--Kraft's views on Mondelez, Kraft Foods group disappoints
investors
--Combined earnings outlook falls short of expectation
--Grocery business will have slower growth profile than global
snacks business Mondelez when split up occurs on Oct. 1
(Adds details in 2nd through 5th paragraphs on earnings outlook
and updates shares.)
By Paul Ziobro
Kraft Foods Inc. (KFT) failed to impress investors during a
two-day unveiling of outlooks and strategies for its global snacks
company, Mondelez International Inc., and its North American
grocery business, Kraft Foods Group Inc., which are set to become
separate companies in a few weeks.
Executives at both companies laid out long-term goals for both
companies, with Mondelez expected to grow per-share earnings at
double-digit rates, while Kraft Foods Group below that but with
meatier dividend and stronger cash flow. The split up is scheduled
for Oct. 1.
But the forecast for 2013 earnings fell short of expectations.
After accounting for one-time items, foreign exchange rates and the
split-up, the two companies are projected to generate per-share
earnings of between $2.65 and $2.70 a share. Analysts most recently
surveyed by Thomson Reuters were projecting per-share earnings of
$2.76.
The companies are also set to put up sales growth next year that
will fall at the low end of long-term targets laid out, with
Mondelez seeing less of a boost from price increases and Kraft
Foods Group losing sales from products it is discontinuing.
Kraft shares were down 5% in recent trading to $40.19, the worst
performer in the Dow Jones Industrial Average.
After Mondelez executives presented to investors Thursday, Kraft
put its North American grocery business in the spotlight Friday,
offering its view as a packaged-food company that will have a
laser-like focus on returning cash to shareholders with meaty
dividends. The company plans to recommend to its board an annual
dividend of $2 a share, up from prior expectations of around $1.92
a share.
"Cash will be king at Kraft," Kraft Foods Group Chief Financial
Officer Tim McLevish said on Friday's conference call.
The company, which will house brands like Maxwell House coffee,
Oscar Mayer deli meats and Kraft cheese, will have to navigate what
will continue to be slow growth rates in the North American
packaged food industry. Kraft also expects to continue to have to
deal with volatile commodity costs.
But Kraft will be navigating the environment with a much leaner
structure than its predecessor after cutting jobs and other costs
through the break-up. The company also says its shedding the
combined company's "post office culture" that was "rife with
bureaucracy and entitlement" and instead tie promotions and pay
more closely to results, rather than longevity.
"We will finally purge the post office culture that so many of
you have talked about," Chief Executive Tony Vernon said.
Kraft Foods Group will be the fourth-largest packaged food and
beverage company in North America, with revenue of about $19
billion, trailing PepsiCo Inc. (PEP), Nestle SA (NSRGY, NESN.VX)
and Coca-Cola Co. (KO).
Other priorities Kraft outlined for the new company include
making "big bet innovations" to create new products and reformulate
existing products. It also said it would step up its marketing
efforts and emphasized that it will free up cash in order to make
these investments.
The new company expects per-share earnings for next year of
about $2.60, including interest expense of around $520 million and
restructuring costs of about $240 million.
It said free cash flow is expected to be about 70% of net
income, below its long-term target of at least 85% due to an extra
tax payment in 2013 of about $200 million.
Long term, it is also aiming for organic revenue growth at or
above the North American food and beverage market rate of growth;
mid-single-digit operating income growth mid-to-high-single-digit
per-share earnings growth and mid-single-digit dividend growth.
--Saabira Chaudhuri contributed to this article.
Write to Paul Ziobro at paul.ziobro@dowjones.com
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