Kellogg: Announces Q3/2013 Results and «Project K»

Battle Creek / MG. (kc) Kellogg Company announced third quarter 2013 reported net sales of 3,7 billion USD; reported net sales were 3,7 billion USD in the third quarter of 2012. Internal net sales, which exclude the effects of foreign currency translation, acquisitions, dispositions, and integration costs, increased by 0,5 percent over the same period. Reported quarterly operating profit was 504 million USD, a decrease of 1,7 percent; underlying internal operating profit increased by 0,6 percent. Underlying internal results exclude the effects of foreign currency translation, acquisitions, dispositions, mark-to-market accounting, and integration and efficiency-program costs.

Reported third quarter 2013 net earnings were 326 million USD or 0,90 USD per diluted share, an increase of 0,01 USD from the third quarter of 2012. This quarter´s reported earnings per share included approximately 0,02 USD per share of integration costs related to the acquisition of Pringles and 0,03 USD per share of costs associated with Project K, the new global growth and efficiency program. Excluding these items, comparable earnings were 0,95 USD per share, an increase of 2,2 percent from the third quarter of 2012´s comparable earnings per share.

North America

Kellogg North America´s reported and internal net sales decreased by 1,3 percent to 2,4 billion USD in the third quarter. The U.S. Morning Foods segment posted a decline in reported and internal net sales of 2,2 percent. Reported net sales in the U.S. Snacks business declined by 2,5 percent; internal net sales declined by 3,3 percent. The U.S. Specialty segment posted reported and internal net sales growth of 6,2 percent. The North America Other segment reported a net sales decline of 1,5 percent and internal net sales growth of 0,3 percent. North American reported and underlying internal operating profit in the third quarter decreased by 0,7 percent.

International

The Latin American business posted reported quarterly net sales growth of 3,4 percent and internal net sales growth of 6,7 percent. European reported net sales increased by 6,4 percent; internal net sales increased by 3,3 percent. Reported net sales decreased by 9,4 percent in the Asia Pacific segment; internal net sales increased by 2,9 percent, as the result of double-digit growth in India, Southeast Asia, and the Pringles business.

Interest and Tax

Interest expense was 56 million USD in the third quarter. The effective tax rate was 27,4 percent.

Cash flow

Year-to-date cash flow, defined as cash from operating activities less capital expenditure, was 1’026 USD million through the end of the third quarter; this amount is as expected and represents a year-over-year decrease of 87 million USD. The comparison to last year´s cash flow includes the one-time benefit from the acquisition of Pringles received in 2012, and increased capital spending in 2013, also as expected.

Efficiency Program Designed to Drive Growth

The company also announced Project K, a global four-year efficiency and effectiveness program. This project will generate a significant amount of savings, a majority of which will be invested in key strategic areas of focus for the business. The company expects that this investment will drive future growth in revenues, gross margin, operating profit, and cash flow.

The focus of the program will be to strengthen existing businesses in core markets, increase growth in developing and emerging markets, and drive an increased level of value-added innovation. The program itself will provide a number of benefits:

• An optimization of supply-chain infrastructure will include actions designed to increase efficiency and improve margins, including the consolidation of facilities and the elimination of excess capacity.
• Global Business Services will create increased productivity throughout the organization. The program will consolidate common processes or business services across multiple regions and functions.
• A new global focus on categories will include the continuation of a process designed to create a regional, category-based model.

The company anticipates that the program will result in total cumulative, pre-tax charges of between 1’200 million USD and 1’400 million USD; the program´s non-cash costs are expected to be between 275 million USD and 325 million USD. The company estimates that by the end of 2017, the anticipated changes to the organization´s design and infrastructure will reduce the company´s global workforce by approximately seven percent. Cash savings are expected to reach an annual run-rate of between 425 million USD and 475 million USD in 2018. Consequently, the program´s expected after-tax rate of return is approximately 30 percent.

Costs of 17 million USD were recognized in the third quarter of 2013; the company anticipates that it will recognize between 175 million USD and 200 million USD for the full year. The company currently expects that savings received in 2013 will be minimal; this has been included in guidance.

In 2014, charges are anticipated to be greater than the annual average that will be recognized over the life of the program; savings in 2014 are expected to be lower than the annual average. The company anticipates providing additional clarity regarding these details on the fourth-quarter 2013 conference call. Initial estimates are that capital expenditure will be between four and five percent of sales in 2014 and 2015.

«We are excited by the potential and opportunities we see for growth in the categories in which we operate», said John Bryant, Kellogg Company´s president and chief executive officer. «As a result, we are making the difficult decisions necessary to address structural cost-saving opportunities which will enable us to increase investment in our core markets and in opportunities for future growth. These actions will set a foundation for our Sustainable Growth operating principle». The areas in which the company will increase its investment include:

• Core markets, particularly in the areas of brand building, innovation, and in-store execution. This will include investment in a number of category-leading activities.
• Developing and emerging markets, which will include brand-building activities, innovation, and investment in infrastructure such as new R+D resources and increased capacity.
• Global category teams, which will increase efficiency by reducing redundancy. It will increase the effectiveness of marketing, innovation, research and development, and brand-related activities.

«The marketplace is constantly changing and evolving and we must adapt», said Bryant. «We remain committed to our core businesses and have great initiatives planned that we believe will drive revenue growth and increasing profitability in the years to come. As we begin this journey, I would like to thank Kellogg employees for all their support and hard work. It is their commitment to this great company that will drive our long-term success».

Kellogg Updates Full-Year 2013 Earnings Per Share Guidance

Kellogg now expects that full-year reported earnings will be toward the lower end of the previously provided range of between 3,75 USD and 3,84 USD per share, excluding integration costs, costs related to Project K, and the impact of mark-to-market accounting; this is due to weaker than expected sales in certain of the categories in which the company competes. Reported earnings per share are now expected to include a negative impact from currency translation of approximately 0.06 USD per share. Reported net sales growth is now expected to be between four and five percent. The company continues to expect that full-year cash flow will be in a range between 1,1 billion USD and 1,2 billion USD, including the impact of Project K.