Battle Creek / MG. (kc) Kellogg Company reported lower second quarter 2010 internal net sales, internal operating profit and currency-neutral earnings per share, reflecting weakness in the cereal category, lower Eggo sales, and the impact of the June 25 voluntary recall of select packages of breakfast cereals. The Company is reducing its 2010 internal net sales, internal operating profit, and currency-neutral earnings per share guidance.
Second quarter net earnings were 302 million USD, a 15 percent decline over the same quarter a year ago. Second quarter reported earnings per diluted share decreased 14 percent to 0,79 USD and decreased eleven percent on a currency-neutral basis. The estimated impact of the recall, including lost sales, reduced earnings per share by approximately 0,10 USD in the quarter and will reduce earnings per share by approximately 0,12 USD for the full year.
Reported net sales in the second quarter declined five percent to 3,1 billion USD. Internal net sales, excluding the effect of foreign currency translation, decreased four percent from the prior year. Total reported operating profit in the quarter decreased 13 percent to 483 million USD. Internal operating profit decreased eleven percent, driven primarily by the voluntary recall. Reported gross margin contracted 90 basis points to 42,6 percent in the quarter due to the impact of the recall.
«Our second quarter results reflect the deflationary environment in the cereal category, particularly in the U.S. and UK, softer Eggo sales, and the voluntary cereal recall», said David Mackay, Kellogg Company´s chief executive officer. «The second quarter performance was weaker than expected, and we have lowered our full-year guidance to reflect the cost of the recall and the difficult business environment. However, we are anticipating a stronger back half driven by increased innovation, reinvestment in our business, and gradual improvement in category trends».
North America
Kellogg North America posted a second quarter net sales decline of five percent on a reported basis and a six percent decline on an internal basis. The decline was primarily driven by 13 percent lower North America Retail Cereal internal net sales reflecting continued weakness in the cereal category, the impact of the voluntary cereal recall, and a reduction in customer inventories. Strong performance in Pop-Tarts and the wholesome snacks categories contributed to Retail Snacks internal net sales growth of one percent. The North America Frozen and Specialty Channels businesses posted an internal net sales decline of nine percent, as a result of softer Eggo sales as we began to recover from our previous supply disruption.
North America operating profit declined 15 percent on a reported basis and 16 percent on an internal basis. The voluntary cereal recall adversely impacted North America operating profit by 13 percent.
International
Kellogg International posted a five percent decline in second quarter 2010 reported net sales. On an internal basis, excluding the effects of currency translation, net sales for Kellogg International were flat. Second quarter internal net sales in Europe were down three percent primarily due to weakness in the U.K. cereal business and lower results in the Russia snacks business. Latin America internal net sales rose five percent, and Asia Pacific internal net sales grew three percent.
Kellogg International operating profit was seven percent lower on a reported basis. Operating profit was flat on an internal basis due to flat internal net sales combined with a rise in advertising expenditures.
Interest and Tax
In the second quarter 2010, Kellogg´s interest expense totalled 61 million USD, an improvement over the same quarter in 2009 as a result of lower debt. The second quarter effective tax rate was 29,7 percent.
Cash flow
Cash flow, defined as cash from operating activities less capital expenditures, was 446 million USD year-to-date. Reinforcing its commitment to returning cash to shareowners, Kellogg purchased 208 million USD of shares in the second quarter under its 2,5 billion USD three-year share repurchase authorization. For the first half of 2010, Kellogg repurchased 356 million USD of shares.
Kellogg Lowers 2010 Guidance
Kellogg continues to invest in its business to drive growth over the long term. Incorporating the challenges associated with the impact of the voluntary cereal recall and the current business environment, the Company lowered its 2010 guidance for full-year earnings per share growth on a currency-neutral basis to the range of eight to ten percent. The Company expects 2010 internal net sales growth to be in the flat to one percent range, and internal operating profit growth to be in the four to six percent range. Up-front costs for full-year 2010 are now expected to be approximately 0,12 USD per share compared with earlier estimates of 0,16 USD per share. Cash flow guidance was reduced to a range of 1,15 USD to 1,2 billion USD, in line with business results.
CEO Mackay: «Our adjusted 2010 guidance reflects the challenges we faced in the first half as well as our commitment to reinvesting in our business for long-term sustainable growth. While the current environment remains challenging, our focus is on improving top-line growth, continuing to implement our cost savings and productivity initiatives, and reinvesting in our business. We remain committed to running the business the right way for the long term».
