Kraft Foods Q4 profit more than triples; next challenge will be Cadbury

The Associated Press ~ staff The News
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PORTLAND, Ore. - Kraft's income more than tripled in its first quarterly report since it acquired British candy maker Cadbury, in part on CEO Irene Rosenfeld's turnaround program.

The next challenge will be delivering on bold promises for international growth to satisfy investors and silence the deal's doubters.

"We're ready to take both Kraft Foods and Cadbury to a level neither could reach on its own," Rosenfeld said Tuesday.

Kraft reported Tuesday that it earned US$710 million, or 48 cents per share, for the quarter, up sharply from $178 million, or 12 cents per share, in the same quarter of the prior year.

The company credited the growth to a multi-year turnaround, which included cutting costs, shedding some business lines and increasing its focus on its most profitable products.

The results exceeded analysts expectations of 45 cents per share, according to Thomson Reuters.

Sales grew three per cent to $11 billion but narrowly missed expectations of $11.7 billion - sending shares of Kraft down 45 cents, about 1.5 per cent, to $28.54 in afternoon trading Friday.

Kraft said sales in North America and Europe fell as food prices dropped and consumers continued to feel the drag of the weak economy. But revenue in developing markets jumped 10.4 per cent - a trend Kraft plans to build on as it completes its acquisition.

Together, the companies have more than half of their business outside of the slow-growing North American market and more than a quarter in fast-growing developing markets such as Latin America and India.

The companies should expect to see strong benefits of the combination, Rosenfeld said. She pointed to Cadbury and Trident brands getting better presence in Brazil, Russia and China while Kraft products like Oreo cookies and Tang will get a much-needed foothold in India, Mexico and South Africa.

Kraft said it will be the global leader in sweet snacks with leading market share in every major region of the world as a result of the acquisition.

Kraft didn't offer many more details on how it plans to combine the companies but expects to announce its management team within the next few months as well as any job or operational changes.

Investors will watch closely to see if the company can turn this revenue growth into profit as the company feels begins to feel the full impact of the $19.5-billion purchase.

Critics said the company paid too much, took on too much debt, used undervalued shares and shouldn't have sold off its growing and profitable North American pizza business to help finance the deal. Among the critics was billionaire Warren Buffett, whose Berkshire Hathaway is Kraft's largest shareholder, who opposed the price and execution of the deal.

Chief among Buffett's objections was the use of Kraft's stock to pay for part of the deal. He said it was undervalued. Over the past year, shares have risen about 18 per cent, but that's lagged an increase in the Standard&Poor's 500 index of about 40 per cent.

The worries haven't gone away. Analysts on Tuesday peppered executives with questions about the decision to sell the pizza business, among other concerns.

Kraft said Tuesday that it has completed its financing of the deal, which it hopes may calm some worries.

It raised $9.5 billion in a bond offering and while it will take on some debt, plans to use $2.5 billion from the sale of its pizza business and other income to aggressively pay down debt over the next two years.

Kraft estimates it will take a five cent per share hit from the sale of the pizza business in 2010 and see a five cent per share benefit from the acquisition in 2011, its first full year in operation as a combined company.

Kraft also emphasized that it was able to finance the offer while keeping key promises it made, such as maintaining dividends and its investment-grade rating.

"Throughout the process there were some doubters and much talk about the ultimate size of our chequebook," Kraft's chief financial officer Tim McLevish told investors. "But as you can see, the final terms of the deal fell well within the bounds of our original criteria. So not only is this deal a strategic home run, we've touched all the bases of the financial front as well."

The company did not issue 2010 guidance, saying it is still assessing the moving parts on the deal. But it reiterated its guidance of near-term net revenue growth of four per cent or more and earnings per share growing at the high end of its range of seven to nine per cent.

For the long term, after its acquisition of Cadbury, Kraft is targeting annual revenue growth of at least five per cent.

Organizations: Cadbury, Kraft Foods, North American Berkshire Hathaway

Geographic location: PORTLAND, India, North America Europe Latin America Brazil Russia China Mexico South Africa

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