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September 3, 2008

US: Kraft upbeat on turnaround

Kraft Foods today (3 September) highlighted the progress the company has made as it reaches the halfway point of a three-year turnaround plan as it upped its earnings guidance for the full year.

Kraft Foods today (3 September) highlighted the progress the company has made as it reaches the halfway point of a three-year turnaround plan as it upped its earnings guidance for the full year.

The US food giant increased its full-year EPS guidance to US$1.88 to reflect the spin-off of the Post cereals business earlier this year. 

Speaking at the Lehman Brothers Back-to-School conference, Kraft CEO Irene Rosenfeld said that investment in the company’s underperforming brands has paid off. 

“At the midpoint of our three-year turnaround, we’re successfully rebuilding our brands through investments in quality, innovation and marketing across our global portfolio,” Rosenfeld said.

“We’ve rejuvenated some of our biggest businesses and created new incremental platforms that we can leverage across brands and categories. As a result, our brands are more relevant to consumers, who are seeking value during tough times. Rebuilding our brands combined with improved execution at retail have been key to driving solid volume and mix growth despite significant cost-driven price increases.”

Rosenfeld said that these improvements have had a tangible impact on Kraft’s profitability. “Most importantly, we’re delivering improved financial results. As our portfolio has improved and our momentum builds, we are returning Kraft to reliable, long-term growth. I’m confident we’ll hit our stride in 2009 and deliver earnings of at least $2.00 per share,” she told investors.

The company has used a combination of price increases and supply chain productivity improvements to offset rising costs and maintain margins.

“We have found ways to optimise some of the initiatives under our existing restructuring programme,” Tim McLevish, EVP and CFO said. “This will lead to annualised savings of $1.4bn, which is $200m greater than previously expected.”

Kraft reaffirmed its long-term EPS target of 7-9% consisting of 4% organic revenue, 2-3% of leverage from manufacturing and overhead costs and 1-2% of benefit from cash flow leverage and lower taxes.

Kraft also revealed that international growth would be a cornerstone of its expansion strategy.

In order to drive sales and profitability gains in overseas markets, Sanjay Khosla, EVP and president of Kraft International, said that the group was looking to increase its focus on core categories, brands and geographies.

“Instead of planting Kraft flags all over the world and trying to be all things to all people, we are now focusing where we can win,” Khosla said.

Specifically, Khosla said that Kraft International will concentrate on five key categories – biscuits, chocolate, powdered beverages, coffee and cream cheese. In these categories the company is looking to build awareness of ten brands – Oreo cookies; Tuc/Club Social crackers; Jacobs and Carte Noire coffees; Milka, Cote d’Or, Toblerone and Lacta chocolates; Philadelphia cream cheese; and Tang powdered beverages.

Khosla said that it will also narrow its focus geographically, concentrating on ten markets. Kraft has categorised four markets – China, Russia, Brazil and South East Asia – as “growth engines” and six markets – Germany, France, UK, Italy, Spain and Australia – as “scale markets”.

“All of this adds up to a powerful growth engine for Kraft,” said Khosla. “Early results show our strategy is working, as we have significantly accelerated both top- and bottom-line growth. In addition, we have improved the depth of our international management team, so I believe the best is yet to come.”

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