Kellogg makes 'great' progress with Project K

Kellogg Company said that its first-quarter results for earnings per share were greater than the company's expectations, while results for operating profit were in-line with expectations, thanks in part to Project K — the company’s global cost-cutting initiative.



Net sales for the quarter decreased 3.1% to $3.7 billion. Internal net sales, which exclude the effects of foreign currency translation, acquisitions, dispositions and integration costs, decreased 2.4% over the same period.



Operating profit for the quarter was $614 million, an increase of 22.1% 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%. 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 president and CEO John Bryant. "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."



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



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



The company reaffirmed its guidance for full-year internal net sales growth of approximately 1%. Underlying internal operating profit growth is still expected to be in a range between 0 and 2%. Currency-neutral comparable earnings per share growth is still expected to be between 1 and 3%. 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.