Kellogg Company Reports Fourth Quarter 2017 Results

Battle Creek / MG. (kc) Kellogg Company announced fourth quarter and full year 2017 results and issued its financial outlook for 2018. Highlights:

• Q4 results complete the delivery of full-year guidance for currency-neutral comparable net sales, operating profit, and earnings per share, as well as cash flow.
• Continued marked improvement in net sales performance during the second half, driven by several key businesses and brands.
• Important progress made on initiatives related to growth priorities of snacking, health and wellness, and emerging markets.
• Issued guidance(*) for 2018, including flat net sales on a currency-neutral basis; adjusted operating profit growth of +4-6 percent on a currency-neutral basis; adjusted earnings per share growth of 9-11 percent on a currency-neutral basis.

«We’re pleased to report a good finish to an important year», said Steve Cahillane, Kellogg Company’s Chief Executive Officer. «We delivered on our financial guidance for the year, by continuing to improve our sales performance from a soft first half, and by executing productivity initiatives that continued to boost our profit margins, even as we stepped up investment in our brands. We also continued to make significant progress on several strategic imperatives that will contribute to better performance ahead. Our transition out of Direct Store Delivery in U.S. Snacks freed up resources that we are reinvesting behind our brands. We continued to expand our emerging markets scale and presence, via the integration of Parati, which tripled our size in Brazil; the investment in rapid growth for our joint ventures in Africa and China; and the expansion of Pringles across the globe. We continued to stabilize our core developed international cereal markets, and we completed the acquisition of RXBAR, a new growth platform for us in health and wellness».

«We enter 2018 on sound financial footing, with many of our businesses starting to gain traction», added Cahillane. «Net sales guidance for 2018 reflects roughly two quarters of negative DSD-transition impacts and the prudent assumption that it will take some time for our investments to take hold. Our commercial ideas are stronger, and we are putting increased investment where the growth is. We have strong enough cost-savings that we can boost investment in growth, while still delivering margin expansion and solid growth in profit and earnings».

(*) All guidance and goals expressed in this press release are on a currency-neutral basis, and adjusted to exclude restructuring charges, and the mark-to-market adjustments of pensions and various financial instruments. Expected net sales, margins, operating profit, operating profit margin and earnings per share are provided on this non-GAAP, currency- neutral basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.

Fourth Quarter Consolidated Results

Kellogg’s fourth quarter 2017 GAAP (or «reported») earnings per share increased significantly from the prior-year quarter, due to favorable mark-to-market adjustments, lower restructuring charges, and higher operating profit. Non-GAAP, comparable and currency-neutral comparable earnings per share also increased year on year in the quarter, finishing the year within the Company’s full-year guidance range.

Quarterly reported operating profit and operating profit margin increased sharply in the fourth quarter. This was driven by significantly lower restructuring charges and favorable mark-to- market impacts year-on-year, as well as strong productivity savings related to the Project K restructuring program, particularly this year’s exit and elimination of overhead from its U.S. Snacks segment’s Direct Store Delivery (DSD) system. These savings more than offset a substantial increase in advertising and promotion investment. Currency-neutral comparable operating profit and operating profit margin both increased, finishing the year within the Company’s full-year guidance.

Fourth-quarter 2017 reported net sales increased by nearly 4 percent year on year, owing to the acquisitions of RXBAR (October 2017) and Parati (December 2016), as well as to favorable currency translation. On a currency-neutral comparable basis, net sales declined by 1.5 percent, reflecting previously announced list-price adjustments and other impacts in U.S. Snacks related to its transition from DSD. Excluding these DSD-related impacts, currency-neutral comparable net sales grew slightly year-on-year in the quarter, completing a much improved second half of 2017.

Fourth Quarter Business Performance

Kellogg Company’s net sales and operating profit performance in the fourth quarter continued to improve sequentially from the first half. Year on year, sales were again reduced by the list-price adjustment and other impacts from transitioning out of DSD in U.S. Snacks, masking growth elsewhere. U.S. Specialty Channels, North America Other, and Asia-Pacific sustained their growth momentum, while Europe returned to growth. From a global brand perspective, Pringles growth accelerated again in the fourth quarter, and Special K continued to show progress toward stabilizing. Meantime, productivity savings accelerated with the closing of the DSD system in U.S. Snacks, only partially offset by a sharp increase in brand-building investment.

Kellogg North America’s net sales in the fourth quarter decreased on a reported and currency-neutral comparable basis, reflecting the aforementioned list-price adjustment and other impacts related to the transition out of DSD in U.S. Snacks. The Region continued to make progress against key strategic priorities to improve future sales performance, with U.S. Snacks showing early signs of post-DSD improvement, and Specialty Channels and North America Other both posting accelerated net sales growth. Reported operating profit increased, due to lower restructuring charges year on year, but currency-neutral comparable operating profit declined slightly, as savings from the elimination of DSD overhead during the quarter were offset by lower net sales and a substantial increase in brand-building investment. Specifically, by segment:

• The U.S. Snacks segment posted lower net sales, on both a reported and currency-neutral comparable basis. This past summer, 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, and sales in the quarter were also affected by the impact of eliminating smaller, less productive stock-keeping units (SKUs). In the fourth quarter, the Company returned to normal promotional activity following the transition, and reinvested in incremental advertising and promotion, improving consumption for several supported brands. Operating profit was up strongly in the quarter, both on a reported and a currency-neutral comparable basis, owing to lower restructuring charges and overhead reductions related to the DSD transition, which more than offset the sharp increase in advertising and promotion investment.
• The U.S. Morning Foods segment’s net sales declined on both a reported and currency- neutral comparable basis, as cereal category consumption remained soft, particularly in the health and wellness segment. The segment’s operating profit declined on a reported and currency-neutral comparable basis, on lower net sales and lapping a particularly strong year- ago performance.
• The U.S. Specialty Channels segment delivered another quarter of growth in net sales and operating profit, both on a reported and currency-neutral comparable basis. Kellogg posted growth in all three major channels, Foodservice, Convenience Stores, and Vending.
• The North America Other segment, which is comprised of the U.S. Frozen Foods, Kashi Company, and Canadian businesses, as well as the recently acquired RXBAR, increased net sales on both a reported and currency-neutral comparable basis. The growth was driven by continued momentum in Frozen Foods, driven by accelerated consumption and share gains for both Eggo and Morningstar Farms. Canada also grew its sales in the quarter, with increased share in cereal and Pringles, and Kashi Company posted continued consumption and share growth in cereal, led by its Bear Naked granola brand. North America Other’s operating profit increased sharply on a reported basis, reflecting lower restructuring costs and favorable currency translation, but it declined on a currency-neutral comparable basis, largely due to a substantial increase in brand-building investment in the quarter and to lapping an unusually strong year-ago profit performance.

Kellogg Europe recorded growth in net sales, both on a reported and currency-neutral comparable basis. Reported growth was additionally aided by favorable currency translation, while currency-neutral comparable growth was driven by gains both in snacks, with Pringles sustaining its second-half return to growth, and in cereal, which posted growth in the quarter on improving consumption trends. Operating profit increased sharply on a reported basis, owing to lower restructuring costs and favorable currency translation. It declined on a currency-neutral comparable basis, owing to a substantial increase in brand-building investment in the quarter.

Kellogg Latin America posted a strong increase in reported net sales, due to the December 2016 acquisition of Parati in Brazil, while its currency-neutral comparable net sales were down slightly because of lingering hurricane-related disruption in the Central America + Caribbean sub- region. This masked continued growth for the rest of Kellogg Latin America, led by consumption and sales growth in Mexico, its largest market. Kellogg Latin America’s operating profit increased sharply on a reported basis, owing to the Parati acquisition, but it was down slightly on a currency-neutral comparable basis, due to lower sales in Central America + Caribbean, as well as currency-driven input cost inflation. Importantly, the integration of Parati is progressing well, with that business continuing to grow strongly in the fourth quarter.

Kellogg Asia Pacific’s net sales increased on both a reported and currency-neutral comparable basis, with gains in both cereal and snacks. Cereal growth was led by Asian markets like India and Korea, and in its core developed market of Australia, it recorded another quarter of growth in sales, consumption, and share. Kellogg Asia Pacific recorded a slight decline in reported operating profit, related to higher restructuring charges, but sales growth and productivity savings drove solid operating profit growth on a currency-neutral comparable basis, even despite a substantial increase in brand building investment. 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 rapidly on a reported and currency-neutral comparable basis, as we continue to invest in their expansion.

2018 Financial Guidance

The Company issued financial guidance for 2018:

• Net sales flat on a currency-neutral basis. The October 2017 acquisition of RXBAR contributes 1-2 percentage points of this growth. This implies an organic decline of 1-2 percent, of which 1 percentage point of the decline is related to the negative impact of U.S. Snacks’ DSD transition, including its list-price adjustment and rationalization of stock-keeping units (SKU). The remainder of the business is flat to down 1 percent, an improvement from 2017.
• Adjusted OP +4-6 percent on a currency-neutral basis. The acquired RXBAR contributes 1-2 percentage points of this growth, while the rest of the growth is driven by remaining Project K and ZBB savings, partially offset by an increase in Brand Building. The resultant operating profit margin reaches the Company’s publicly stated margin-expansion target, excluding the restatement for the change in pension accounting.
• Adjusted EPS +9-11 percent on a currency-neutral basis. U.S. Tax Reform contributes 5-6 percentage points of this growth, even after the Company uses some of its favorability to mitigate risk in its pension plans, via a less aggressive investment mix and potentially making cash contributions, and on its balance sheet, through reduction of debt.
• Cash Flow guidance. The Company projects cash from operating activities to increase to USD 1.7-1.8 billion in 2018, driven by higher net income, sustained working-capital improvement, and benefits from U.S. Tax Reform. With capital expenditure remaining roughly flat at USD 0.5 billion, this implies Cash Flow of USD 1.2-1.3 billion.