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April 30, 2008

Kraft's revenue soars but earnings suffer from higher costs

Originally published by the Medill News Service, Apr. 30, 2008

Kraft Foods Inc. posted earnings lower than the year-prior quarter because of higher input costs and despite stronger net revenues. However, the company beat analysts’ expectations by three cents sending the stock 2.8 percent higher in Wednesday trading.

For the quarter ended March 31, the Northfield-based food processor, with brands such as Jell-O, Oreo and Maxwell House, reported net income of $608 million, or 40 cents per diluted share. Earnings were 13.4 percent lower than earnings in the year-prior quarter of $702 million, or 43 cents per diluted share.

Excluding items, the company earned $681 million or 44 cents per diluted share. This was 4.9 percent lower than the same quarter of the previous year, when the company earned $716 million, excluding items, or 44 cents per diluted share.

Wall Street estimated diluted per-share earnings excluding items at 41 cents per share, as compiled by Zacks Investment Research Inc.

The company’s equity base was reduced from the same period a year ago because of an ongoing share repurchase program. Average diluted shares outstanding were reduced by 102 million shares from the same quarter last year. The year-ago period also benefited from a one-time interest benefit of 3 cents per share related to Kraft’s separation from Altria Group Inc.

Net revenues in the first quarter were $10.4 billion, up 20.8 percent from the same period in the year prior when net revenues were $8.6 billion.

Kraft continues to deal with higher input costs related to commodities across the board. However, the company said it is combating those costs by raising prices on products as it continues to reinvest in its brands. On Wednesday's conference call, CEO Irene Rosenfeld said she is optimistic about the impact of the moves that Kraft is making.

“Our ability to increase prices and increase market share is proof positive that our investment is paying off,” she said.

Matt Arnold, an analyst who covers the company for Edward D. Jones and Co. LP, agrees that the pricing strategies are important.

“It is a key piece of it, absolutely,” Arnold said. “The pricing they are taking alone isn’t enough to offset the inflation they are seeing in input costs.”

Despite what Rosenfeld termed “aggressive” pricing strategies, Kraft’s margins were lower in the quarter. The company’s gross margin declined by 1.9 percent to 33.6 percent and operating margin was down 1.9 percent to 11.2 percent.

Margin erosion was strongly felt in the U.S. snacks and cereal business, an area where the company had historically strong performance according to David Driscoll, an analyst who covers the stock for Citigroup Inc.

Operating margin in the segment was 11.7 percent in the first quarter, down from 16.8 percent in the year-prior period. Operating income in the segment fell 28.2 percent from $234 million to $168 million.

“Clearly we are not pleased with the Q1 performance of our snacks and cereals business,” Rosenfeld said. She added that the issues with margin were due to a major run-up in the cost of wheat, which surpassed what the company was expecting.

“This is a tough one to swallow here,” Driscoll said to conclude his comments on the earnings call.

According to the company’s management, the full impact of pricing changes will start to be seen in the second quarter, and will be complete in the second half of the year. This is based on the price increases lagging behind the rise in costs, and some price points being protected for large events that occurred in the first quarter, such as the Super Bowl and Easter.

Rosenfeld continued her positive spin looking ahead as consumers move away from eating out at restaurants and eat more of their meals at home.

“We feel comfortable that as consumers eat home more often, they will come home to Kraft,” she said.

“The single biggest key to success, and where we see opportunity, is to improve profitability in the U.S. business,” Arnold explained. He added that the company continues to make investments in their iconic brands and that there is a lot of opportunity to improve domestic profitability.

Kraft projected that its full-year earnings per diluted share will be $1.56, down from the full-year earnings of $1.62 per diluted share in 2007. Excluding items, the company is estimating $1.90 per diluted share. Analysts’ consensus excluding items is $1.89 per share as compiled by Zacks.

The forecast includes the impact of the acquisition of Group Danone SA’s international biscuit operations, but does not include the impact of the pending sale of the Post cereals business to Ralcorp Holdings Inc. When asked for guidance on the impact of the Post sale, Timothy McLevish, chief financial officer of Kraft, said the company would wait to comment until the transaction is completed.

Kraft Foods stock closed Wednesday at $31.63, up 86 cents from the previous day’s closing price of $30.77

Posted by bmiraski at 4:07 PM

April 29, 2008

Sanfilippo back on track to consistent profit

Originally published by the Medill News Service, Apr. 29, 2008

With its raw-material costs declining and its big moving expenses and redundant costs soon to be out of the way, nut processor John B. Sanfilippo and Son Inc. appears to be on track to turning a profit year-round instead of only in the fall quarter.

“Commodity costs have come back down,” Adam Strauss said. “We expect their gross margins to normalize.” Strauss is the portfolio manager for the Appleseed Fund, a mutual fund offered by Pekin, Singer, Strauss Asset Management Inc. The company is the largest shareholder of Sanfilippo.

The Elk Grove Village-based company has recently struggled on the bottom line outside of its fiscal second quarter, which ends in December, the largest in terms of sales. Holiday-related sales generally are 33 percent higher than summer business, helping the company to reach profitability for the year.

However, in its past two fiscal years the company has lost $30.4 million, and its stock has tumbled from $22 to about $11 recently.

Nevertheless, CEO Jeffrey Sanfilippo recently told investors that he sees the company’s fortunes on the rise.

“Although we still have a lot of work to do, it is evident that the initiatives the company executed over the last year are beginning to demonstrate positive results,” Sanfilippo stated.

Strauss agrees. He said the company has two major reasons for its recent struggles. First, commodity prices in the nut industry were at their highest point in the last 10 years. During a five-year stretch from 2001 to 2006, the average grower price of almonds went from 91 cents per pound to $2.81.

Sanfilippo management specifically highlighted the company’s issues with almond prices in its latest earnings report. Because the prices of almonds dropped soon after the company purchased its almond crop in 2005, the company sustained losses over the next year as it sold through its high-priced supplies.

According to Strauss, the trend of rising prices was exacerbated by fad diets, which pushed nuts as a healthy snack food and stimulated extra demand while supply was down because of crop problems caused by insect issues.

However, this trend is reversing in the nut industry, despite rising food prices elsewhere.

According to Marieke de Rijke, assistant vice president in food and agriculture research at Rabobank Group, this price drop might be seen in almonds this year. “What you see with the almond crop is that the bloom this spring has been good, and the growing conditions have been ideal,” she said.

While she would not comment on prices, de Rijke said that if the crop is big again, there is a possibility of the price declining.

The rising nut costs have been an issue across the industry. Diamond Foods Inc., which markets its nuts under the Emerald Nuts label, was able to pass on the higher prices to customers and weather the pricing issues.

“Over the last three to five years, there has been a big increase in walnut tree plantations. Over the next several years, those will start to come online,” said Michael Lippold, an analyst who covers Diamond Foods Inc. for Craig-Hallum Capital Group LLC. He expects costs to drop and margins to increase for nut companies that have raised their consumer prices to keep pace with their growing costs.

However, de Rijke pointed out that prices may remain firm with the increased demand, especially in Asia, as exports of almonds, walnuts and recently, pecans, are increasing.

“Prices for nuts are really a matter of supply and demand,” she said. “With all nuts, the harvest is still several months away so it is hard to say something about production levels.”

Sanfilippo's other costly problem, now also diminishing, was the consolidation of its manufacturing and processing facilities in Elgin. The company is in the process of moving production lines from three Chicago facilities which has led to charges in excess of $10 million related to the consolidation in the past two quarters.

Redundant operating expenses were estimated at $2.4 million by management as the company continued to produce the same products in two locations during the move.

Although this cost has been hanging over the company, the operations streamlining has almost reached completion and the most difficult move – relocating a peanut butter production line from Elk Grove Village to Georgia – is complete and in operation at its new location.

Recent efforts to accelerate the move have added some incremental costs but CEO Sanfilippo sees the company completing its move of all Chicago operations to Elgin by the end of June.

Despite consolidation, the new facility is only about 50 percent utilized. When investors asked company’s management when the facility would be fully utilized, they were quick to point out that the company did not want to repeat failures in the past.

“The one thing we don’t want to do… we don’t want to go out and capture unprofitable sales, and end up where we were last year,” said CFO Michael Valentine in a recent earnings call.

CEO Sanfilippo reiterated that sentiment: “We are focused on value added customers. We’ve targeted specific retail accounts, food manufacturers, food service companies to grow their business, to grow our business. It could be a five-year horizon by the time we fully get utilized out of this facility.”

While the company still needs to deal with the 800-pound. gorilla in the industry, Planters, owned by Northfield-based Kraft Foods Inc., and upstart Diamond Foods Inc., it is innovating with products like Fisher Snack Naturals, which is aimed at the health-conscious consumer.

“Demand is increasing because of the health benefits of nuts,” de Rijke said.

Sanfilippo points to a qualified health claim on its Web site: “Scientific evidence suggests but does not prove that eating 1.5 ounces per day of most nuts, such as peanuts, almonds, hazelnuts, pecans, pistachio nuts and/or walnuts, as part of a diet low in saturated fat and cholesterol may reduce the risk of heart disease.” The site also lists the nutritional benefits of eating nuts.

Sanfilippo said the company is seeing an uptick in interest from its private label customers, helping to capture back some business which was lacking during the company’s recent struggles.

“We are working with many of our private label accounts to develop new items for their programs,” Sanfilippo said.

As costs and demand improve, so does the outlook for the stock. After Sanfilippo in February reported earnings of 33 cents per diluted share, the shares jumped $2.40 to $9.35, their highest point since October.

Strauss noted that the stock had a market value of only $100 million while its shareholder equity on the balance sheet was near $163 million. With that valuation, he sees room for the investment that his firm has made to grow, especially given the changing nature of the two costly factors that have kept earnings down.

“We saw the two reasons as temporary in nature,” said Strauss.

He noted that, with the economy slowing, many companies are going to see lower earnings.

However, he quickly added, “this is a staple product.”

Posted by bmiraski at 3:57 PM

April 28, 2008

Coming Soon

Soon there will be more posted here.

This is a test of the Emergency Brain Wave system.

This is only a test

Posted by bmiraski at 1:46 PM

April 24, 2008

Housing slump drags down Fortune Brands in first quarter

Originally published by the Medill News Service, Apr. 24, 2008

Fortune Brands Inc. reported flat earnings due to a slowdown in the housing market affecting its home products business. The results underperformed analysts’ estimates, but the stock fell 2.8 percent Thursday.

For the quarter ended March 31, 2008, the Deerfield-based holding company with subsidiaries in the spirits, golf and home and hardware businesses, earned $120.5 million, or 77 cents per diluted share. The result was essentially flat compared with results the previous year when the company earned $120.2 million, or 77 cents per diluted share.

Wall Street estimated diluted per share earnings of 79 cents per diluted share, as compiled by Zacks Investment Research Inc.

The company recorded net sales of $1.81 billion in the first quarter, a drop of 5.4 percent from the previous year when the company had net sales of $1.91 billion.

The biggest contribution to the reduction in sales and the flat earnings was the slowdown in the U.S. housing market. Sales in the home and hardware segment of the business were $894.4 million, down 12.5 percent from the prior year's first quarter. Chief Financial Officer Craig Omtvedt said in the earnings conference call Thursday that the replace-and-remodel sector of that business continues to be stronger than the new construction market. He projected that operating income in the segment would be down from high single digits to low teens for the year.

The poor results in the home and hardware segment were not a surprise to Robin Diedrich, an analyst who covers the company for St. Louis-based Edward D. Jones and Co. LP. “We were expecting that segment to be the weakest. We had a decline baked in for the quarter. It was a little more than we expected,” Diedrich said.

While a company might raise prices to offset the slow sales, Fortune Brands is looking at other ways to decrease its costs and maintain margins.

“We are doing some material substitution,” CEO Bruce Carbonari said. “Pricing is getting more and more difficult unless we have a sudden rise. With the environment being what it is, it is difficult to do a price increase.”

In the spirits business, the company used the earnings conference call to emphasize its focus on building brands. Carbonari said the company is making investments in its current brands to grow organically, rather than aggressively seeking a purchase.

Fortune Brands recently lost the bidding for the purchase of the Absolut Vodka brand to rival Pernod Ricard SA. The company was praised for its unwillingness to overpay. Fortune Brands took a one-time charge in the first quarter of 3 cents per diluted share from its participation in the bidding for the brand. The company still has an agreement to distribute Absolut in the U.S. until 2012.

Jonathan Feeney, an analyst for Wachovia Capital Markets LLC, reiterated praise for the company’s fiscal responsibility on the earnings conference call. “It certainly shows some discipline on your part that you allowed someone else to pay that price for the assets,” Feeney said. Pernod paid $8.3 billion for the rights to Absolut.

The organic growth is a model that Diedrich likes for the company, even if it is hard to quantify the results.

“It is not as easy to put your finger on as ‘We are going to go out and buy X brand.’,” Diedrich said.

“I would rather see them build the brand long-term than do an acquisition. A bad acquisition can destroy returns for decades. I think it is the prudent move.”

The company saw sales gains of 8.0 percent in its golf business, helped by strong sales in the Asian markets, specifically Korea and Japan.

Despite the flat quarter, Omtvedt said the company will continue to invest in itself. He is projecting capital expenditures to be in the range of $200 million to $225 million.

“We are maintaining strategic spend for new products in the businesses. That is what we did in 2000 through 2001 and that served us well when things turned around,” Omtveldt said. “What we are not going to do is take out $1 now to protect diluted earnings per share and find out it takes $2 to put it back in later.”

Diedrich, who has a buy rating on the stock, continues to see a good outlook for the company.

“This is a long-term investment," she said.

The company forecasts its second quarter results to be lower than last year's second quarter, based on the weakness in the housing market and a late start to the golf season. Fortune Brands earned $1.48 per diluted share in that quarter and expects results to be down at a rate between the high single digits and the mid-teens. The company also narrowed its forecast for the full year.

“We’re now targeting diluted EPS before charges/gains to be in the range of flat to down at a high-single-digit rate,” Carbonari wrote in the earnings press release.

Fortune Brands stock closed Thursday, down $2.02 at $68.86, a decline of 2.8 percent from the previous day's closing price of $70.88.

Posted by bmiraski at 3:20 PM

Tootsie Roll takes its licks in the first quarter

Originally published by the Medill News Service, Apr. 24, 2008

Tootsie Roll Industries Inc. reported sharply lower first-quarter earnings due to higher costs for raw materials and fuel, missing analyst expectations.

Late Wednesday, the Chicago-based maker of confectionary products reported net income of $6.45 million, or 12 cents per share, for the quarter ended March 29. That’s a decrease of 34 percent from the same period in 2007 when the company earned $9.81 million, or 17 cents per share.

The company missed analyst expectations of 16 cents per share. Only a single analyst issues an estimate for the company.

“The company’s per share earnings for first quarter 2008 did benefit from common stock purchases in the open market resulting in fewer shares outstanding,” Chairman Melvin Gordon stated in the press release. The average shares outstanding for the company decreased by 1.36 million shares since the first quarter of last year.

The company’s earnings were hurt due to less favorable exchanges rates affecting margins on products manufactured in Canada.

Tootsie Roll reported net product sales of $90.3 million, a decrease of 2.8 percent from the same period last year, when the company had net product sales of $92.9 million.

The decrease in sales was due to the struggling economy, Gordon explained in the press release. The company is battling higher costs in addition to lower sales and has implemented price increases to counteract the difficult environment.

“The company does do a certain amount of buying of currencies and a certain amount of hedging,” a spokeswoman added.

Despite the controls, the company has not been able to recover all of the higher raw material costs during the first quarter, according to Gordon.

Tootsie Roll’s stock closed down 34 cents at $24.07 Thursday, a decrease of 1.4 percent.

Posted by bmiraski at 3:12 PM

April 17, 2008

Energy, Food continue to inflate Consumer Price Index

Originally published in the Daily Herald, Apr. 17, 2008

Prices continued to climb in March, rising 0.3 percent, according to the Consumer Price Index, released Wednesday by the Labor Department. The core CPI, which excludes food and energy prices, rose 0.2 percent.

The CPI was unchanged in February and up 0.4 percent in January. It measures the average change in prices over time, using a basket of goods most consumers purchase, such as food, energy, transportation, housing, medical costs and clothing.

Adolfo Laurenti, a senior economist with Chicago-based Mesirow Financial Holdings Inc., said consumers should be concerned. While the Federal Reserve has emphasized the core numbers, he said the overall CPI gives a better picture of trends in prices.

"Normal people buy energy, buy gas, buy food, and you have to acknowledge that those numbers are higher, and you have to come to terms with it," Laurenti said.

Prices in the Chicago area rose 4.5 percent since March 2007, according to the Labor Department.

Medill News Service

Posted by bmiraski at 3:07 PM

April 10, 2008

Kraft to open Bahrain plant

Originally published in the Daily Herald, Apr. 10, 2008

Kraft Foods Inc. will officially open a new manufacturing plant in Bahrain on Tuesday.

The Northfield-based food processor invested $40 million in the construction of the plant to produce 60,000 tons annually of products such as Tang, Kraft Cream Cheese Spread and Kraft Cheddar Cheese for the Middle East and Africa.

According to a Kraft statement, the plant, on which construction began in January 2007, will create more than 250 jobs and is expected to contribute $120 million to the Bahrain economy.

Matt Arnold, an analyst who covers Kraft for Edward D. Jones and Co., said the opening is in line with the stated strategy of the company.

"Part of the Kraft story is that the emerging markets are where they are looking to build a bigger base," Arnold said. "It is known that this developing base is where they will see growth longer term."

The developing market region, covering Eastern Europe, the Middle East, Africa, Asia and Latin America, was the second-fastest growing market for Kraft in 2007 and saw the biggest increase in sales during the fourth quarter. In 2007, the company reported $5.3 billion in net revenue in the regions, an increase of 17 percent over 2006. By comparison, the U.S. market saw net revenue growth of 3.6 percent in 2007.

Operating income for the developing market region grew 18 percent to $491 million in 2007.

"They want to improve profitability where they are established and build a bigger footprint where they aren't," Arnold said. "This falls into the second half of that."

Arnold has maintained a buy rating on Kraft stock since March 2007.

"This new state-of-the-art facility will enable us to increase our production and distribution efficiencies to cater for the growing Middle East and Africa market demands," wrote Claire Regan, a senior director in corporate affairs at Kraft.

Medill News Service

Posted by bmiraski at 2:59 PM