"Cheese" would be a misnomer:
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Monday, Jan. 30, 2006
Kraft announces plans to cut 8,000 jobs, close up to 20 plants
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By MIKE COLIAS AP Business Writer
(AP) - CHICAGO-Kraft Foods Inc., the nation's largest food manufacturer,
plans to eliminate 8,000 additional jobs, or about 8 percent of its work
force, and close as many as 20 production plants, including one in
Australia, as it broadens an ongoing restructuring effort.
Kraft announced the moves Monday as it reported fourth-quarter earnings
that rose 23 percent, beating Wall Street's expectations.
Kraft said the cuts would save an additional $700 million (€579.37
million) in annual costs, atop a targeted $450 million (€372.45
million) in savings it says it will achieve through a restructuring that
began in January 2004.
The maker of Kraft cheese, Nabisco crackers, Oscar Mayer meats and Post
cereals already had announced closures of 19 production facilities and
the elimination of 5,500 jobs under the original cost-cutting plan.
Kraft said those efforts are on track but more cuts are needed.
The company said it intends to shut plants in Broadmeadows, Victoria, in
Australia and Hoover, Alabama, but did not announce the other facilities
it plans to close. Kraft also said it would trim its product line by
another 10 percent, atop a 20 percent cut since 2004.
The Northfield, Illinois-based company said the new cuts would cost $2.5
billion (€2.07 billion), bringing the total cost of its overall
restructuring to $3.7 billion (€3.06 billion).
"Further cost reduction is a necessity in the current environment,"
Chief Financial Officer Jim Dollive told analysts during a conference call.
Kraft and other food manufacturers have been hammered by higher costs
for commodities such as meat, coffee, nuts and packaging. Kraft said
Monday it spent $800 million (€662.14 million) more on commodities
last year than it did in fiscal 2004.
CEO Roger Deromedi said the high commodity costs offset signs of
improvement in the U.S. market in the fourth quarter. He also said flat
volume in 2005 has weighed down results.
But some analysts said they were surprised by the scope of the planned
reductions considering the other cuts Kraft has undergone over the past
two years.
"It's a very large number. It almost feels like the entire kitchen sink
went into this restructuring program," Citigroup Inc. analyst David
Driscoll said.
Analyst Eric Katzman of Deutsche Bank questioned whether Kraft's plan
for more layoffs and plant closures even before the initial cost-cutting
program concludes might hint at problems in the company's strategy.
"How inefficient is the structure and the business if you're able to
move forward and take so much out versus the first charges?" he asked
Deromedi on the conference call.
Deromedi said the original restructuring is going well and is on pace to
produce $450 million (€372.45 million) in annual cost savings by
year's end - $50 million (€41.38 million) more than projected. But he
said Kraft continues to discover areas to trim fat.
"As we continue to simplify the organization ... there was significant
additional opportunities we found that, I'll be honest, two years ago we
didn't think we could get at," Deromedi said.
He said Kraft would use the savings to strengthen its brands. The
company has been working to improve its product mix by shedding
low-margin items in favor of more profitable ones and introducing
healthier offerings.
Deromedi said sales of new products, such as its line of South Beach
Diet items, accounted for $1.5 billion (€1.24 billion) of its 2005
revenue of $34.1 billion (€28.22 billion), proving that its product
focus is bearing fruit.
Net earnings for the October-December period totaled $773 million
(€639.79 million), or 46 cents a share, up from $628 million, or 37
cents a share, a year earlier. Revenue rose to $9.66 billion (€8
billion) from $8.78 billion a year ago.
Excluding 10 cents in restructuring charges, Kraft posted a 56 cent
operating profit. Wall Street had expected a profit of 53 cents a share,
based on the consensus estimate of analysts polled by Thomson Financial.
The job and plant cuts and the earnings were announced after the market
closed for the day. Kraft had risen 71 cents, or 2.4 percent, to close
at $30 on the New York Stock Exchange. Its shares added another 65
cents, or 2.2 percent, in after-hours trading.
Kraft is 86 percent owned by Altria Group Inc., the parent of tobacco
company Philip Morris. Altria has repeatedly stated it plans to spin off
Kraft once it settles outstanding litigation hanging over the tobacco
business. Kraft officials did not discuss a potential spinoff during
Monday's conference call.
When Kraft announced its 2004 restructuring, there had just been a
shake-up at top management that followed more than a year of
disappointing sales and earnings.
At the time, Kraft executives blamed the poor results on American
consumers' increased health concerns, which had put the entire packaged
food industry under severe pressure to change quickly. The company's
troubles cost marketing expert Betsy Holden her job of co-CEO and head
of North American operations in December 2003. That left Deromedi solely
in charge.
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