SAN FRANCISCO (MarketWatch)--Kraft Foods Inc. (KFT) is giving
investors an inside look at its North American grocery business,
the first glimpse of what the unit will look like after it is
separated from the company's snacks business.
Bearing brands such as Kraft Cheese, Oscar Mayer meats and
Maxwell House coffee, the unit to be called Kraft Foods Group has
posted increased revenue for two consecutive years, generating 2011
sales of $18.7 billion, according to a regulatory filing late
Monday. However, earnings and margins have been nicked by commodity
costs.
Earnings from operations, which excludes divestitures, fell 2.5%
to $1.8 billion last year. Earnings were $2 billion in 2009;
operating margin dropped to 15.7% last year from 16.6% in 2010 and
17.2% in 2009.
Kraft announced last August that it planned to split into two
independent companies by separating its global-snacks unit from its
grocery business. The spinoff is scheduled to be completed by
year-end.
Shares of Kraft have surged 22% since the company unveiled its
spinoff plans. The transaction must be approved by regulators.
Kraft's stock was down 0.2% at $38.31 a share in afternoon trading
Tuesday.
Following the spinoff, the grocery company will assume $10
billion of debt and shoulder $4.4 billion of pension obligations.
It wasn't clear from the filing if the debt will be inherited from
Kraft's current $27 billion debt load.
Wal-Mart Stores Inc. (WMT) is its largest customer, making up
24% of total sales.
Advertising expenses as a percentage of total sales were 3% in
2011 and will likely go up, according to J.P. Morgan analyst Ken
Goldman. The same measure is 9.8% at Kellogg Co. (K), 7.9% at
General Mills Inc. (GIS) and 6.8% at Hershey Co. (HSY), he
said.
Kraft has told investors to expect the grocery-foods business to
deliver strong cash flows and pay a competitive dividend.
While it is too early in the separation process to deduce what
the future dividend will be, Kraft did show in the filing what the
business was generating in free cash flow--money that can be used
to pay a dividend. Free cash flow (operating cash flow minus
capital expenditures) rose to $2.3 billion in 2011 from $380
million in 2010. It was $2.5 billion in 2009.
-By Matt Andrejczak; 415-439-6400; AskNewswires@dowjones.com
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