UPDATE 3-Kraft outlooks disappoints, shares fall

Fri Sep 7, 2012 5:48pm EDT

* Delivers forecasts for split company over two days

* Kraft long-term EPS growth in mid to high single digits

* Management to recommend annual dividend of $2/share

* Cautioned Thursday about currency impact on Mondelez

* Kraft shares down 5.5 pct

By Martinne Geller and Brad Dorfman

Sept 7 (Reuters) - Shares of Kraft Foods Inc, which is splitting into two companies next month, fell 5.5 percent on Friday after it forecast 2013 profits below Wall Street expectations, hurt by a strong dollar and additional costs.

Kraft plans to spin off its North American grocery business on October 1 into a company called Kraft Foods Group that will make Planters peanuts, Oscar Mayer lunch meat and Velveeta cheese. The remaining company, which will sell Oreo cookies, Cadbury chocolate and Trident gum, mostly overseas, will be called Mondelez International.

Kraft executives met with investors on Thursday to discuss the growth strategy of Mondelez and on Friday to discuss Kraft Foods Group.

In both cases, the company gave earnings forecasts for 2013 that were disappointing, said S&P Capital IQ analyst Tom Graves.

"For the global snacks business, I was disappointed that currency translation is going to affect them as negatively as indicated. And for the North American grocery business I was hoping for a more favorable impact from cost reduction efforts," Graves said.

"That being said, I still think the split up of the company is a good thing," Graves added, noting that it lets managers focus on the different traits of the businesses and gives investors opportunities to invest in either growth or income companies.

Kraft said on Friday it expects earnings of about $2.60 a share in 2013, including restructuring charges of about 26 cents a share. It said on Thursday that it expected earnings of $1.50 to $1.55 per share in 2013 for Mondelez.

These were the first forecasts given for each company, and as such, the average analyst estimate for the combined company is not exactly comparable.

But for Mondelez, Barclays analyst Andrew Lazar said the starting base for earnings in 2013 will be some 10 percent lower than Wall Street forecasts.

Kraft also said there would be extra costs associated with the split, including overhead to run two companies, that will hurt earnings in the near term.

In the longer term, Kraft expects earnings-per-share growth in the mid to high single digits for Kraft and in the double digits for Mondelez. The long-term growth rates were in line with Wall Street estimates, analysts said.

TIME TO SHINE

In Friday's presentation to Wall Street analysts, Kraft Foods Group executives said they would focus on generating cash for shareholders, including a $2 per share annual dividend, which was higher than analysts expected.

The company will also look to cut costs, with measures such as tiered wage scales, cutting the size of its corporate office, and pruning the number of product varieties it offers.

Tony Vernon, who will be chief executive of Kraft Foods Group, said half of every dollar saved would go to shareholders and half would be reinvested in the company, for things like marketing and innovation.

Vernon also said he wants to create "a renaissance" in the North American food and beverage industry, which has been squeezed in recent years by higher commodity costs and weak consumer spending. He said the spin-off will let the company's large, mature brands shine.

"When you're sharing the stage with Oreo in China there's not a whole lot of room to make Oscar Mayer shine as much as it should," Vernon said in an interview.

The company did not set a specific revenue target but said organic revenue, which strips out the impact of divestitures and foreign exchange, would be at or above the growth rate of the North American food and beverage market.

Edward Jones analyst Matt Arnold applauded Kraft's focus on returning cash to shareholders, given the North American company's concentration in a low-growth market.

"Return on invested capital is the right approach. The whole mindset there is to get the most out of what you have," Arnold said.

Kraft shares, which have gained some 13 percent this year through Thursday, closed down $2.33, or 5.5 percent, at $39.99 on Nasdaq.

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