Kellogg to rebuild in year ahead

by Monica Watrous
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BATTLE CREEK, MICH. — After selling less cereal and snacks to U.S. consumers last year, and suffering a fourth-quarter loss, executives of the Kellogg Co. cautioned of continued sluggish sales growth ahead.

Net income for the year ended Jan. 3 tumbled to $633 million, equal to $1.76 per share on the common stock, which amounted to a 65% decline from $1,807 million, or $4.98 per share, for fiscal 2013. Net sales for the year dipped 1.4% to $14,580 million from $14,792 million the year before.

For the fourth quarter, Kellogg recorded a loss of $293 million, which compared with net income of $819 million in the prior-year quarter. Net sales for the quarter rose 0.3% to $3,514 million, which compared with $3,501 million in the year-ago period.

In trading Feb. 12 on the New York Stock Exchange after the financial results were announced, Kellogg’s share price opened at $62.87, down 5% from the previous close and ended trading at for the day $63.30. Daily trading volume surged to 5,478,800 shares from 1,272,700 the day before.

“After a disappointing 2014, we are building a platform for growth over the coming year,” said John Bryant, chairman and chief executive officer, during a Feb. 12 earnings call with financial analysts. “As we look to the long-term health of the business, it's critically important that we set realistic financial goals.”

Kellogg reported a 64% decrease in full-year operating profit, which included impacts from the effect of mark-to-market adjustments and costs associated with the Project K efficiency program. The company sustained an operating loss of $422 million for the quarter, which included a non-cash mark-to-market adjustment of $822 million, primarily driven by the impact of changes in interest rates on pension plans.

Net sales for the Kellogg North America segment decreased 2.2% for the year but rose 2.3% for the quarter. The U.S. Morning Foods segment reported a 5.7% drop in comparable net sales for full year and a 7.7% decline for the quarter.

“2014 was clearly a disappointing year for us in Morning Foods, but we're taking the right actions to improve the performance of the business over time,” Mr. Bryant said. “We expect that sales in the U.S. cereal business will be down in 2015, but that trends will show a real improvement over those we saw in 2014.”

Kellogg is launching new Special K cereals, including gluten-free and added-protein varieties, and evolving the Kashi brand with certified organic and non-bioengineered/non-G.M.O. products.

“We expect that these actions will have a positive impact on the performance of the Special K and Kashi brands, and on the cereal business as a whole,” Mr. Bryant said. “However, our plan for investment is a long-term one, and the levels, content, and effectiveness of the support, we evolve and increase over time.”

Consumption of Pop-Tarts declined in the quarter, lapping comparisons to strong performance last year, but the brand gained share in the quarter and full year.

“(We) launched a new variety of peanut butter and jelly flavored Pop-Tarts during the quarter, and we expect this to improve results in 2015,” Mr. Bryant said.

U.S. Snacks posted a 2.4% decline in comparable net sales for the year and a 3.1% drop during the quarter.

“As we saw last quarter and in other categories around the world, the decline in sales was largely due to consumer trends away from weight management brands,” Mr. Bryant said.
“Sales in the cracker business were lower in the quarter, although sales in share were approximately unchanged for the full year.”

Cheez-It, Club and Townhouse brands gained share in the quarter, but performance was offset by declines in the Special K cracker chip business.

“As a result, we're addressing this by relaunching Special K cracker chips with better taste profiles, improved packaging, and with new positioning,” Mr. Bryant said.

Kellogg’s share in the cookie category decreased in the quarter as a result of continued declines in the Right Bites 100 Calorie Pack business.

“This was also the result of the trends in weight management and accounted for half of that total decline in share,” Mr. Bryant said. “However, we are migrating consumers to an expanded line of single-serve products, which should help to reduce the impact of the decline in Right Bites in 2015.”

Consumption of Kellogg’s wholesome snack products declined in the quarter, but trends improved for Nutri-Grain and Rice Krispies Treats as a result of core growth and innovation. Dragging on the business were Special K bars and FiberPlus bars. Pringles posted mid-single-digit comparable net sales growth for the year.

“As we expected, our U.S. snacks business continued to face challenges in the fourth quarter,” Mr. Bryant said. “As with the cereal business, we anticipate that improvement will take time. However, we have identified the issues which were set on our weight management brands, and we're beginning the investment necessary to stabilize this business and return it to growth. We're taking the actions now that will start to drive improvement in the future.”

Comparable net sales for the U.S. Specialty Channels business decreased 1.4% for the year and 1% for the quarter.

“Total net sales in the convenience business increased at a high single-digit rate in the quarter, partially as a result of introduction of new products,” Mr. Bryant said.

The North America Other segment, which includes Kellogg’s U.S. frozen foods and Canadian business, had a comparable net sales decline of 1.8% for the year and a comparable net sales growth of 1.3% for the quarter. Consumption of Eggo waffles is improving with the launches of gluten-free and thick and fluffy varieties.

“Finally, for the frozen foods business, we have new Special K products scheduled for launch in April, and we've also seen good results from our Morningstar Farms Roasted Garlic and Quinoa Burger, which is non-G.M.O. and made with organic ingredients,” Mr. Bryant said. “So, we've got a lot of activity planned for this year, and we expect this business to return to growth in 2015.”

Comparable net sales in the Latin America business grew 3.9% for the year and 7.2% for the quarter.

In Europe, comparable net sales declined 0.7% for the year and 1.2% for the quarter.

“In the fourth quarter, the developed cereal business in Europe continues to face challenges similar to the ones we've seen in the U.S.,” Mr. Bryant said. “We ran brand building activities in the second half of 2014, and we've got more new products and brand building launching in the first quarter of 2015.”

The Asia Pacific business reported a 0.7% decline for the year and a 1.2% drop in comparable net sales for the quarter.

Executives said Project K remained on track in 2014 and is beginning to provide flexibility to reinvest in the business.

“We've made significant improvements to our food in order to meet the rapidly changing views of consumers, regarding health and wellness,” Mr. Bryant said. “This includes new foods in new packaging, and the reformulation of many of our existing foods. So 2015 is a rebuilding year for us. It's an opportunity to invest in great food and ideas, and to build a solid platform for long-term growth.”

For 2015, management expects comparable net sales to remain approximately unchanged year-over-year with comparable operating profit to decrease 2% to 4%, including the negative impact from rebasing of incentive compensation. Full-year currency-neutral comparable earnings per share are projected to be between 2% lower and flat. Guidance excludes the impact of mark-to-market adjustments, an additional week in 2014, integration costs, expenses related to Project K, acquisitions and dispositions, and foreign currency translation. Executives expect to generate cash flow of approximately $1 billion, including cash required by Project K.

The company has changed its long-term financial targets and now expects 1% to 3% comparable annual revenue growth, down from 3% to 4%. Kellogg’s targets of 4% to 6% annual comparable operating profit growth and 7% to 9% annual, currency-neutral comparable earnings per share growth remain unchanged.

“We are seeing improvement from where we were,” Mr. Bryant said. “And we have confidence that we can get these businesses back to growth, not high growth, but back to modest, at the low end of the low-single-digit range type growth.”
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