CAGE: Kraft to leverage cash position to boost returns

Kraft Foods Group has said it will use the "significant" cash flows it generated in 2012 to increase returns to shareholders by reinvesting in the business, raising the possibility of M&A or share repurchases. 

Addressing the Consumer Analyst Group of Europe conference in London yesterday (20 March), CEO Tony Vernon told attendees the company plans to end 2013 the same way it started it: "With a strong level of cash".

"We expect to generate about US$1bn of free cash flow in 2013. With this we will fund highly competitive dividends. After that we will rack and stack our opportunities on a risk adjusted basis, we'll evaluate reinvesting in the business, making acquisitions providing they're quickly accretive to EPS, or repurchasing our shares. Whichever has the highest adjusted return is where we will deploy our excess cash."

On the acquisition scene, CFO Dave Brearton said the company has put in place a "return discipline" when it comes to potential purchases.

He added: "We'll look at everything but I think right now, on a risk adjusted basis, we've got a lot of opportunity in the portfolio."

Vernon revealed that Kraft plans to invest in increasing innovation, "turbo charging" Kraft's principal brands.

"There is no such things as a mature brand at Kraft, only tired marketers. We believe our scale is a huge advantage and a challenge and in the bar bell economy of North America this is even more true."

Vernon said that much of Kraft's innovation was driven by the continued growth in demand for health and wellness products and innovations around dietary needs. 

"Today's customers now require products with better nutrition and simpler ingredient profiles and we're on it. There is more sodium reduction to come. We are innovating to meet dietary needs. We realise we have more work to do and we understand our obligation to consumers to innovate for both our customers and our consumer and we're off to a very good start."

Commenting on the macroeconomic environment in the US, Vernon revealed that Kraft's price positioning is under pressure from cautious consumers. 

"Consumer behaviour here [in the US] has been more extreme as families in the middle-classes fear moving lower. We have a financial obligation to lower income families to drive grocery sales. It is critical we have the right product, right pricing at every rung of the ladder."

Separately, Vernon addressed the issue of volatility in input costs, which he said over the last few years has driven "considerable margin volatility".

"As such, the change in absolute percent margins is not necessarily a good indicator of profitable earnings growth," he told attendees. "We're confident we have the ability to manage input costs through pricing, to deliver significant cost savings, reinvest in our business and deliver income operating growth that is consistently in the mid single digits."

He finished: "Kraft will well positioned in 2013 and beyond. Our brand, our innovation, our people and our cost management discipline will set us apart."