--Kraft second-quarter earnings up 5.4% as margins improve from
cost-cutting
--Kraft sets Oct. 1 date for split into snacks, grocery
companies
--Company backs guidance for the full year
(Adds details from earnings call and comments from interview
with CEO.)
By Paul Ziobro
Kraft Foods Inc. (KFT) is headed for splitsville a bit sooner
than expected, with attention quickly shifting from its final
quarterly earnings report as a whole company to the food giant's
prospects as two stand-alone companies .
Kraft on Thursday set Oct. 1 as the date for its planned spinoff
of its legacy North American grocery business, which is retaining
the Kraft name, from the remaining snack brands that will become
Mondelez International. It also named board members for each of the
companies.
The date is "a little earlier than folks had expected," Chief
Executive Irene Rosenfeld said in an interview, as the company has
been saying it would be done by the end of 2012. But the process
unfolded faster than expected. Kraft still needs a tax ruling from
Canada and board approval for the spinoff date, but Ms. Rosenfeld
doesn't expect any "deal breakers" that would cause delays.
The announcement came as Kraft reported a 5.4% increase in
second-quarter earnings, with margins improving from tight cost
controls and Europe sales proving resilient despite a darkening
macroeconomic picture. But net sales posted a surprise drop, as a
stronger U.S. dollar took a bite out of results.
Still, organic revenue, which strips out foreign-exchange and
other impacts to offer a more comparable picture, rose 3.4% in the
quarter, with the metric rising in each region. Organic growth was
up 1.7% in North America, 1.4% in Europe and 7.6% in emerging
markets.
The results offered a bit for investors to chew--both good and
bad--as they evaluate the separate companies. Kraft shares were up
1.2% to $39.42 in after-hours trading on the results. Based on
Thursday's close, the stock is up 14% from a year ago, when Kraft
announced the splitup, outperforming an 8.5% gain in the Dow Jones
Industrial Average over the same period.
Mondelez, with brands like Oreo cookies and Cadbury chocolate,
is expected to enjoy rosier growth prospects in developing markets,
and Kraft's sales in China and India are up 30% and 20%,
respectively, through the first half of the year. But the company
has seen some slowdown in Russia and Brazil due to macroeconoic
concerns.
Mondelez will also face a daunting environment in Europe. Kraft
is managing the majority of the continent well by steering cost
savings toward proven marketing programs behind its top brands. But
its gum business, which includes the Trident and Stride brands, is
struggling, with sales down 10% this year in Europe, primarily as
teenagers have less spending money.
Kraft is trying to fix its gum business with new items, like its
upcoming Stride ID, with sticks of gum swirled with candy, but Ms.
Rosenfeld said that gum is unlikely to return to historical growth
rates anytime soon.
Kraft's North American grocery business will continue to face a
consumer that's increasingly frugal with its food purchases, and
its volumes have slumped a bit as it has raised prices.
"It continues to be a reasonably weak consumer environment," Ms.
Rosenfeld said.
But the business will be charged primarily with widening margins
and paying fat dividends. In the latest quarter, Kraft's North
America business, including its snack business, saw margins grow to
19.7% from 18.2% a year ago.
For the full year, Kraft continued to back its guidance, which
calls for organic sales growth of about 5% and adjusted per-share
earnings growth of at least 9%.
In its most recent quarter, Kraft reported a profit of $1.03
billion, or 58 cents a share, up from $976 million, or 55 cents a
share, a year earlier. Excluding spinoff costs, integration costs
and other items, operating earnings rose to 68 cents from 62
cents.
Revenue fell 4.3% to $13.29 billion. Analysts polled by Thomson
Reuters had most recently predicted earnings of 66 cents a share
and revenue of $13.96 billion.
Gross margin widened to 36.7% from 35.1%, though input costs
rose 6.6%.
-Nathalie Tadena contributed to this article.
Write to Paul Ziobro at paul.ziobro@dowjones.com.
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