Kellogg Company: Reports Q2/2015 Results

Battle Creek / MG. (kc) Kellogg Company announced second-quarter results; earnings per share were in-line with the company’s expectations. The Asian, Latin American, and European Snack businesses posted currency-neutral comparable net sales growth and the North American business benefited from improving trends.

«We were pleased that results in the second quarter were as we expected. We’ve seen good growth in the Asian and Latin American businesses, growth in the European Snacks business, and improving trends in the North American business». said John Bryant, Kellogg Company’s chairman and chief executive officer. «After a difficult 2014, we continue to build momentum in 2015 and are on-track to achieve our long-term-growth targets for currency-neutral comparable sales and operating profit in 2016».

Second-quarter 2015 reported net sales decreased by 5.1 percent to 3.5 billion USD, largely as the result of currency translation. Currency-neutral comparable net sales increased by 0.1 percent in the second quarter; sales increased in the Latin American and Asia Pacific regions and in the Frozen Foods and Canadian businesses in North America. Second quarter 2015 reported operating profit was 412 million USD, a decline of 11.6 percent; this decrease was driven primarily by up-front costs associated with Project K, a remeasurement of the Venezuelan business at the SIMADI rate of 198 Venezuelan bolivars per U.S. Dollar (see Exhibit 9), and foreign-currency exchange. Currency-neutral comparable operating profit declined by 6.8 percent due to higher distribution costs, costs associated with the timing of production, and the resetting of incentive compensation.

Reported earnings for the second quarter of 2015 were 223 million USD, or 0.63 USD per share, a decrease of 23 percent from the 0.82 USD per share reported in the second quarter of last year. This quarter’s reported earnings per share included negative impacts from the remeasurement of the Venezuelan business of 0.37 USD per share, costs associated with the Project K efficiency and effectiveness program of 0.18 USD per share and 0.01 USD per share of integration costs related to the acquisition of Pringles and Bisco Misr. In addition, reported results included a benefit of 0.06 USD per share from mark-to-market and a benefit of 0.21 USD per share from the deconsolidation of a variable interest entity (see Exhibit 15). Excluding all of these items, comparable second-quarter 2015 earnings were 0.92 USD per share. This result included a negative impact of 0.05 USD per share from currency translation; currency-neutral comparable earnings per share were 0.97 USD per share.

North America

Net sales posted by Kellogg North America were 2.3 billion USD in the second quarter, a reported decrease of 2.8 percent; currency-neutral comparable net sales decreased by 1.8 percent. The U.S. Morning Foods segment posted a currency-neutral comparable net sales decline of 2.3 percent, although trends in the cereal business continued to improve. Currency-neutral comparable net sales in the U.S. Snacks segment decreased by 1.8 percent. The U.S. Specialty Channels segment posted a 1.2 percent decline in currency-neutral comparable net sales in the quarter. The North America Other segment, which is composed of the U.S. Frozen Foods, Kashi, and Canadian businesses, posted a 1.3 percent decrease in currency-neutral comparable net sales. Reported operating profit in North America decreased by 2.5 percent; currency-neutral comparable operating profit declined by 12.7 percent, due to lower sales, higher distribution costs, costs associated with the timing of production, and the resetting of incentive compensation.

International

Reported net sales decreased by 15.3 percent in Europe in the quarter. Currency-neutral comparable net sales decreased by 2.5 percent; the Pringles business posted good rates of growth. In Latin America, reported net sales increased by 2.5 percent; currency-neutral comparable net sales increased by 14.5 percent, including good rates of growth across much of the region. Reported net sales in Asia Pacific decreased by 5.2 percent; currency-neutral comparable net sales increased by 6.8 percent due to strong growth in the Asian businesses.

Interest and Tax

Kellogg’s interest expense was 58 million USD in the second quarter. The comparable effective tax rate* in the second quarter of 2015 was 26.9 percent, lower than last year due to tax-planning initiatives.

Cash flow

Cash flow,* a non-GAAP measure defined as cash from operating activities less capital expenditures, was 323 million USD for the first half of the year. The year-over-year change was due to earnings results, core working capital changes, and increased cash costs associated with Project K. The company continues to expect that cash flow for the full year will be approximately 1.0 billion USD.

Kellogg Reaffirms Full-Year Currency-Neutral Comparable 2015 Guidance

The company reaffirmed previous guidance for currency-neutral comparable net sales, operating profit, and earnings per share in 2015; the company also reaffirmed guidance for full-year cash flow. Currency-neutral comparable net sales are expected to remain approximately unchanged year-over-year. Kellogg expects full-year 2015 currency-neutral comparable operating profit to decrease at a rate between two and four percent. Full-year 2015 currency-neutral comparable earnings per share are anticipated to be in a range between two percent lower and approximately unchanged. The estimates for currency-neutral comparable operating profit and currency-neutral comparable earnings per share include a negative impact of between three and four percentage points from the re-basing of incentive compensation for 2015. Guidance for both operating profit and earnings per share excludes the impact of mark-to-market adjustments, 2014’s 53rd week, integration costs, costs related to Project K, acquisitions, dispositions, foreign-currency translation, remeasurement of the Venezuelan business, and other items that could affect comparability. Cash flow is expected to be approximately 1.0 billion USD, which includes the impact of the cash required by Project K.

In addition, Kellogg Company announced that due to continued strong productivity, progress with Project K and zero-based budgeting, and the year-over-year sales momentum seen in 2015, it expects that it will achieve its long-term targets for currency-neutral comparable net sales and operating profit growth in 2016.

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