Kellogg Company: Delivers Strong Q3/2009

Battle Creek / MG. (kc) Kellogg Company reported third quarter 2009 financial results that included strong internal net sales and internal operating profit growth. Third quarter net earnings were 361 million USD, a six percent increase from last year´s third quarter net earnings of 342 million USD. Earnings per diluted share were 0,94 USD for the quarter, a year-over-year increase of six percent on a reported basis and twelve percent higher on a currency-neutral basis despite higher up-front costs.

«The current economic environment has placed significant pressure on our consumers», said David Mackay, Kellogg Company chief executive officer. «However, the environment also provided us with both the incentive and the opportunity to build an even stronger company for the future. We are aggressively pursuing productivity initiatives, as well as taking advantage of media deflation and efficiency programs to invest even more back into advertising to further drive the long-term health of our brands».

Third quarter reported net sales were 3,3 billion USD, representing a 0,3 percent decrease versus the third quarter of 2008. However, internal net sales growth, which excludes the effects of foreign currency translation and acquisitions, rose three percent, in line with the Company´s long-term annual growth targets. Kellogg North America posted net sales growth of one percent on a reported basis, and two percent on an internal basis, building on strong year-ago internal net sales growth of nine percent. Internal net sales growth for Kellogg North America consisted of two percent internal net sales growth delivery from North America Retail Cereal, three percent growth from North America Snacks, and a decline of three percent from North America Frozen and Specialty Channels.

Kellogg International posted a third quarter net sales decline of four percent on a reported basis; however, net sales grew six percent on an internal basis, which excludes the effects of currency translation and acquisitions. Internal net sales for Kellogg International consisted of Latin America´s internal net sales growth of nine percent, Asia Pacific´s growth of four percent, and Europe´s growth of five percent versus the third quarter of last year. Of particular note is Europe´s strong return to internal net sales growth in the back half of the year, in line with guidance from the Company´s second quarter conference call.

Operating profit for the third quarter of 567 million USD was a solid six percent increase on a reported basis, and a strong eleven percent increase on an internal basis. Total up-front costs for cost-reduction initiatives totaled approximately 0,06 USD per share, out-pacing 2008´s third quarter up-front costs of 0,01 USD per share. Gross margin for third quarter 2009 of 43,9 percent represents a 120 basis point increase over last year´s third quarter on a reported basis.

The benefit to third quarter earnings per share from favorability below the operating profit line in items such as interest expense and a lower effective tax rate was more than offset by unfavorability in other income and expense.

Kellogg Company continued to deliver strong cash flow, generating 978 million USD year-to-date, including an unfavorable impact from foreign exchange. The Company´s year-to-date cash flow, defined as cash from operating activities less capital expenditures, surpassed the 893 million USD of cash flow generated during the comparable period in 2008. For the full-year 2009, Kellogg raised guidance for cash flow, as defined, to approximately 1,2 billion USD. «Manage for Cash continues to be a key operating principle for Kellogg. Having re-doubled our efforts in this difficult environment, we will deliver a record cash flow performance in 2009 despite the adverse impact of foreign exchange», said Mackay.

Kellogg Raises Full-Year 2009 Guidance and Provides Guidance for 2010

Kellogg re-affirmed its internal sales growth guidance of three to four percent for full-year 2009, which is above the Company´s long-term targets. The Company now anticipates increased gross margin expansion for full-year 2009 of approximately 100 basis points, reflecting strong productivity gains and slightly lower than expected inflation. Kellogg also raised guidance for 2009 internal operating profit growth to a range of eight to ten percent, above the Company´s long-term targets and despite significant re-investment in advertising and up-front costs. In addition, the Company raised its currency-neutral earnings per share guidance for 2009 from a range of eight to ten percent to a range of ten to twelve percent, reflecting strong profit growth slightly offset by higher interest expense.

Supported by the strong performance in 2009, continuing momentum and significant re-investment, the Company is well-positioned to deliver another year of strong growth in 2010. For 2010, Kellogg anticipates internal net sales growth of two to three percent, in line with the Company´s long-term targets and reflecting less pricing year-on-year. Up-front costs for full-year 2010 will decrease from 2009´s 26 cents per share to a range of 0,14 USD to 0,16 USD per share and this decrease will positively impact operating profit and net earnings. Accordingly, the Company anticipates internal operating profit growth in the high single-digit range, above its long-term annual targets. Reflecting this higher level of anticipated profit growth for 2010, the Company further guided to a range of ten to twelve percent earnings per share growth on a currency-neutral basis, anticipating a second consecutive year of growth above its long-term annual targets.

CEO Mackay concluded, «Although most aspects of our guidance for both 2009 and 2010 are above our long-term targets, we are pragmatic about the challenging environment we face. Hence, we are focused on continued reinvestment into our brands, as well as optimizing our business model and global organization – while achieving cost savings and future visibility. We therefore remain confident in our ability to continue delivering sustainable, dependable performance in the future».

Info: «Kellogg Delivers Strong Q3/2009; Raises Full-Year 2009 Guidance, Sets Targets for 2010» (complete press release inclusive tables).