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Kraft to cut 8,000 more jobs; profits up

Kraft Foods Inc. on Monday said it would cut up to 8,000 more jobs, or 10 percent of its work force, through 2008 as the food company, hammered by higher commodity costs and sluggish sales volume, looks to save more money.
/ Source: The Associated Press

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 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 in annual costs, atop a targeted $450 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, Ala., 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, Ill.-based company said the new cuts would cost $2.5 billion, bringing the total cost of its overall restructuring to $3.7 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 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 in annual cost savings by year’s end — $50 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 of its 2005 revenue of $34.1 billion, proving that its product focus is bearing fruit.

Net earnings for the October-December period totaled $773 million, or 46 cents a share, up from $628 million, or 37 cents a share, a year earlier. Revenue rose to $9.66 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.