040142 Kraft to Cut 6,000 Jobs, Close 20 Plants

Deromedi hopes his action, taken in his sixth week at the helm of the largest U.S. food company, will appease investors who have endured more than a year of sagging sales and earnings from the maker of Oscar Mayer meats and Oreo cookies.

The latest disappointment came Tuesday, when the Northfield-based company reported that fourth- quarter earnings dropped 7 percent, to $869 million, or 50 cents a share, from the same period a year ago. Kraft also warned that 2004 earnings would be lower than expected.

But Deromedi expects that renewed focus on marketing and his restructuring program, projected to save more than $400 million annually by 2006, will turn Kraft's fortunes and woo back customers who have fled to cheaper rivals.

Deromedi said about 1,300 salaried positions in North America would be cut in the first quarter of 2004. The remaining cuts to the company's worldwide workforce will be completed over three years in a restructuring that will stretch "across all levels," he said.

"It's never easy to decide to close a plant or to eliminate jobs because of the obvious impact it has on the people who have worked hard to make this company successful," Deromedi told investors and analysts gathered Tuesday in New York. "However difficult, these actions have been taken with a lot of thought and are in the best interest of the company as a whole."

Costly cutback

The company anticipates that the moves will result in pretax charges of as much as $1.2 billion over three years.

With several plants in Illinois, Kraft is among the state's largest employers. But there are few signs yet that the new chief plans major cuts close to home, according to company insiders.

The company immediately identified just three plants to be closed: Canton, N.Y.; Farmdale, Ohio; and one in central Europe. But it was clear that Deromedi was not discounting any possibility as he scours the company for cost savings.

Since taking over sole control at Kraft on Dec. 16, when former co-CEO Betsy Holden was demoted, Deromedi has moved swiftly to shake up operations at the nation's largest foodmaker. He has already announced the closure of the Rye Brook, N.Y., international base and put in place a new global organizational structure designed to help Kraft compete more effectively in the 150 countries where it operates.

In the new structure, Holden has been placed in charge of global marketing. Previously, she headed Kraft's domestic operations, which account for more than 70 percent of the company's $30 billion in annual sales. Deromedi had been responsible for the overseas arm, accounting for about 30 percent of sales.

Last week several analysts warned that the new boss could make sharp cuts at the company, which employs more than 100,000 people and has some 200 facilities worldwide. Half are in the United States. The largest is a 1.6 million-square-foot food plant in downstate Champaign.

In announcing another quarter of disappointing results, Deromedi said it could take several months before signs of improvement become apparent.

While fourth-quarter net earnings fell to $869 million, or 50 cents a share, from $931 million, or 54 cents, a year earlier, sales rose 6.2 percent to $8.33 billion in the quarter.

Dollar weakness

A large part of the increase was the result of the weakness of the dollar, which makes Kraft's overseas sales look healthier than might normally be the case. Sales volume rose just 1.1 percent.

Citing restructuring charges of about 30 cents a share, Kraft lowered its estimate for 2004 earnings to a range of $1.63 to $1.70 a share, though predicting sales would rise about 3 percent. Analysts were forecasting $2.01 per share.

After a down year in 2004, Deromedi said, he hopes to be able to hit his long-term target of increasing earnings per share by 6 percent to 9 percent annually.

Several analysts questioned whether he would be able to provide the necessary growth by spending more money.

Deromedi said he planned to target the fast-growing Hispanic market and wanted to grow Kraft's business in developing countries, which account for just one-tenth of sales.

But analysts expressed skepticism about plans to spend up to $600 million more annually on marketing and to cut the price of products facing competition from private-label alternatives.

Deutsche Bank Securities analyst Eric Katzman, who last week was among those that forecast the job cuts, asked if the money was being well spent, particularly on the Nabisco cookie business, which saw sales fall 6 percent in the fourth quarter despite an increase in advertising and promotional spending.

"We are very comfortable with our increased spending there," Deromedi said. "It will take some time for the cookie business to stabilize."

After the meeting, several analysts said they doubted that Kraft could make good on its growth forecast.

Deromedi said the company was reviewing potential businesses it might sell, but he emphasized that 50 of Kraft's biggest brands accounted for 75 percent of the company's revenue, appearing to dismiss suggestions that he might sell a big division, such as Oscar Mayer.

In fact, Deromedi signaled that Kraft was back on the acquisition trail. He said he would consider increasing the company's debt in order to make the "right acquisition."

RETURN TO HOME PAGE

E-mail: sflanagan@sprintmail.com