Kellogg: Reports Second Quarter 2016 Results

Battle Creek / MG. (kc) Kellogg Company announced second-quarter 2016 results, and increased its guidance for comparable profit margin for 2016 through 2018.

«We’re making good progress on our priorities: We have continued to improve our foods to insure they are on trend; we’ve continued to expand the Pringles business worldwide; we’re enhancing our sales capabilities; and we are designing and executing productivity initiatives that are contributing to more profit-margin expansion than we previously anticipated», saidJohn Bryant, Kellogg Company’s chairman and chief executive officer. «We have carefully constructed a plan to boost our profit margins higher and sooner, giving us enhanced earnings visibility».

* Expected operating profit, operating profit margin and earnings per share are provided on a non-GAAP, currency-neutral comparable basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable,dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.

Financial Summary:		Quarter ended											Year-to-date period ended
(millions, except per share data)		July 2, 2016				July 4, 2015				% Change			July 2, 2016				July 4, 2015				% Change
Reported Net Sales		USD	3’268			USD	3’498			(6.6)	%		USD	6’663			USD	7’054			(5.5)	%
Comparable Net Sales *		USD	3’263			USD	3’490			(6.5)	%		USD	6’643			USD	7’051			(5.8)	%
Currency-Neutral Comparable Net Sales *		USD	3’791							8.6	%		USD	7’587							7.6	%
Reported Operating Profit		USD	449			USD	412			9.1	%		USD	887			USD	796			11.5	%
Comparable Operating Profit *		USD	507			USD	506			0.3	%		USD	1’027			USD	1’033			(0.5)	%
Currency-Neutral Comparable Operating Profit*		USD	559							10.6	%		USD	1’270							23.0	%
Reported Net Income (Loss) Attributable to Kellogg Company (KC)		USD	280			USD	223			26.0	%		USD	455			USD	450			1.3	%
Comparable Net Income (Loss) Attributable to KC*		USD	321			USD	327			(1.6)	%		USD	662			USD	678			(2.2)	%
Currency-Neutral Comparable Net Income (Loss) Attributable to KC*		USD	352							7.9	%		USD	825							21.7	%
Reported Diluted Earnings Per Share		USD	0.79			USD	0.63			25.4	%		USD	1.29			USD	1.26			2.4	%
Comparable Diluted Earnings Per Share*		USD	0.91			USD	0.92			(1.1)	%		USD	1.87			USD	1.90			(1.6)	%
Currency-Neutral Comparable Diluted Earnings Per Share*		USD	1.00							8.7	%		USD	2.33							22.6	%

* Non-GAAP financial measure.

Q2 Results

• Kellogg’s Q2 2016 GAAP (or «Reported») earnings per share were up significantly from the prior-year quarter, driven mainly by lower one-time costs and higher profit margins. Non-GAAP, comparable earnings per share were off slightly from the year-earlier quarter, due to the negative impact of currency translation, mostly related to our Venezuelan business. Non-GAAP, currency-neutral comparable earnings increased strongly year-on-year, and ahead of the Company’s expectations, owing primarily to better profit-margin performance in North America.
• Second-quarter 2016 reported net sales decreased, primarily due to the effect of currency translation resulting from the remeasurement of the Venezuelan business in mid-2015. Currency-neutral comparable net sales increased strongly in the quarter, as a result of inflation-related sales growth in Venezuela; currency-neutral comparable net sales excluding the impact of Venezuela decreased modestly.
• Quarterly reported operating profit increased due to favorable one-time costs, as well as to strong performance in inflationary Venezuela and cost savings in North America. Currency-neutral comparable operating profit increased strongly, with half of the gain attributable to the Venezuela profit performance, and the rest coming primarily from the margin expansion in North America.
• Currency-neutral comparable operating profit and earnings were ahead of the Company’s expectations in the second quarter.

Reconciliation of Non-GAAP Amounts – As Reported to Currency-Neutral Comparable Earnings Per Share

	Quarter ended							Year-to-date period ended
	July 2, 2016			July 4, 2015				July 2, 2016			July 4, 2015
Reported EPS	USD	0.79		USD	0.63			USD	1.29		USD	1.26
Mark-to-Market	0.05			0.10				(0.01)			(0.09)
Project K and Cost Reduction Activities	(0.20)			(0.25)				(0.35)			(0.44)
Other Costs Impacting Comparability	—			0.21				(0.43)			0.13
Acquisitions/Divestitures and Integration	—			(0.02)				—			(0.04)
Remeasurement of Venezuelan Business	(0.01)			(0.43)				(0.03)			(0.43)
Income Tax Benefit Applicable to Adjustments, Net*	0.04			0.10				0.24			0.23
Comparable EPS	0.91			0.92				1.87			1.90
Foreign Exchange	(0.09)							(0.46)
Currency-Neutral Comparable EPS	USD	1.00						USD	2.33

* Represents the estimated income tax effect on the reconciling items, using weighted-average statutory tax rates, depending upon the applicable jurisdiction.

Q2 Business Performance

• The company continued to make progress on its priorities, including stabilizing cereal in the U.S. and Australia, good emerging-markets growth, improved profit margins, and Pringles growth worldwide.
• Kellogg North America’s net sales declined on a reported and currency-neutral comparable basis, but generated strong cost savings under the Project K and Zero-Based Budgeting initiatives. Reported operating profit in North Americadecreased, due to one-time costs and to adverse currency translation in Canada. Currency-neutral comparable operating profit increased, primarily due to cost-savings from the Project K and Zero-Based Budgeting initiatives.
  • The U.S. Morning Foods segment posted a net sales decline on both a reported and currency-neutral comparable basis, but its six core cereal brands held all-channel share and the segment’s profit margins improved strongly.
  • The U.S. Snacks segment posted a net sales decline on both a reported and currency-neutral comparable basis, but core brands like Cheez-It, Pringles, and Rice Krispies Treats continued to post consumption growth.
  • The U.S. Specialty Channels segment posted a slight increase in reported and currency-neutral comparable net sales in the quarter, with growth in key brands and channels, and increased profit margins.
  • The North America Other segment, which is composed of the U.S. Frozen Foods, Kashi, and Canadian businesses, posted a decrease in reported and currency-neutral comparable net sales, amidst price elasticity in Canada, and portfolio rationalization and food and packaging transitions in Frozen Foods and Kashi.
• Kellogg Europe posted a decrease in reported net sales in the quarter, driven mainly by currency translation; currency-neutral comparable net sales were flat year-over-year, as broad-based growth in Pringles and wholesome snacks were offset by softness in U.K. cereal.
• In Latin America, reported net sales decreased due to the translation effect of a sharply devalued Venezuelan currency; currency-neutral comparable net sales increased significantly because of inflationary Venezuela; excluding Venezuela, currency-neutral comparable net sales declined slightly, amidst difficult economic conditions.
• Reported net sales in Asia Pacific decreased because of adverse currency translation; currency-neutral comparable net sales increased on good growth across the region for Pringles, and continued improvement in Australia, where the company gained share in cereal. While not reported in our sales results, the joint ventures in China and West Africacontinued to perform well.

Full Year 2016 Outlook*

• The Company is raising its full-year guidance for earnings per share on a currency-neutral comparable basis, to 4.11 USD to 4.18 USD, from previous guidance of 4.00 USD to 4.07 USD.
• The increase is driven by higher currency-neutral comparable operating profit, which is now expected to increase by 15-17 percent, from our previous estimate of 11-13 percent.
• This increased guidance is based on two factors: The better-than-expected first-half profit performance in inflationaryVenezuela, and an increased forecast for operating profit margin for the rest of the business.
• The company believes its currency-neutral comparable operating profit growth excluding Venezuela will come in at the high end of the 4-6 percent growth range previously communicated. The company now expects higher savings from Zero-Based Budgeting in North America, along with the roll-out of a similar program in its international regions.
• These savings are expected to more than offset the impact of a trimmed net sales outlook excluding Venezuela, now expected to come in at the low end of the 0-2 percent range previously communicated.
• Because of further weakening in currency exchange rates for Venezuela and for other currencies, particularly in the aftermath of Britain’s vote to exit from the European Union, currency translation is expected to have a more negative impact than previously estimated.
• The company expects full-year cash flow from operating activities to be approximately 1.7 billion USD. The company reaffirmed that it expects full-year cash flow to be approximately 1.1 billion USD, including capital expenditure. Capital expenditure for the year is still expected to be between 4 percent and 5 percent of sales, which translates approximately into 525 to 625 million USD; this includes the impact of the cash required by Project K and an increase in capital spending equal to approximately one percent of sales to support the growth of the Pringles business.

Profit-Margin Outlook for 2017-2018*

• The company also announced that it has plans to accelerate and increase the previously announced goals for expanding its currency-neutral comparable operating profit margin.
• It now believes it will increase this margin by approximately 350 basis points from 2015 levels, and that it will realize the increase through 2018, an acceleration of two years from its previous guidance. This acceleration comes from a combination of expanding Zero-Based Budgeting across North America and International segments, pursuing a more disciplined approach to revenue growth management, and other potential initiatives.
• These actions are expected to drive accelerated currency-neutral comparable operating profit and earnings growth in 2017 and 2018, even as they contribute to holding net sales flat during that time period.