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Kraft Foods Group, Inc. (KRFT - Analyst Report), which was recently spun off from the old Kraft Foods, reported its first quarterly results. The packaged food and beverage company beat on both the top and bottom lines in its third quarter 2012. The company also re-affirmed its financial outlook for the next year.

Kraft Foods Group reported adjusted earnings per share (excluding asset impairment and exit costs) of 85 cents, way ahead of the Zacks Consensus Estimate of 68 cents. Earnings increased 21% from the prior-year quarter’s adjusted figure on the back of innovation, productivity improvements, volume growth and increased marketing investments.

Quarter in Detail

Kraft Foods Group was spun off from the old Kraft Foods into a separate independent company on October 1 and started trading regularly on the NASDAQ stock exchange from October 2. The new Kraft Foods Group consists of the North American grocery business of the old Kraft Foods. The old Kraft Foods was renamed to Mondelez International, Inc. (MDLZ - Analyst Report) and focuses on its global snacks business.

Revenue increased 3% to $4.6 billion, slightly ahead of the Zacks Consensus Estimate of $4.5 billion. Revenues were largely helped by a volume/mix gain of 2.6% and also new product launches. The new company was not much successful in raising prices and pricing added only 0.6 percentage point to revenue growth.

Adjusted operating income (excluding restructuring costs and unrealized gains/losses from hedging activities) improved 5.1% driven by revenue growth, productivity gains and increased marketing activities.

Segment Details

Kraft Foods Group includes products in the beverages, cheese, convenient meals and grocery food categories. All the business segments of this maker of popular brands like Kraft cheeses, Oscar Mayer meats and Maxwell House coffees delivered positive organic revenue growth.

The Beverage business revenue was almost flat organically at $688 million, as volume/mix gains of 0.7 percentage point (pp) was offset by price decline of 0.6 pp. Gains in Maxwell House and Gevalia coffees, Kool-Aid Jammers and MiO beverages was offset by lower shipments in Capri Sun ready-to-drink beverages.

The Cheese business grew 1.4% organically to $921 million as an impressive volume growth of 5.7 pp was offset by a pricing headwind of 4.3 pp. Volume growth was driven by Kraft natural cheese, Philadelphia and Velveeta brands.

Refrigerated Mealswere up 3.5% organically to $895 million, gaining both from volume/mix (1.1 pp) and price (2.4 pp) growth. Lunchables and Oscar Mayer cold cuts and bacon did well in the quarter.

The Grocery business was up 4.6% organically to $1.13 billion, being the only category gaining from a price increase (5.1 pp), while volumes suffered (0.5 pp). Kraft Macaroni & Cheese, Velveeta dinners and Cool Whip brands gained in the quarter on the back of innovation and brand building initiatives. Volumes declined for JELL-O desserts and Planters nuts.

The International & Foodservice business increased 5.1% to $968 million with volumes up 5.4 pp and price down 0.3 pp.

2013 Outlook Retained

The company retained its 2013 outlook that was provided at the investor day meet held in September.

Organic revenue are expected to be in line with the long-term growth rates; i.e., equal to or above the North American food and beverage industry’s growth rate. The top-line guidance includes a negative impact of up to 1 percentage point from product pruning in North America.

For 2013, earnings are expected to be approximately $2.60. Free cash flow is expected to be at least 70% of the net income, lower than the long-term targets.

Our Recommendation

We currently have a Neutral recommendation on Kraft Foods Group. The stock carries a Zacks #3 Rank (a short-term Hold rating).

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