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Higher Costs Bite Kraft

The food maker cuts its full-year outlook after being hurt by rising commodity costs.
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Kraft Foods


posted worse-than-expected third-quarter earnings as surging energy and commodities costs took a bite out of profits, leading the foodmaker to cut its earnings outlook for the full year.

Kraft posted third-quarter net earnings of $674 million, or 40 cents a share, down from $779 million, or 46 cents a share, a year earlier. The results for both years' periods include 2 cents a share in restructuring charges tied to the company's restructuring plan.

Analysts polled by Thomson First Call had predicted earnings of 46 cents a share.

Revenue rose 4.4% to $8.06 billion from $7.72 billion a year earlier, beating analysts' average estimate for sales of $7.96 billion, with particular strength in sales of new products. But despite the higher top line, Kraft's overall results were hurt by margin pressure coming from higher costs of items such as coffee, nuts, energy and packaging. In addition, Kraft said an expected decline in dairy costs from high prior-year levels didn't materialize as strongly as the company projected.

"Given that we expect this higher cost environment to continue, we are exploring additional pricing actions," Chief Executive Roger Deromedi said in a statement.

Kraft, which is majority-owned by


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, said it expects commodity costs for the year will increase by $800 million -- $200 million more than its previous projection -- and thus cut its full-year earnings projection to $1.68 to $1.71 a share. The forecast includes about 22 cents a share in costs related to its ongoing restructuring and 4 cents a share in divestiture gains.

Kraft previously predicted 2005 earnings of $1.73 to $1.78 a share. Analysts, on average, peg full-year earnings at $1.89 a share, before items.

The company narrowed its top-line guidance range for ongoing constant currency revenue growth to 4.5% to 5% from 4.5% to 5.5%, taking into account an extra week in the year. On a comparable 52-week basis, Kraft sees revenue up 3% to 3.5%. The company, which makes products ranging from Oscar Mayer meat to Philadelphia cream cheese, posted 2004 revenue of $32.17 billion.

Kraft shares recently shed 21 cents in after-hours trading to $29.39.