Boca Raton / FL. (kf) At the Consumer Analyst Group of New York (Cagny) conference, executives of Kraft Foods Inc. reviewed the company´s 2011 results and updated its plans to create two world-class companies later this year. «We delivered in 2011, and we will deliver again in 2012», said Irene Rosenfeld, Chairman and CEO. «Our strong operating momentum provides a solid springboard as we prepare to launch two industry-leading public companies later this year».
Driving Sustainable Top-Tier Growth
All three of Kraft´s regions – Europe, Developing Markets and North America – are benefiting from a virtuous cycle of growth. In 2011, net revenues grew 10,5 percent globally. Focused investments in Power Brands, up eight percent, drove Organic Net Revenue growth of 6,6 percent.
Rosenfeld highlighted impressive growth in Developing Markets, where net revenues rose 16,2 percent. Power Brands grew 17 percent, driving Organic Net Revenue growth of 11,2 percent. Within Kraft Foods Europe, net revenues also grew strongly, up 14,9 percent. Power Brands grew seven percent, fuelling Organic Net Revenue growth of 4,6 percent – an eighth consecutive quarter of growth, despite the Eurozone crisis.
The virtuous cycle is also driving strong bottom-line performance. Kraft Foods delivered diluted earnings per share of 1,99 USD in 2011. Operating EPS was 2,29 USD, which was up 13 percent, or ten percent on a constant currency basis, from 2,02 USD last year. This improvement was driven primarily by operating gains of 25 cents.
Productivity improvements in procurement and manufacturing, integration synergies and overhead savings also generated cash to continue investments in innovation, quality and marketing. Globally, advertising and consumer spending increased about 250 million USD versus the prior year, while new products accounted for more than ten percent of the company´s revenues, up from nine percent in 2010.
Building on Success in North America
North America President Tony Vernon, who will become CEO of the grocery company following the separation, said net revenues grew 5,1 percent in this region last year. Focused investments in Power Brands drove Organic Net Revenue growth of 4,8 percent. This performance outpaced most peers and drove Kraft´s categories faster than the industry average. Higher revenue, coupled with improved productivity and lower overheads, provided the funds to continue investing in effective marketing and successful innovation. For example, new product revenue rose to nine percent of total North America sales last year, up from 6,5 percent in 2009.
«Our momentum is palpable», Vernon said. «We have tremendous opportunities ahead to drive industry-leading results. With the foundation we´re laying now, both our grocery and snack businesses will be well-positioned for success as stand-alone operations».
Top-Tier Financial Performance Expected to Continue
Citing excellent progress in the integration of Cadbury, CFO Dave Brearton said the company has already generated about 400 million USD in revenue synergies to date, which is on track to reach the company´s goal of one billion USD. Concurrently, Kraft has already captured more than 80 percent of its targeted 750 million USD in annual cost synergies. In fact, based on the gains to date, the company now expects to deliver approximately 800 million USD in cost synergies by year-end, exceeding the original target and doing so about one year ahead of schedule.
«Despite the additional activities to ready each business for independence, we are confident that the strong momentum of our base businesses will allow us to deliver another year of top-tier performance», Brearton said. For 2012, the company expects Organic Net Revenue growth of approximately five percent. Operating EPS is expected to grow at least nine percent on a constant currency basis, despite higher pension and tax costs.
Brearton also said that the company will incur one-time restructuring, transition and transaction costs of 1,6 billion USD to 1,8 billion USD as it prepares to separate into two companies later this year. In addition, the company estimates that it may incur between 400 million USD and 800 million USD of potential debt breakage and financing fees as it executes a migration of debt to the North American grocery company. Brearton underscored that both companies will be investment-grade with access to commercial paper.
The Path to Successful Separation
Concluding the presentation, Rosenfeld said that Kraft´s operating momentum will enable the company to execute the separation of its businesses from a position of great strength.
The North American grocery company, with roughly 18 billion USD in sales, will retain the Kraft Foods name and be a major force in the industry. By growing with its categories and capturing significant cost savings opportunities, the business is expected to deliver strong margins and substantial free cash flow with a highly competitive dividend payout.
The global snacks company, whose proposed name will be announced in March, will have sales of about 35 billion USD. With a diverse geographical profile and significant exposure to high-growth Developing Markets, it is expected to deliver strong revenue growth and top-tier earnings growth while paying a modest dividend.
Until the companies separate later this year, Kraft Foods will continue to report as one company. It expects to file its initial Form 10 with historical carve-out financials early in the second quarter and receive tax rulings from the U.S. Internal Revenue Service around the middle of the year. Organizational structures and personnel decisions will be finalized by mid-year, so that both companies can hit the ground running when they launch before the end of 2012. Just prior to the spin-off, separate investor events for each company will be held.
