Aug 2 2010 --- 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, a 15 percent decline over the same quarter a year ago. Second quarter reported earnings per diluted share decreased 14 percent to $0.79 and decreased 11 percent on a currency-neutral basis. The estimated impact of the recall, including lost sales, reduced earnings per share by approximately $0.10 in the quarter and will reduce earnings per share by approximately $0.12 for the full year.

Reported net sales in the second quarter declined 5 percent to $3.1 billion. Internal net sales, excluding the effect of foreign currency translation, decreased 4 percent from the prior year. Total reported operating profit in the quarter decreased 13 percent to $483 million. Internal operating profit decreased 11 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 5 percent on a reported basis and a 6 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 1 percent. The North America Frozen and Specialty Channels businesses posted an internal net sales decline of 9 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 5 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 3 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 5 percent, and Asia Pacific internal net sales grew 3 percent.

Kellogg International operating profit was 7 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 totaled $61 million, an improvement over the same quarter in 2009 as a result of lower debt. The second quarter effective tax rate was 29.7 percent.