Kraft looks to deliver top- and bottom-line growth

by Eric Schroeder
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BOSTON — Executives with Kraft Foods Inc. speaking to analysts at the Barclays Back to School Conference in Boston on Sept. 7 said the “new” Kraft, which will become an independent public company in October, expects to deliver “steady and profitable top-line growth, consistent bottom-line growth and a superior dividend payout.”

As previously announced, Kraft Foods Inc. plans to spin-off Kraft Foods Group, Inc., which will hold Kraft Foods’ North American grocery business, on Oct. 1, 2012. Following the spin-off, Kraft Foods Inc. will be renamed Mondelēz International, Inc.

“Today, I have the honor to introduce a new Kraft, one with the spirit of a startup and the soul of a powerhouse,” said Tony Vernon, president of Kraft Foods North America and future chief executive officer of Kraft Foods Group. “Our aim is to be North America’s best food and beverage company, and we’ll get there by continuing to offer products consumers love, creating a performance-based culture that motivates and excites employees and becoming the best investment in the industry.”

Featuring brands such as Kraft, Oscar Mayer and Maxwell House, Kraft Foods Group will be North America’s fourth-largest consumer packaged food and beverage company, with revenues of approximately $19 billion in 2011. Ten of the company’s brands achieved sales of $500 million or more in 2011, while an additional 17 brands posted sales of $100 million or more in 2011. Approximately 80% of Kraft Foods Group’s revenue comes from categories in which the company holds the No. 1 or No. 2 market position.

The company said Kraft Foods Group’s future growth will be driven by a four-part strategic plan: making its people its competitive edge, executing with excellence, “turbocharging” its iconic brands and redefining efficiency.

In making its people its competitive edge, Kraft said it has developed incentive plans that will incorporate stock ownership more broadly to reinforce the alignment between employee and shareholder interests.

Additionally, stepped-up investment in talent acquisition and a newly created “Kraft University” will help create the next generation of Kraft leaders, the company said.

Second, Kraft Foods Group plans to allocate resources to leverage the breadth of the company’s portfolio, sales and warehouse distribution system.

The third step in the company’s plan is to “turbocharge” its brands so they may grow faster than the market and key competitors.

“This means delivering the right products at the right price points, introducing “big bet” innovations like MiO, which created an entirely new product category of liquid beverage enhancers, addressing health and wellness needs through the reformulation of existing products and introduction of new products, and investing in world-class marketing,” Kraft said. “Increased advertising in brands like Velveeta, Philadelphia, Kraft Mayo and Capri Sun has already resulted in significant sales increases.”

Finally, Kraft Foods Group said it will redefine efficiency to free up cash. The company said it plans to achieve this by employing several tools, including supply chain simplification and strategic sourcing. The goal is to become the lowest cost producer in its categories, Kraft said.

Looking to the future, Kraft Foods Group expects to deliver steady, reliable growth with a strong focus on cash flow to fund a highly competitive dividend and reinvestment in people, innovation and brand-building. The company said it will consistently aim to accomplish several goals:

• 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 e.p.s. growth;
• Mid-single digit dividend growth; and
• Free cash flow of at least 85% of net income.

“Cash will be king at Kraft,” said Tim McLevish, chief financial officer of Kraft Foods Group. “What matters to shareholders is total return and dollars in their pockets. And cash will be the fuel to grow our business.”

Also at the conference, Kraft Foods outlined some of its 2013 projections. Productivity improvements and overhead savings are expected to drive 2013 e.p.s. of approximately $2.60 on a GAAP basis, Kraft said. Meanwhile, free cash flow is expected to be about 70% of GAAP net income — below the long-term target of at least 85% due to an extra tax payment in 2013 of approximately $200 million.

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