Kraft 2012 outlook stable in face of commodity pressures, says rating agency

11-Apr-2012 - Last updated on 12-Apr-2012 at 15:09 GMT

Kraft is looking to BRIC countries to foster growth for its global snacks spin-off

Risks remain for Kraft Foods ahead of its planned split as it is squeezed by commodity costs, but it will sustain growth in 2012, according to the rating agency Standard and Poor’s (S&P).

S&P expects Kraft to achieve mid-single digit revenue growth in the coming year by capitalising on emerging markets.

But as Kraft plans a split into a global snacks business (Mondelez) and a North American grocery business before the end of the year, S&P warns that risks remain as the company is exposed to volatile commodity costs.

‘Strong risks’

“Our rating outlook on Kraft is stable. We believe the company will continue generating good cash flow despite a competitive operating environment,” said S&P.

However it warned: “The remaining global snacks business will have a strong business risk profile, albeit somewhat weaker than the consolidated Kraft's current business risk profile because of the narrower business focus, reduced scale, and lower margins.”

Kraft kept its ‘BBB’ rating, but S&P added that an upgrade was unlikely in the near term and a downgrade was possible if the business failed to perform to expectations.

Standard and Poor's relatively positive outlook for Kraft is at odds with a recent downgrading from Jefferies

‘Sizeable’ commodity pressures

S&P said part of risk came in Kraft’s exposure to volatile commodity prices, which could impact profit margins.

“Kraft's existing product lines contain sizable commodity exposure. During 2011, its commodity costs were about $2.6 billion higher than for 2010, and the company expects input cost to remain volatile in 2012,” said the ratings agency.

Strengthen through developing markets

One way Kraft can offset pressure from commodity prices is through growing international markets, said S&P.

Kraft has estimated that annual sales for its global snacks spin-off will amount to $35bn, with 44% coming from developing markets.

The company’s sales in BRIC countries were up 19% in its 2011 results, with 15% gains in Brazil to $2bn and a 30% growth in China to $800m.

Kraft CEO Irene Rosenfeld, who will head the snacks arm, previously said that BRIC countries would be the focus of the global snacks spin-off.

Cost of spin-off

Last month, another rating agency, Jefferies, downgraded Kraft from ‘buy’ to ‘hold’ as it expected the company to be hit by spin-off related costs.

Kraft has said that it expects spin-off costs to be between $1.6bn and $1.8bn.

S&P said it had excluded costs in planned restructuring and other expenses related to the spin-off in its analysis, which it put at $2.1bn.