Kraft Foods to split into two companies

by Eric Schroeder
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NORTHFIELD, ILL. — The board of directors of Kraft Foods Inc. announced today its intent to split into two publicly-traded companies, with one focusing on its global snacks business and the other on its high-margin North American grocery business.

The companies are expected to be created through a tax-free spin-off of the North American grocery business to Kraft Foods shareholders. The current target for launch is before the end of 2012.

“As our second-quarter results once again show, our businesses are benefiting from a virtuous cycle of growth and investment, which we fully expect will continue,” said Irene Rosenfeld, chairman and chief executive officer. “We have built two strong, but distinct, portfolios. Our strategic actions have put us in a position to create two great companies, each with the leadership, resources and strong market positions to realize their full potential.

“The next phase of our development recognizes the distinct priorities within our portfolio. The global snacks business has tremendous opportunities for growth as consumer demand for snacks increases around the world. The North American grocery business has a remarkable set of iconic brands, industry-leading margins, and the clear ability to generate significant cash flow.”

Kraft said the global snacks company would consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. The company would have estimated revenues of approximately $32 billion, with about 75% of revenues coming from snacks around the world and about 42% coming from developing markets. The non-snacks portion of the portfolio would consist primarily of powdered beverages and coffee.

The snacks company would house brands such as Oreo and LU biscuits, Cadbury and Milka chocolates, Trident gum, Jacobs coffee and Tang powdered beverages.

The North American grocery business would contain the current U.S. Beverages, Cheese, Convenient Meals and Grocery segments and non-snack categories in Canada and Food Service. In total, the company would have about $16 billion in estimated revenue. The grocery business would house brands such as Kraft macaroni and cheese, Oscar Mayer meats, Philadelphia cream cheese, Maxwell House coffee, Capri Sun beverages, Jell-O desserts and Miracle Whip salad dressing.

Separately, Kraft said net income in the second quarter ended June 30 rose 4% to $976 million, equal to 55c per share on the common stock, up from $937 million, or 54c per share, in the same period a year ago. Net revenues rose 13% to $13,878 million from $12,253 million.

“Consumers are responding well to our investments in marketing and innovation, and our focus on End-to-End Cost Management is paying off,” Ms. Rosenfeld said. “As a result, we’re successfully managing higher input costs through pricing and productivity, and we’re well-positioned to continue our momentum and take the next step in our transformation.”

Operating income within Kraft Foods North America during the second quarter fell 4% to $1,139 million, as the impact of the Starbucks consumer packaged goods business and integration program costs weighed on results. Net revenues in the unit rose 3% to $6,318 million from $6,161 million.

Within Kraft Foods North America, the company’s U.S. Snacks business posted operating profit of $192 million, down 20% from $240 million in the same period a year ago. Net revenues in U.S. Snacks also were lower, easing to $1,510 million from $1,516 million. U.S. Grocery operating profit was $379 million in the period, up 6% from $357 million, while sales rose 2% to $973 million from $923 million.

Operating income for the U.S. Beverages business fell 23% during the second quarter to $138 million. Sales also were lower, falling 12% to $779 million from $886 million. U.S. Convenient Meals operating income eased 2% in the quarter to $99 million from $101 million, while sales increased 5% to $881 million from $839 million. U.S. Cheese operating income was $143 million in the quarter, up 5% from $136 million. Net revenues for U.S. Cheese also were higher, rising 10% to $875 million from $797 million.

Kraft Foods Europe posted operating income of $415 million in the second quarter on sales of $3,535 million, up 24% and 26%, respectively, from the same period a year ago.

Kraft Foods Developing Markets posted operating income of $518 million on sales of $4,035 million, up 21% and 22%, respectively, from the same period a year ago.

For the six months ended June 30, overall net income at Kraft Foods was $1,775 million, or $1.01 per share, down 37% from $2,820 million, or $1.68 per share, in the same period of fiscal 2010. Net revenues in the six months rose 12% to $26,451 million from $23,571 million.

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