The FINANCIAL -- Kellogg Company on October 31 announced third- quarter 2017 results and updated and reaffirmed its financial outlook for the full year 2017.
"Our third quarter played out as expected. Operating profit margin expansion got an added boost from the transition out of Direct-Store Delivery, and we posted another quarter of sequential improvement in our net sales performance,” said John Bryant, Kellogg Company’s chairman. “There was some timing benefit that comes out of the fourth quarter, but these results put us solidly on track to deliver on our full- year 2017 financial guidance, just as we welcome Steve Cahillane as the eleventh chief executive officer in our Company's history."
"I am honored and excited to be part of this great Company," said Steve Cahillane, chief executive officer. "In a few weeks, I have already confirmed everything that attracted me to the Company: Iconic brands, outstanding food, a special culture, and a will to win. The third quarter results and 2017 financial outlook are a testament to the strategy in place, as is the acquisition of RXBAR, which will serve as an additional platform for growth."
Third Quarter Consolidated Results:
•Kellogg’s third quarter 2017 GAAP (or "reported") earnings per share increased by almost 4% from the prior-year quarter, as higher operating profit more than offset a higher effective tax rate. Non-GAAP, comparable earnings and currency-neutral comparable earnings per share were both up 9% from the year-earlier quarter.
•Quarterly reported operating profit increased by 13%, and operating profit margin improved by 1.6 points. This was driven by strong productivity savings related to the Project K restructuring program, particularly this year's exit from its U.S. Snacks segment's Direct Store Delivery (DSD) system and its related elimination of overhead during the quarter. Currency-neutral comparable operating profit increased by 17% year on year, and its currency-neutral comparable operating profit margin improved by 2.8 points.
•Third-quarter 2017 reported net sales increased year on year, due to the December 2016 acquisition of Parati in Brazil, as well as favorable currency translation. On a currency-neutral comparable basis, net sales declined modestly, principally reflecting previously announced list- price adjustments and other impacts in U.S. Snacks related to its transition from DSD.
Third Quarter Business Performance:
Kellogg Company's third-quarter net sales and operating profit performance continued to improve sequentially. Year on year, sales were reduced by the list-price adjustment and other impacts from transitioning out of DSD in U.S. Snacks, and remained pressured by softness in the health and wellness segment of the cereal category in the U.S. However, key elements of an improving second-half net sales performance took shape as anticipated, including the return to promotional activity and growth for Pringles in Europe; a return to growth in North America Other, led by accelerated consumption growth in Frozen Foods; and sequential improvement in Special K's global performance. Additionally, productivity savings accelerated with the closing of the DSD system in U.S. Snacks.
Kellogg North America’s net sales in the third quarter decreased on a reported and currency- neutral comparable basis, principally reflecting the aforementioned list-price adjustment and other impacts related to the transition out of DSD in U.S. Snacks, as well as continued consumption softness in U.S. cereal in traditional retail channels. The Region continued to make progress against key strategic priorities to improve future sales performance, and in the quarter North America Other stood out for its accelerated consumption and net sales growth. Reported operating profit decreased, due to higher restructuring charges and lower net sales, but currency-neutral comparable operating profit increased strongly because of cost savings accelerated by the elimination of DSD overhead during the quarter. Specifically, by segment:
•The U.S. Snacks segment posted lower net sales, on both a reported and currency-neutral comparable basis. During the quarter the Company discontinued shipping through its DSD distribution system, reduced its workforce, and exited leases for its distribution centers, trucks, and other equipment. Accordingly, all sales are now made at a list-price that is reduced by a cost- to-serve for various DSD services no longer provided by the Company. U.S. Snacks' net sales
were also affected by a pull-back in merchandising to facilitate customer transitions early in the quarter, and the impact of eliminating smaller, less productive stock-keeping units (SKUs). Higher up-front costs related to Project K restructuring, in line with forecasts, drove a decrease in reported operating profit, while currency-neutral comparable operating profit increased strongly year-on-year, as DSD-related overhead reductions more than offset an increase in brand investment aimed at improving top-line growth going forward.
•The U.S. Morning Foods segment posted lower net sales on both a reported and currency- neutral comparable basis, as cereal category consumption remained soft, particularly in the health and wellness segment. Key taste-oriented cereal brands and Pop-Tarts toaster pastries continued to gain share in the quarter. The segment's reported operating profit declined due to higher restructuring charges, with a flat operating profit margin, while currency-neutral comparable operating profit and operating-profit margin increased, reflecting the strength of productivity initiatives.
•The U.S. Specialty Channels segment posted another quarter of growth in reported and currency-neutral comparable net sales. The segment also delivered another quarter of strong reported and currency-neutral comparable operating profit and operating-profit margin.
•The North America Other segment, which is comprised of the U.S. Frozen Foods, Kashi, and Canadian businesses, posted solid increases in reported and currency-neutral comparable net sales. Frozen Foods' sales growth accelerated in the quarter, with strong consumption and share performance for both Eggo and Morningstar Farms, each driven by innovation and favorable category dynamics. Canada's sales were flat, with increased share in both cereal and snacks. Kashi Company sales declined at a moderated rate, as renovated and new products are leading to increased share in cereal and stabilizing share in snack bars. On a reported and currency-neutral comparable basis, North America Other's operating profit and operating-profit margin increased strongly in the quarter.
Kellogg Europe posted higher reported net sales, due to favorable currency translation. Net sales declined modestly on a currency-neutral comparable basis, a sequential improvement in performance driven by a return to growth for Pringles across the Region, continued stabilization of cereal consumption in the U.K., and growth in emerging markets like Russia; these factors largely offset the impact of soft cereal consumption in Continental Europe. Operating profit decreased on a reported basis, owing to higher restructuring costs, and declined less on a currency-neutral comparable basis, as the impact of the sales decline was partially offset by the benefit of productivity savings.
In Latin America, reported net sales increased due to the December 2016 acquisition of Parati in Brazil, while currency-neutral comparable net sales were down because of continued economic softness and hurricane-related disruption in the Central America & Caribbean sub-region. These factors masked continued growth in Mexico and the rest of the Region. Latin America's operating profit decreased on a reported and currency-neutral comparable basis, due to lower sales in Central America and Caribbean, as well as currency-driven input cost inflation. Importantly, the integration of Parati is progressing well, with that business continuing to grow in spite of a challenging operating environment, according to Kellogg Company.
Reported and currency-neutral comparable net sales in Asia Pacific increased, led by continued broad-based growth in Asia, sustained momentum in Pringles across the Region, and stable sales in Australia, where our cereal business again grew share. Asia Pacific increased its operating profit and operating profit margin strongly on a reported and currency-neutral comparable basis. Not included in Asia Pacific's consolidated results is the performance of the Company's joint ventures in West Africa and China, both of which continued to grow net sales and operating profit on a reported and currency-neutral comparable basis.
Outlook for 2017:
The Company reaffirmed its financial guidance for currency-neutral comparable net sales, operating profit, and earnings per share, as well as for cash flow. Specifically:
•The Company continues to forecast a decline in currency-neutral comparable net sales of about (3)% in 2017, with no change to its estimates for the DSD exit's impact or for the rest of the business.
•Guidance is reaffirmed for currency-neutral comparable operating profit growth, which the Company still expects will finish the year with 7-9% year on year growth. The Company's currency-neutral comparable operating profit margin remains on pace to improve by approximately 350 basis points from 2015 through 2018.
•Guidance is also reaffirmed for earnings per share on a currency-neutral comparable basis. Specifically, the Company still expects growth of 8-10% year on year, off a 2016 base that excludes after-tax $0.02 from deconsolidated Venezuela results, to $4.03-4.09. The growth should be driven by the aforementioned 7-9% growth in operating profit, with roughly 1% of additional leverage from modestly lower shares outstanding and other items, which slightly more than offset a higher effective tax rate.
•This earnings per share guidance excludes currency translation impact. Given the recent movement in key exchange rates, the Company now estimates this impact to be about $(0.03) after tax, which is roughly half of our previous estimate of $(0.06), and would imply a comparable- basis earnings per share of $4.00-4.06 for 2017.
•Comparable-basis and currency-neutral comparable-basis earnings per share guidance by definition excludes up-front costs, principally related to the Project K program. These up-front costs are now expected to be after-tax $(0.65)-(0.75) per share, or $(325)-(375) million pretax, down from previous guidance of $(0.80)-(0.90) per share after tax and $(400)-(450) million pretax. This reflects timing and composition of activities, including one-time curtailment gains related to pension-plan amendments and workforce reductions. The EPS guidance also continues to exclude integration costs, related to the Company's acquisition in Brazil and other acquisitions. These integration costs are now expected to come in toward the low end of our previous guidance range of $(0.01)-(0.03) per share after-tax.
•The Company also affirmed its guidance for 2017 cash flow. Specifically, it forecasts cash from operating activities should be approximately $1.6-1.7 billion, which after capital expenditure translates into cash flow of $1.1-1.2 billion.
“We are encouraged that we remain on track to deliver on our 2017 financial guidance, even amidst challenging industry conditions," added Mr. Cahillane. “Going forward, strong productivity programs give us good visibility into cost savings, and we will continue to transform and drive this business back to top-line growth.”