, pricing actions, increased competition, our ability to differentiate our products from private label products, increased costs of sales, our ability to realize the expected cost savings and spending from our planned restructuring program, unexpected safety or manufacturing issues, FDA or other regulatory actions or delays, unanticipated expenses such as litigation or legal settlement expenses, our indebtedness and ability to pay our indebtedness, the shift in our product mix to lower margin offerings, risks from operating internationally, our inability to integrate the LU biscuit business and tax law changes. For additional information on these and other factors that could affect our forward-looking statements, see our filings with the SEC, including our most recently filed Annual Report on Form 10-K/A and subsequent reports on Forms 10-Q and 8-K. We disclaim and do not undertake any obligation to update or revise any forward-looking statement in this presentation.
Strategic Turnaround Operational Turnaround Financial Turnaround 4
Rewire for Growth Reframe Categories Exploit Sales Capabilities Balance Cost & Quality 1 2 3 4 5
Unprecedented input cost inflation Total Input Costs +23% +$1.3Bn +$3.3Bn vs. 2006 2006 2007 2008E Source: Company estimates 6
Doing what we said we would do 7
We re building momentum 8
We ll deliver GAAP EPS of at least $2.00 in 2009 9
Strong momentum at midpoint of turnaround Rebuilding our brand equities Strengthened our portfolio Benefiting from decentralized structure delivering improved financial results 10
Rebuilding our brand equities Investments Paying Off Reframing Value Proposition 11
Leveraging our portfolio breadth 12
Solid volume/mix despite pricing Organic revenue growth profile* 6.2% 7.5% pp contribution Pricing Volume/Mix 4.0% 2.1 1.0 1.5% 0.8 0.7 3.0 4.1 2006 H1 07 H2 07 5.8 1.7 H1 08 * Reported net revenue growth was 0.7% in 2006; 6.3% in H1 07; 10.4% in H2 07; 21.1% in H1 08. See GAAP to Non-GAAP reconciliation at the end of this presentation 13
Strengthened our portfolio Exited several businesses that did not fit VeryFine and Fruit 2O Post cereals European salty snacks Acquired LU biscuits Integration on track Business growing strongly EPS accretive in 2008 14
Benefiting from decentralized structure Faster reaction to marketplace Taking the lead on cost-driven pricing Cutting inefficient trade spending Tightly controlling costs 15
Improving profitability while we invest (ex items*) Gross margin 31.2% 33.7% 36.1% 34.8% Adjusted** Q4 07 Q1 08 Q2 08 Operating income margin 11.4% 15.3% 12.4% 13.9% Adjusted** Q4 07 Q1 08 Q2 08 * Reported gross profit margin was 31.0% in Q4 2007, 33.6% in Q1 2008 and 36.2% in Q2 2008. Reported operating income margin was 10.0% in Q4 2007, 11.2% in Q1 2008 and 13.5% in Q2 2008. See GAAP to Non-GAAP reconciliation at the end of this presentation. ** Adjusted for $150 million gain related to certain commodity hedges 16
Returning Kraft to reliable growth 2007: Investment 2008: Sequential improvement 2009: We hit our stride At least 4% organic revenue growth 7%-9% EPS growth 17
Strategic Turnaround Operational Turnaround Financial Turnaround 18
Sanjay Khosla President, Kraft International 19
International a vital part of Kraft Net Revenue Operating Income 41% $16 Bn 34% $1.7 Bn 2007 pro-forma estimated results including LU biscuit, excluding Post cereal. 20
A large International player 2007 Food & Beverage revenue outside North America $US Billions $16 Nestlé Unilever Coca-Cola Danone Kraft PepsiCo Cadbury CCE Sara Lee Heinz Source: Bloomberg; company reports. Unilever estimated for food and beverage operations only. Kraft pro-forma to include LU biscuit 21
But not performing up to potential Kraft International 2003-2006 CAGR Organic revenue growth* 2.4% Operating income growth Ex items* (3.5)% * See GAAP to Non-GAAP reconciliations at the end of this presentation 22
Rewire for Growth Reframe Categories Exploit Sales Capabilities Balance Cost & Quality 1 2 3 4 23
Three pillars to rewire Kraft International 1. Win locally, leverage globally 2. Build management depth 3. Focus where we can win 24
1. Win locally, leverage globally Established a more flexible, decentralized business model Empowered business units with full P&L responsibility Linked pay structure to local results Ensured leveraging of global expertise 25
2. Build management depth Best of home-grown talent Experienced international managers from the outside Key leaders from LU biscuits 26
3. Focus where we can win 5 Categories 10 Brands 10 Markets 27
5 Categories Biscuits Chocolate Powdered Beverages Coffee Cream Cheese Snacks Biscuits Chocolate Powdered Bev Coffee Cheese Beverages 28
Global Biscuits leader Number 1 in key markets More than 4X largest competitor Seamless integration of LU biscuits Accretive to earnings this year 29
Leveraging Biscuits for profitable growth Increasing distribution strength in key markets Expanding affordable nutrition platform in developing markets Growing better-for-you alternatives in developed markets 30
Leveraging strong Snacks position for growth Revenue rank versus competition by region EU EEMA LA AP Biscuits 1 1 1 1 Chocolate 3 1 2 Source: Euromonitor, AC Nielsen Kraft does not compete in this region 31
Strong share positions in all 5 categories Revenue rank versus competition by region EU EEMA LA AP Biscuits 1 1 1 1 Chocolate 3 1 2 Powdered Beverages 1 1 1 Coffee 1 2 Cream Cheese 1 1 1 Source: Euromonitor, AC Nielsen Kraft does not compete in this region 32
10 Brands Composite organic revenue growth 6% 11% 14% 03-06 CAGR 2007 H1 2008 33
Building a global icon, market by market Oreo in Asia for more than 10 years but not growing Reframed into individually-wrapped, wafer forms Extending into all channels, new countries 2007 Oreo sales +51%; +46% 2008 first half 34
Trading up our power brands Improving quality, increasing marketing on the core Moving from mainstream to upper mainstream Higher margins from trading up consumers 10% growth in 2007, 18% growth 2008 first half 35
Growing a classic premium brand Enhancing mix of coffee business Expanding into new segments, new geographies Strong organic growth in 2007, 2008 year-to-date 36
10 Markets 60% of international revenue; 70% of profit 37
10 Markets 4 Growth Engines 38
10 Markets 4 Growth Engines 6 Scale Markets 39
Three pillars to rewire Kraft International 1. Win locally, leverage globally 2. Build management depth 3. Focus where we can win 40
Gaining momentum Kraft International Organic Revenue Growth* 2.4% 6.8% 11.7% Operating Income Growth (ex items)* 03-06 CAGR 2007 H1 2008 3.0% 15.0%** (3.5)% 03-06 CAGR * See GAAP to Non-GAAP reconciliation at the end of this presentation ** Organic OI growth (excluding currency and LU biscuit); See GAAP to Non-GAAP reconciliation at the end of this presentation 2007 H1 2008 41
Best is yet to come Organic Net Revenue Growth* Margin 2003-2006 CAGR LT Target LT Target European Union (0.5) 1-3 ++ Developing Markets 7.4 8-10 + * See GAAP to Non-GAAP reconciliation at the end of this presentation 42
International is key to Kraft s growth Right strategy + Right people in the right places + Right focus 43
International is key to Kraft s growth Right strategy + Right people in the right places + Right focus = Powerful growth engine for Kraft 44
Tim McLevish Chief Financial Officer 45
Strategic Turnaround Operational Turnaround Financial Turnaround 46
Long-term growth model Pricing and productivity cover input cost inflation Volume and mix drive margin expansion 47
Long-term growth model Organic Revenue Growth 4%+ Manufacturing, Overhead Leverage 2-3pp Cash Flow Leverage & Tax Rate 1-2pp Long-Term EPS Growth 7%-9% 48
Near-term drivers different Cost-driven pricing a bigger factor Volume and mix pressure due to pricing Driving greater cost reductions to protect investments for long-term growth 49
Tightly controlling costs Greater savings from Restructuring Total program savings of $1.4 billion; +$200mm Savings to reach $1.1 billion in 2008 Spending $900 million in 2008; $3.0 billion total program Savings beyond Restructuring Costs into P&L as ordinary cost of doing business Continue to optimize manufacturing network Reduce overhead costs by at least 1% of Net Revenue 50
2008 Guidance update Organic net revenue growth at least 6% EPS excluding items at least $1.88 Adjusted downwards by $(0.04) from exiting Post cereals in August Effective tax rate ~33.0% 51
2009 Guidance Organic net revenue growth at least 4% Impact from pricing dependent on input cost trends GAAP EPS at least $2.00 Double-digit growth from continuing operations, excluding items $200-300 million spending on cost-saving initiatives $(0.03) residual impact from exiting Post cereals 52
$1 billion annual cash flow improvement Earnings growth Pay as you go restructuring Other opportunities over time Primary working capital below 11% of net revenue Capital Spending below 3% of net revenue 53
Summary Gaining momentum at midpoint of turnaround Strengthening our global portfolio Driving improved financial results 54
Appendix GAAP to non-gaap reconciliation Net Revenue Growth - Total Kraft Foods (Unaudited) As Reported (GAAP) Impact of Divestitures / Other Impact of Acquisitions Impact of Currency Organic (Non- GAAP) Organic Growth Drivers Volume/ Mix Price For the Six Months Ended June 30, 2008 Kraft Foods 21.1% 0.6pp (8.9)pp (5.3)pp 7.5% 1.7pp 5.8pp For the Six Months Ended December 31, 2007 Kraft Foods 10.4% 0.6pp (0.7)pp (4.1)pp 6.2% 4.1pp 2.1pp For the Six Months Ended June 30, 2007 Kraft Foods 6.3% 1.2pp (1.3)pp (2.2)pp 4.0% 3.0pp 1.0pp For the Twelve Months Ended December 31, 2006 Kraft Foods 0.7% 1.6pp (0.3)pp (0.5)pp 1.5% 0.8pp 0.7pp 56
Appendix GAAP to non-gaap reconciliation Net Revenue Growth - Kraft International (Unaudited) As Reported (GAAP) Impact of Divestitures / Other Impact of Acquisitions Impact of Currency Organic (Non- GAAP) For the Years Ended: 2004 European Union Developing Markets International 2005 European Union Developing Markets International 6.2% 4.8% 5.7% 3.2% 13.9% 7.0% 2.0pp 0.0pp (10.1)pp (1.9)% 0.5pp (0.7)pp (1.8)pp 2.8% 1.4pp (0.2)pp (7.1)pp (0.2)% 1.0pp 0.0pp (3.1)pp 1.1% 0.6pp 0.0pp (4.6)pp 9.9% 0.9pp 0.0pp (3.6)pp 4.3% 2006 European Union Developing Markets International (0.6)% 11.2% 3.9% 0.2pp 0.5pp 0.3pp (1.7)pp 0.0pp (1.1)pp 1.4pp (2.1)pp 0.1pp (0.7)% 9.6% 3.2% 2007 European Union Developing Markets International 19.2% 17.1% 18.4% 0.0pp (5.1)pp (10.5)pp 0.0pp (0.2)pp (5.4)pp 0.0pp (3.1)pp (8.5)pp 3.6% 11.5% 6.8% For the six months ended June 30, 2008: European Union Developing Markets International 56.9% 40.0% 50.1% 1.7pp (37.2)pp (15.0)pp 0.0pp (10.9)pp (9.9)pp 0.9pp (26.4)pp (12.9)pp 6.4% 19.3% 11.7% Compound Annual Growth Rate, 2003-2006: European Union Developing Markets International (0.5)% 7.4% 2.4% 57
Appendix GAAP to non-gaap reconciliation Gross Margin and Operating Margin - Total Kraft Foods (Unaudited) Reported (GAAP) Asset Impairment, Exit and Implementation Costs - Restructuring (Gains) / Losses on Divestitures, net Excluding Items (Non-GAAP) Certain Hedging Activity Excluding Certain Hedging Activity (Non-GAAP) For the Three Months Ended June 30, 2008 Gross Margin 36.2% (0.1)pp 0.0pp 36.1% (1.3)pp 34.8% Operating Margin 13.5% 1.1pp 0.7pp 15.3% (1.4)pp 13.9% For the Three Months Ended March 31, 2008 Gross Margin 33.6% 0.1pp 0.0pp 33.7% Operating Margin 11.2% 1.0pp 0.2pp 12.4% For the Three Months Ended December 31, 2007 Gross Margin 31.0% 0.2pp 0.0pp 31.2% Operating Margin 10.0% 1.3pp 0.1pp 11.4% 58
Appendix GAAP to non-gaap reconciliation Operating Income Growth - Kraft International (Unaudited) Reported (GAAP) Asset Impairment, Exit and Implementation Costs - Restructuring Asset Impairment and Other Costs - Non-Restructuring (Gains) / Losses on Divestitures, net Excluding Items (Non-GAAP) For the Twelve Months Ended December 31, 2004 Operating Income Growth (33.0)% 15.6pp 3.4pp 2.1pp (11.9)% For the Twelve Months Ended December 31, 2005 Operating Income Growth 20.3% (7.9)pp (4.4)pp (9.3)pp (1.3)% For the Twelve Months Ended December 31, 2006 Operating Income Growth (14.1)% 14.2pp 14.0pp (10.7)pp 3.4% For the Twelve Months Ended December 31, 2007 Operating Income Growth 10.2% (12.9)pp (11.2)pp 16.9pp 3.0% 2003-2006 Compound Annual Growth Rate (3.5)% 59
Appendix GAAP to non-gaap reconciliation Organic Operating Income Growth - Kraft International (Unaudited) Reported (GAAP) Asset Impairment, Exit and Implementation Costs - Restructuring Asset Impairment and Other Costs - Non- Restructuring (Gains) / Losses on Divestitures, net Excluding Items (Non-GAAP) Impact of Divestitures / Other Currency LU Acquisition, net of Integration Costs Organic For the Six Months Ended June 30, 2008 Operating Income Growth 43.6% (8.9)pp 0.7pp 17.6pp 53.0% 1.6pp (11.1)pp (28.5)pp 15.0% 60