From: Reuters
Published January 30, 2008 11:00 AM

Ingredient costs hit Kellogg, Kraft earnings

By Brad Dorfman

CHICAGO (Reuters) - Kraft Foods Inc <KFT.N> and Kellogg Co <K.N>, two of the world's largest food makers, posted lower quarterly results on Wednesday, hampered by soaring costs for ingredients like dairy products and wheat.

The fourth quarter was one of the worst ever for food companies in terms of commodity costs, analysts said. Kraft said that wheat, soybean oil, cheese, coffee, cocoa and a host of other commodities are well above their 10-year averages.

"Across the food space, it's showing up this (fourth) quarter," Edward Jones analyst Matt Arnold said of rising commodity costs. Arnold said costs should remain tough in the first quarter, but then could ease later this year.

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Like other food companies, Kellogg, the largest cereal maker, and Kraft, the largest North American food company, have raised prices to try to help recoup some of the rising costs.

Those increases come as the U.S. economy teeters on the brink of a recession. But executives at both companies said they should be well positioned if the economy were to move into a full-fledged recession.

"The most prominent impact of a potential recession will be that people will continue to eat at home more," rather than at restaurants, Kraft Chief Executive Irene Rosenfeld said in an interview with Reuters.

FOURTH-QUARTER RESULTS

Kraft profit fell to $585 million, or 38 cents a share, in the fourth quarter compared with $624 million, or 38 cents, a year earlier when the company had roughly 100 million more shares outstanding.

The maker of Oreo cookies, Crystal light drink mixes and Oscar Mayer lunch meat said profit was 44 cents a share excluding restructuring costs, matching the average analyst estimate compiled by Reuters Estimates.

Revenue rose to $10.40 billion from $9.37 billion. Excluding divestitures and the benefit from the weaker dollar, "organic" revenue rose 6.2 percent, the company said.

The company has been making changes in its portfolio, purchasing Groupe Danone's <DANO.PA> global cookie business in November while separately agreeing to sell its Post Cereals business to Ralcorp Holdings Inc <RAH.N>.

At the same time, it has increased development of new products like Oreo sandwich cakes and Oscar Mayer deli sandwich kits to help boost sales.

Still, surging dairy costs weighed on profits. The company, which gets almost one-fifth of its revenue from cheese, said dairy costs were up more than 40 percent in the quarter.

"Cheese has been a category that they have struggled to manage properly for the past decade," Gregg Warren, analyst at Morningstar, said.

KELLOGG SLIPS

Kellogg -- manufacturer of Frosted Flakes cereal, Keebler cookies and Eggo waffles -- posted a 3 percent decline in fourth-quarter profit to $176 million, or 44 cents a share, matching analysts estimates.

Sales rose 8.1 percent to $2.79 billion. Internal sales, which exclude currency fluctuations and acquisitions, increased 5 percent.

Fourth-quarter North American internal sales rose 8 percent in the cereal business, 2 percent in the snack business and 6 percent in the frozen and specialty channels business.

For 2008, the company stood by its earnings forecast of $2.92 to $2.97 a share. Kellogg Chief Executive David Mackay said on a conference call that the company should be able to weather a recession.

"Really, our business has performed pretty well through those periods," he said of past U.S. economic slowdowns.

Kellogg shares were up 64 cents a share at $50.26 on Wednesday on the New York Stock Exchange and Kraft was down 33 cents at $29.86. Kellogg trades at 18 times estimated 2008 earnings, while Kraft trades at a multiple of 16.5 times.

(Editing by Dave Zimmerman)

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