Organic operating income declined by 6.3 per cent to $1.3bn during the second quarter 2007 up to June 30, compared to $1.4bn the same period in 2006.
"As a result of our investments in growth and our expectations for significant increases in input costs, particularly dairy, our profit margins will show further decline in the second half of the year," said Kraft's chief executive officer Irene Rosenfeld.
"But it is critical that we invest now in order to lay the foundation for our future growth."
Operating margins decreased to 14.5 per cent in the second quarter 2007 compared to 16.6 per cent in the second quarter in 2006.
Kraft said higher overhead costs and company investments were partly to blame.
However, revenues were up 6.8 per cent to $9.2bn for the quarter.
Operating income declined 2.8 per cent within the North America snacks and cereals segment, however the company said investment in the Nabisco 100 Calorie Pack segment and the Back to Nature bars helped double-digit volume gains.
Within North America beverages, revenue grew 4.3 per cent and operating income grew 13.6 per cent, partly due to the introduction of Crystal Light with antioxidants within powdered beverages.
"A favourable product mix more than offset higher input costs, primarily green coffee and packaging costs, " Kraft said.
Operating income within cheese and food service business in North America declined 20.5 per cent due to high input costs as well as increased marketing.
However, there was some sales growth following the launch of Kraft Singles Select and LiveActive cottage cheese.
Operating income declined 27.7 per cent within the North America convenient meals business due to higher commodity costs, and 7.5 per cent within the grocery segment due to lower sales, Kraft said.
Within the EU, organic income grew 8.1 per cent to $173m due to product mix gains in coffee and chocolate, Kraft said.
The company was successful with new product launches, and it said revenues were slightly affected by investment in marketing within coffee and chocolate.
However, Kraft said the $1.07bn (€836m) United Biscuits acquisition last September contributed 7.4 percentage points to the overall net revenue growth, as well as offsetting the increased marketing and investments costs.
The company said organic net revenues grew 11.5 per cent within developing markets, particularly due to increased marketing spend and new product launches within coffee and chocolate in Eastern Europe.
Operating income was up 15.3 per cent from higher pricing, although Kraft said this was partially offset by higher overhead expenses and higher input costs.
Kraft said it expects organic net revenue growth of at least 4 per cent in 2007, with a high level of savings expected from the restructuring programme.
The company estimates this to be $725m, although spending will be around $575m in 2007, it said.
"While making these investments, we are taking other significant steps to build long-term shareholder value, including expanding our international footprint by acquiring Danone's global biscuit business and actively repurchasing our stock," Rosenfeld added yesterday.