Kellogg Company Reports First Quarter 2014 Results, Reaffirms Full-Year Guidance

02 May 2014 --- Kellogg Company announced first-quarter results for earnings per share that were greater than the company's expectations; results for operating profit were in-line with expectations. First quarter 2014 reported net sales decreased by 3.1 percent to $3.7 billion.

Internal net sales,* which exclude the effects of foreign currency translation, acquisitions, dispositions, and integration costs, decreased by 2.4 percent over the same period. First quarter 2014 operating profit was $614 million, a reported increase of 22.1 percent; this increase was driven primarily by the impact that asset returns and changes in interest rates had on pension plans.  Underlying internal operating profit,* which excludes the effects of foreign currency translation, acquisitions, dispositions, mark-to-market accounting, integration costs, and costs associated with Project K, decreased by 5.5 percent.  As expected, the decline in underlying internal operating profit was largely the result of lower sales and the timing of costs of goods sold in the period.

Reported earnings for the first quarter 2014 were $406 million, or $1.12 per diluted share, an increase of 32 percent from the $0.85 per diluted share reported in the first quarter of last year.  This quarter's reported earnings per share included an impact from mark-to-market of $0.22 per share, partially offset by $0.10 per share of costs associated with Project K and approximately $0.01 per share of integration costs related to the acquisition of Pringles.  Excluding these items, comparable first quarter 2014 earnings* were $1.01 per share, greater than the company's expectations as the result of the impact of a $0.03 per share benefit in Other Income and Expense.

"Our results for operating profit and earnings in the first quarter were broadly in-line with the expectations we highlighted on the last earnings call," said John Bryant, Kellogg Company's president and chief executive officer.  "In addition, we've made great progress with Project K and we've developed strong investment plans for the remainder of the year.  As a result, we've reaffirmed our guidance for the full year and expect top-line performance to improve over time."

* Internal sales growth, underlying internal operating profit growth, comparable earnings, underlying effective tax rate and cash flow are all non-GAAP financial measures. See the tables herein for important information regarding these measures and a full reconciliation to the most comparable GAAP measure.

North America

Net sales posted by Kellogg North America were $2.5 billion in the first quarter, a reported decrease of 2.9 percent; internal net sales decreased by 2.4 percent.  The U.S. Morning Foods segment posted an internal net sales decline of 5.5 percent.  Internal net sales in the U.S. Snacks segment increased by 0.3 percent.  The U.S. Specialty Channels segment posted a 1.7 percent internal net sales decline in the quarter and the North America Other segment, which is comprised of the U.S. Frozen Foods and Canadian businesses, posted a 2.1 percent decrease in internal net sales.  Reported operating profit in North America decreased by 9.4 percent; internal operating profit declined by 6.1 percent, largely as the result of lower sales and the timing of costs of goods sold.

International

Reported net sales increased by 2.3 percent in Europe in the quarter; internal net sales decreased by 1.7 percent.  In Latin America, reported net sales decreased by 9.8 percent and internal net sales decreased by 5.3 percent, reflecting the impact of an increased food tax in Mexico.  Reported net sales in Asia Pacific decreased by 10.7 percent and internal net sales decreased by 1.4 percent.

Interest and Tax

Kellogg's interest expense was $52 million in the first quarter.  The underlying tax rate* in the first quarter of 2014 was 28.8 percent.

Cash flow

Cash flow,* a non-GAAP measure defined as cash from operating activities less capital expenditures, was $171 million for the quarter, and was in-line with expectations.  It is still anticipated that cash flow for the year will be in a range between $1.0 and $1.1 billion.

Kellogg repurchased $321 million of shares during the first quarter, far exceeding option proceeds of $32 million.

Kellogg Reaffirms Full-Year 2014 Guidance

The company reaffirmed its guidance for full-year internal net sales growth of approximately one percent.  Underlying internal operating profit growth is still expected to be in a range between zero and two percent.  Currency-neutral comparable earnings per share growth is still expected to be between one and three percent.  Integration costs associated with the acquisition of the Pringles business are still expected to be in a range between $0.07 and $0.09 per share.  Costs associated with Project K are still expected to be in a range between $0.60 and $0.65 per share.  As a result, earnings excluding the impact of mark-to-market accounting, integration costs, Project K and other items impacting comparability are still anticipated to be between $3.89 and $3.97 per share.  This year's 53rd week is still expected to add approximately $0.08 per share to earnings.  As a result, the company continues to expect an earnings range including the impact of the 53rd week of between $3.97 and $4.05 per share, which the company estimates is in line with the Bloomberg consensus estimate.