What Makes Kraft Foods Palatable For Investors?

(RTTNews) - With a strong portfolio of unrivaled brands, and an innovative pipeline to address changing consumer preferences, this food and beverage giant is striving to improve its operational strategy and product quality to avoid costly executional missteps and recalls that held back its productivity in the past year.

About KRFT

Kraft Foods Group Inc. (KRFT) is one of the largest consumer packaged goods companies in North America, with annual revenues of more than $18 billion.

It manufactures and markets food and beverage products, including cheese, meats, refreshment beverages, coffee, packaged dinners, refrigerated meals, snack nuts, dressings, and other grocery products, primarily in the United States and Canada, under a host of iconic brands. Its product categories span breakfast, lunch, and dinner meal occasions.

The company's diverse brand portfolio consists of many of the most popular food brands in North America, including three brands with annual net revenues exceeding $1 billion each— Kraft cheeses, dinners, and dressings; Oscar Mayer meats; and Philadelphia cream cheese—plus over 25 brands with annual net revenues between $100 million and $1 billion each.

Customer Concentration & Sales

The company sells its products primarily to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, drug stores, value stores, and other retail food outlets in the United States and Canada.

Its five largest customers accounted for about 42% of the company's net revenues in 2014. One of its customers, Wal-Mart Stores Inc., accounted for about 26% of net revenues in 2014.

Kraft Foods' products are sold primarily to consumers in the United States and Canada, but also to many other countries and territories across the globe. The company generated about 13% of its 2014 consolidated net revenues and 14% of 2013 and 2012 revenues outside the United States, primarily in Canada.

Revenues By Product Category

Kraft Foods manages and reports its operating results through six reportable segments: Cheese, Refrigerated Meals, Beverages, Meals & Desserts, Enhancers & Snack Nuts, and Canada. Its remaining businesses, including Foodservice and Exports businesses, are aggregated and disclosed as "Other Businesses".

Cheese and dairy products contributed 33%, 32% and 31% for the years ended December 27, 2014, December 28, 2013, and December 29, 2012, respectively,

Meat and meat alternatives accounted for 15% of net revenues, Meals contributed 11%, and Refreshment beverages contributed 10% for the years 2014, 2013, and 2012, respectively.

Enhancers product category contributed 9% to net revenues for the years 2014 and 2013, and 10% for the year 2012.

Although Kraft's Cheese and Refrigerated Meals segment managed to grow 3.6% and 3%, respectively, despite price increases, its other segments, including Beverages, Meals & Desserts, and Enhancers & Snack Nuts, experienced tough time due to the relatively elastic nature of their demand, reflecting a shift in consumer preferences.

Beverages segment revenue declined 2.0%, while Meals & Desserts revenue dropped 6.5% and revenues from Enhancers & Snack Nuts slipped 1.9% from last year.

Canada:

Full year net revenues of $1.9 billion decreased 4.9%, including a 6.8 percentage point unfavorable impact from foreign currency. Organic Net Revenues increased 1.9% from a combination of higher net pricing and favorable volume/mix. Higher net pricing in cheese and coffee was partially offset by lower net pricing in refreshment 5beverages. Favorable volume/mix was driven by higher shipments of natural cheese and the launch of McCafé coffee, partially offset by lower shipments of processed cheese.

Other Businesses:

Full year net revenues of $1.9 billion grew 4.9% despite the impact of unfavorable foreign currency. Organic Net Revenues increased 6.0%, driven by higher net pricing and favorable volume/mix. Higher net pricing realized in Foodservice and higher shipments in Exports were partially offset by the unfavorable impact of planned foodservice product line exits.

Industrywide Packaged-Food Sales

According to Euromonitor International, an independent provider of strategic market research, packaged food sales continue to grow at a steady rate amidst the on-going recovery. As an immediate result of the recession value, sales growth of packaged food decelerated as many areas witnessed consumers trading down. With the economy moving again and unemployment slowly dropping, consumers are trading back up in numerous areas for healthier and more premium products.

Manufacturers are taking several measures to remove food allergens, add natural ingredients and lower calories, as consumers become more focused on health and wellness. These same products, however, are also introducing innovative and bold flavours, in line with consumer demand.

In order to cope up with the changing consumer trend, Kraft Foods continues to implement extremely well with a strong pipeline of innovation ahead. Kraft's Oscar Mayer P3, McCafé coffee and the rejuvenation of its Philadelphia soft cream cheese line have all been well received by the consumers and customers.

Key Leadership Change

In order to strengthen its execution, Kraft Foods recently appointed James Kehoe as Executive Vice President and Chief Financial Officer.

Kehoe has extensive financial experience and previously spent more than two decades with Kraft in roles across numerous businesses and corporate functions. He rejoins the company from Gildan Activewear Inc., a supplier of branded basic family apparel in Canada, where he most recently served as Executive Vice President and Chief Financial and Administrative Officer. Prior to that, he was Senior Vice President of Operating Excellence at Mondelez International Inc., where he led the company's global transformation program through improving execution across the business as well as cost savings initiatives.

Latest Q4 Results

Kraft Foods slipped to a loss of $398 million or $0.68 per share from a profit of $931 million or $1.54 per share earned a year ago, hurt by a non-cash loss of $1,364 million or $1.43 per share in the latest quarter, from market-based impacts to post- employment benefit plans.

Fourth quarter 2014 results also included $92 million, or $0.10 per share, of unrealized losses from commodity hedging activities.

Meanwhile, net revenues improved 2.2% to $4.7 billion from $4.6 billion generated last year.

Organic net revenues were up 3.4%, and outpaced North America food and beverage industry growth of 2.4%. The organic growth was attributed to positive net pricing of 1.9 percentage points to offset higher input costs, as well as volume/mix gains of 1.5 percentage points from growth in the Refrigerated Meals, Exports and Canada businesses.

"While there were some positive developments in the fourth quarter, we did not deliver to our potential in 2014, with the macro environment and our execution affecting our results," said Kraft Chairman and CEO John Cahill.

Annual Financial Data

For fiscal 2014 and 2013, the company had net revenues of $18.2 billion compared to $18.3 billion generated in 2012, $18.6 billion in 2011, and $17.7 billion in 2010.

Net income amounted to $1.04 billion or $1.74 per share in 2014 compared to $2.72 billion or $4.51 per share in 2013, $1.64 billion or $2.75 per share in 2012, $1.78 billion or $3.00 per share in 2011, and $3.53 billion or $3.20 per share in 2010.

Summary

The latest fourth-quarter and full year 2014 results "reflected the impact of significant pricing actions to offset record-high commodity costs, mixed execution across the business portfolio as well as a number of factors, which are not expected to repeat."

John Cahill, said, "I believe our brands and our people are an unbeatable combination, but as we look at 2015 and beyond, we need to leverage those strengths against a plan that accelerates the pace of change, improves execution and puts Kraft on a clear path to long-term, sustainable growth."

The company expects to be well-positioned over the long term to deliver steady, reliable growth with a strong focus on cash flow to fund a highly competitive dividend and reinvestment in its people, innovation and brand-building. It aims to consistently deliver: profitable top-line growth, consistent bottom-line growth and superior dividend payout.

An important caveat worth mentioning here is that it will continue to face headwinds with increasing competition from its peers, as other companies in the industry continue to launch innovative products.