Kellogg's Sales Drop on Slow Cereal Sales

31 Oct 2014 --- Kellogg Company has announced third-quarter results for operating profit and earnings per share that were slightly greater than the company's expectations. Third-quarter 2014 reported net sales decreased by 2.1 percent to $3.6 billion. Internal net sales, which exclude the effects of foreign currency translation, acquisitions, dispositions, and integration costs, decreased by 1.7 percent over the same period.

Third-quarter 2014 operating profit was $365 million, a reported decrease of 27.5 percent; this decrease was driven primarily by costs associated with Project K, the company's four-year efficiency and effectiveness program, the impact of mark-to-market accounting, and lower sales. 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 1.8 percent. The decline in underlying internal operating profit was largely the result of lower sales.

Reported earnings for the third quarter 2014 were $224 million, or $0.62 per diluted share, a decrease of 31 percent from the $0.90 per diluted share reported in the third quarter of last year. This quarter's reported earnings per share included an impact from mark-to-market of $0.11 per share, $0.19 per share of costs associated with Project K, and approximately $0.02 per share of integration costs related to the acquisition of Pringles. Excluding these items, comparable third quarter 2014 earnings were $0.94 per share, slightly greater than anticipated by the company.

"We are pleased to have announced results for quarterly operating profit and earnings per share that were ahead of our expectations. Our international business did well in the quarter, although we continued to face the challenges in developed regions and categories that we've seen all year," said John Bryant, Kellogg Company's chairman and chief executive officer. "We have been working hard on our plans for 2015 and we have both good brand-building activities and new-product introductions planned for the first quarter, and the balance of the year. We also continue to execute the largest restructuring program in our history, which will enable us to invest back in our business and drive sustainable growth."

Net sales posted by Kellogg North America were $2.3 billion in the third quarter, a reported decrease of 4.2 percent; internal net sales decreased by 3.9 percent. The U.S. Morning Foods segment posted an internal net sales decline of 4.7 percent. Internal net sales in the U.S. Snacks segment decreased by 4.2 percent. The U.S. Specialty Channels segment posted a 4.1 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 1.1 percent decrease in internal net sales. Reported operating profit in North America decreased by 19.8 percent; underlying internal operating profit declined by 9.1 percent, as the result of lower sales.

Reported net sales decreased by 0.6 percent in Europe in the quarter; internal net sales also decreased by 0.6 percent. In Latin America, reported net sales increased by 6.2 percent and internal net sales increased by 7.3 percent. Reported net sales in Asia Pacific increased by 4.8 percent and internal net sales increased by 5.0 percent.

Kellogg's interest expense was $54 million in the third quarter. The underlying tax rate* in the third quarter of 2014 was 28.5 percent.

Cash flow, a non-GAAP measure defined as cash from operating activities less capital expenditures, was $822 million for the first three quarters of the year. The company continues to anticipate that cash flow for the year will be at the low end of the range between $1 billion and $1.1 billion.

Year-to-date, Kellogg has repurchased $690 million of shares, far exceeding option proceeds of $151 million. The company remains on-track with its share repurchase program for the full year.