Management's Discussion and Analysis of Financial Condition and Results of Operations

(Continued)

Discussion and Analysis > Operating Results by Business Segment > Food > Operating Results 

2006 compared with 2005

The following discussion compares food operating results for 2006 with 2005.

• North American food: North American food included 52 weeks of operating results in 2006 compared with 53 weeks in 2005. Kraft estimates that this extra week positively impacted net revenues and operating companies income in 2005 by approximately $435 million and $80 million, respectively. This difference is included as volume/mix in the following analysis.
  
  Net revenues decreased $175 million (0.8%), due primarily to the impact of divestitures ($457 million), partially offset by favorable currency ($153 million), favorable volume/mix ($82 million) and higher net pricing ($45 million, reflecting commodity-driven price increases, partially offset by increased promotional spending). Excluding the impact of divestitures, net revenue growth reflects volume growth in meats and snacks, favorable mix and commodity-based price increases.
  
  Operating companies income decreased $78 million (2.0%), due primarily to higher pre-tax charges for asset impairment and exit costs ($182 million), the impact of divestitures ($67 million) and lower volume/mix ($59 million), partially offset by net gains on sales of businesses ($118 million), lower marketing, administration and research costs ($49 million, including costs associated with the 53rd week of shipments in 2005), lower fixed manufacturing costs ($44 million) and favorable currency ($27 million).
  
  Volume decreased 7.0%, due primarily to the impact of divestitures and the 53rd week of shipments in 2005. Excluding divestitures and the 53rd week of shipments in 2005, volume decreased 0.7%. In Beverages, volume decreased due primarily to the discontinuation of certain ready-to-drink product lines. Volume in Cheese & Foodservice declined, due primarily to the impact of divestitures and the discontinuation of lower margin foodservice product lines. In Convenient Meals, volume increased, driven by higher meat shipments (cold cuts, hot dogs and bacon) and higher shipments of pizza, partially offset by lower shipments of dinners, due to competition in macaroni and cheese dinners, and the divestiture of the rice brand and assets. In Grocery, volume declined due primarily to the impact of divestitures, the discontinuation of certain Canadian condiment product lines and lower shipments of ready-to-eat and dry packaged desserts and spoonable salad dressings. Snacks volume decreased driven by the impact of divestitures and lower shipments of snack nuts, partially offset by higher shipments of biscuits and snack bars.
• International food: International food included 52 weeks of operating results in 2006 compared with 53 weeks in 2005. Kraft estimates that this extra week positively impacted net revenues and operating companies income in 2005 by approximately $190 million and $20 million, respectively. This difference is included as volume/mix in the following analysis.
  
  Net revenues increased $418 million (3.9%), due primarily to higher pricing, net of increased promotional spending ($184 million), favorable volume/ mix ($162 million) and the impact of acquisitions ($111 million), partially offset by the impact of divestitures ($31 million) and unfavorable currency ($8 million). In the European Union, unfavorable currency and the impact of the 53rd week in 2005 negatively impacted all sectors, partially offset by the impact of the United Biscuits acquisition. In Developing Markets, Oceania & North Asia, net revenues increased, driven by growth in Russia and Ukraine, higher shipments in Brazil, higher pricing across much of the portfolio and favorable currency in Brazil.
  
  Operating companies income decreased $158 million (14.1%), due primarily to higher pre-tax charges for asset impairment and exit costs ($341 million, including $170 million of asset impairment charges related to Tassimo), higher marketing, administration and research costs ($134 million) and gains on sales of businesses in 2005 ($109 million), partially offset by the 2006 pretax gain on redemption of the United Biscuits investment ($251 million), favorable volume/mix ($91 million), higher pricing, net of unfavorable costs and higher promotional spending ($71 million) and the impact of acquisitions. The higher marketing, administration and research costs were due primarily to higher marketing costs in 2006 and the 2005 recovery of a previously written-off account receivable, partially offset by the costs associated with the 53rd week of shipments in 2005.
  
  Volume increased 0.4%, due primarily to the impact of acquisitions and higher shipments in Eastern Europe and Latin America, partially offset by the impact of the 53rd week in 2005, lower cheese and coffee shipments in the European Union and lower volume in Asia Pacific. In the European Union, volume increased, due primarily to the impact of the UB acquisition, partially offset by lower shipments across several sectors and the divestiture of the U.K. desserts assets in the first quarter of 2005. Snacks volume increased, due primarily to the acquisition of UB and higher confectionery shipments, particularly in Poland. In convenient meals, volume increased due primarily to the acquisition of UB, partially offset by lower shipments in Germany and the Nordic area. Grocery volume declined due primarily to the divestiture of the U.K. desserts assets and lower shipments in Germany, partially offset by the acquisition of UB. In beverages, coffee volume declined across most countries except Germany and refreshment beverage shipments were lower. In cheese & dairy, volume decreased due to lower shipments in Germany and Italy. Volume decreased in Developing Markets, Oceania & North Asia, due primarily to lower volume in Asia Pacific, partially offset by growth in Eastern Europe and Latin America. In cheese and dairy, volume declined in Asia Pacific, partially offset by higher shipments in the Middle East. Grocery volume declined due to lower shipments in Brazil, Mexico, Venezuela and the Middle East. In beverages, volume declined due to the discontinuation of a product line in Mexico and lower shipments in Southeast Asia and the Middle East, partially offset by higher coffee volume in Russia, Ukraine and Romania, and higher refreshment beverages volume in China. Snacks volume increased driven by higher shipments in Brazil reflecting confectionery growth and gains in biscuits, and growth in Venezuela, Russia, Southeast Asia, Romania and Ukraine. Convenient meals volume decreased slightly.