The FINANCIAL — Kellogg Company on November 1 announced third-quarter 2016 results, updated its earnings outlook for 2016, and reiterated its plans and progress toward improved profit margins for 2017.
“Our third quarter earnings exceeded our expectations, on the strength of good operating margin expansion and a favorable tax rate,” said John Bryant, Kellogg Company’s chairman and chief executive officer. “Our sales were affected by trade-inventory reductions in U.S. cereal, a challenging U.K. market, and portfolio transformations that have taken longer than anticipated to execute. However, we did realize growth in U.S. Snacks, U.S. Specialty Channels, Latin America, and Asia-Pacific, and every Region posted operating-profit margin expansion. Most importantly, we continued to make progress against priorities that will enable improved performance in Q4 and in 2017.”
Q3 Results:
Currency-neutral comparable operating profit and earnings were ahead of the Company’s expectations in the third quarter.
Kellogg’s Q3 2016 GAAP (or “reported”) earnings per share were up 41% from the prior-year quarter, driven mainly by decreased one-time costs, higher profit margins, and a lower effective tax rate. Non-GAAP, comparable earnings per share were up 13% from the year-earlier quarter, despite the negative impact of currency translation. Non-GAAP, currency-neutral comparable earnings increased by nearly 18% year-on-year, and ahead of the Company’s expectations, owing primarily to better profit-margin expansion across all Regions and a lower effective tax rate.
Quarterly reported operating profit increased sharply due to lower one-time costs, as well as to profit-margin expansion across all Regions. Currency-neutral comparable operating profit increased because of the profit-margin benefit of efficiencies in SG&A expenses, reflecting the impact of Zero-Based Budgeting.
Third-quarter 2016 reported net sales decreased, led by adverse currency translation, while currency-neutral comparable net sales declined because of trade-inventory reductions in U.S. cereal, softness in U.K. cereal, and portfolio transitions in our U.S. Frozen and Kashi businesses.
The Company continued to make progress on its 2016 priorities, including improving currency-neutral comparable basis operating profit margins across every Region, through various productivity initiatives; gaining share in U.S. cereal; improving performance in U.S. Snacks; generating good emerging-markets growth; and growing Pringles globally.
Kellogg North America’s net sales declined on a reported and currency-neutral comparable basis, but reported and currency-neutral comparable operating profit increased on the strength of cost savings under 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 it improved its category share, led by its six core cereal brands and Pop-Tarts. On both a reported and currency-neutral comparable basis, the segment’s operating profit margin again improved strongly, driving operating profit growth in the quarter.
The U.S. Snacks segment posted flat net sales on both a reported and currency-neutral comparable basis, an improvement in trend led by core brands like Cheez-It, Pringles, and Rice Krispies Treats, each of which grew consumption. On both a reported and currency-neutral comparable basis, the segment posted another quarter of strong operating profit margin expansion, leading to operating profit growth in the quarter.
The U.S. Specialty Channels segment posted increases in reported and currency-neutral comparable net sales in the quarter, with growth in key brands and channels. On both a reported and currency-neutral comparable basis, the segment increased its operating profit margin, growing operating profit in the quarter.
The North America Other segment, which is comprised of the U.S. Frozen Foods, Kashi, and Canadian businesses, posted a decrease in reported and currency-neutral comparable net sales, due to the volume impact of price increases in Canada, and continued impacts of portfolio rationalization and food and packaging transitions in Frozen Foods and Kashi. On a reported and currency-neutral comparable basis, the net sales decline pulled down the segment’s operating profit in the quarter.
Kellogg Europe posted a decrease in reported net sales, driven primarily by adverse currency translation, while currency-neutral comparable net sales decreased slightly. The decline was due to lower sales in the U.K., where we continue to face a challenging retailer environment. This more than offset broad-based growth elsewhere in the Region, led by improving share trends in cereal and continued growth in Pringles. Both on a reported and currency-neutral comparable basis, Europe improved its operating profit margins, which drove an increase in operating profit in the quarter.
In Latin America, reported net sales decreased due to adverse currency translation, while currency-neutral comparable net sales increased strongly because of inflationary Venezuela; currency-neutral comparable net sales also increased outside of Venezuela, led by gains in Mexico and Brazil, even amidst difficult economic conditions across the region. On a reported and currency-neutral comparable basis, both with and without Venezuela, Latin America improved its operating profit margin, driving strong operating profit growth in the quarter, according to Kellogg.
Reported and currency-neutral comparable net sales in Asia Pacific increased, led by good growth across the region for Pringles. While not reported in our sales results, the joint ventures in China and West Africa continued to grow at a double-digit rate. On both a reported and currency-neutral comparable basis, Asia Pacific increased its operating profit margin, generating operating profit growth in the quarter.
Full Year 2016 Outlook:
The Company increased its full-year guidance for earnings per share on a currency-neutral comparable basis. Specifically, it raised its guidance range by about a nickel, to $4.16-$4.23, reflecting the lower effective tax rate it realized during Q3.
Guidance is unchanged for currency-neutral comparable operating profit, which the Company still believes will come in at the high end of its previously communicated ranges: Growth of 15-17%, or 4-6% excluding Venezuela. This reflects better-than-anticipated margin expansion, which should offset the impact of net sales coming in lower than expected.
The Company modestly softened its net sales outlook; we now expect to grow a little less than 4% on a currency-neutral comparable basis, and down about 1% excluding Venezuela; the latter is a reduction from previous guidance of flat.
Incorporated into our earnings per share guidance is the company’s recently announced acquisition in Brazil, which it expects to close during the fourth quarter. To help fund this acquisition without increasing our debt, we intend to curb share buybacks during the fourth quarter. Even with a resultant increase in shares outstanding, we expect the acquisition to have only a slight impact on our reported earnings per share in 2016 and 2017, as its integration costs should fall within the range we had already communicated; no material impact is expected on our currency-neutral comparable earnings per share for either year.
Cash from operating activities should be approximately $1.6 billion. The Company continues to expect full-year cash flow of approximately $1.1 billion, which includes capital expenditure.
Preliminary Outlook for 2017:
The Company reiterated its plans to achieve high single-digit growth in currency-neutral comparable operating profit in 2017, excluding Venezuela.
Previously announced productivity efforts, including Project K restructuring savings, Zero-Based Budgeting expense efficiency, and price realization through Revenue Growth Management, should move currency-neutral comparable-basis operating profit margin toward its goal of achieving 350 basis points increase from 2015 levels through 2018, excluding Venezuela.
As previously communicated, currency-neutral comparable net sales, excluding Venezuela, are projected to be flat in 2017, reflecting sequential improvement as we continue to stabilize portions of our business.
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