Kraft Foods (KFT) reported strong second-quarter results with earnings of 55 cents per share, above the Zacks Consensus Estimate of 48 cents. Quarterly earnings were also up 61.8% year-over-year.

However, net revenues for the quarter declined 5.7% year-over-year to $9.8 billion, primarily due to the unfavorable negative 5.6% impact of foreign currency and a negative 0.6% impact from divestitures. Organic revenues increased 0.5%, driven by a 0.7% gain from volume and mix, which was partially offset by negative 0.2% from pricing.

In the North American segment (KNAC) sales declined 2.5% year-over-year as gains in U.S. Convenient Meals (5.0%), and U.S. Beverages (1.5%) were fully offset by the declines in U.S. Cheese 10.3%, U.S. Grocery 3.0%, U.S. Snacks 3.3% and Canada & North American Foodservice 4.9%.

In the International segment, net revenues in the European Union decreased 11.5% while the top-line in developing markets contracted 8.4%.

Gross margins for the quarter expanded 434 basis points (bps) to 36.1% versus 31.8% in the comparable prior-year quarter. The increase was primarily due to cost saving programs undertaken by the company. The operating margin for the quarter also expanded 464 bps to 14.5%.

Year-to-date, free cash flow was $2.7 billion, up 67% compared to the prior-year quarter. The increase was primarily attributable to efficient working capital management and lower capital expenditures.

Based on the strong year-to-date performance, management has raised guidance for fiscal 2009. The company now expects annual earnings of at least $1.97 per share compared to $1.93 guided earlier. This guidance reflects strong year-to-date profit performance and a reduction in its full-year effective tax rate to approximately 30.0%.

The new guidance also reflects further investments in marketing to drive future growth and an estimate for certain costs in connection with the company’s possible combination with Cadbury plc (CBY).

The organic net revenue growth is now expected to be 2% compared to 3% stated earlier. The change in outlook primarily reflects a lower contribution from pricing due to lower-than-expected input costs.

Driven by the company’s increased profit guidance, and the benefit of improved working capital management, the company raised its outlook for full-year free cash flow to approximately $3.0 billion versus the previous estimate of $2.6 billion.

In Sept. 2009, Kraft had proposed a takeover of Cadbury for $16.2 billion (£10.2 billion). However, Cadbury rejected the offer. However, the company has little time left to make a firm offer for Cadbury. British regulators have set a deadline of Nov. 9 for Kraft to make a formal bid or the company will have to wait for 6 months.

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