BATTLE CREEK, MICH. — Kellogg Co. “remained on plan” during the third quarter, as the company’s reshaped portfolio continued to perform as expected. Optimism was voiced by the company’s top executive against a backdrop of financial results that were adversely affected by the divestiture of the company’s cookies, fruit snacks, pie crusts and ice cream cone businesses, which occurred in July.
“We once again delivered good growth in emerging markets where we’ve built up scale and diversified our offerings,” Steven A. Cahillane, president and chief executive officer, said during an Oct. 29 conference call with analysts. “We once again grew in developed markets snacks, thanks to revitalized brands, effective innovation and on-the-go pack formats. And we delivered growth in developed markets frozen foods led by innovation and marketing that has driven a particularly exciting acceleration for MorningStar Farms veggie foods. This portfolio should give you confidence in our ability to sustain steady top-line growth even as we work to stabilize developed markets cereal, particularly in the United States.”
Net income in the third quarter ended Sept. 28 totaled $247 million, equal to 73c per share on the common stock, down 35% from $380 million, or $1.10 per share, in the same period a year ago.
Operating profit in the quarter fell 34% to $263 million, down from $396 million a year ago. Adjusted operating profit, meanwhile, was $444 million, down 6% from $471 million primarily due to the absence of divested businesses’ results, as well as unfavorable currency translation.
Net sales fell 2.8% to $3,372 million from $3,469 million.
In North America in the third quarter, Kellogg posted operating profit of $208 million, down 37% from the same period a year ago, and net sales of $2,059 million, down 6% from $2,188 million. Organic net sales were up narrowly featuring price realization and sustained consumption growth in five of six major categories.
“For a second straight quarter, we were able to grow organic net sales in this region in spite of a soft period for cereal,” Mr. Cahillane said. “This speaks to the composition of our portfolio and the growth momentum we are seeing in our big snacks and frozen brands. It also speaks to the behind-the-scenes work we have been doing. We have changed our organizational design for better visibility and more holistic resource allocation. We have invested in capabilities such as revenue growth management and digital marketing. Our innovation launches and pipeline are the best we’ve had in years.”
In snacks, third-quarter sales fell 7.6%. The segment was the hardest hit by Kellogg’s divestiture during the quarter. Despite the decline, Mr. Cahillane said Pringles continued to grow consumption, led by on-the-go pack expansion and the new Wavy innovation platform. Snacks also benefited from double-digit consumption growth in Cheez-It and its successful Snap’d innovation platform.
In cereal, third-quarter sales fell 5% from the previous year, primarily reflecting category softness and only a gradual return to brand-building activity following a pack-size harmonization in the first half of the year.
“Candidly, cereal has taken a little longer than anticipated to bounce back after we pulled back investment in the first half to execute our pack-size harmonization program,” Mr. Cahillane said. “Our promotional activity, as measured by the percentage of units sold on promotion in the scanner data, didn’t climb all the way back to year-ago levels yet, and we also delayed some advertising activity, in part, to enable us to activate additional capacity for certain products. Where we have most returned to normal brand activity is in the Taste/Fun segment, which underwent its pack harmonization back in Q1. This quarter, our Taste/Fun segment brands collectively grew consumption and share.
“Greater consumer activation behind Frosted Flakes and its Mission Tiger program resulted in share growth for that key brand. We’re seeing a good recovery in Honey Smacks with new reformulated food. And we’re supporting better performance for brands like Froot Loops, Krave and new Pop-Tarts Cereal. It is in the health and wellness in all family segments, which underwent pack harmonization in Q2, that we did not restore activity as quickly as we had planned in quarter three, and we’re also seeing the impact of eliminating certain underperforming s.k.u.s (stock-keeping units).
“In recent weeks, we are encouraged to see positive reaction to new advertising campaigns for both Special K and Mini-Wheats. We’ve also reaccelerated growth in the Bear Naked granola brand and continued to grow Corn Flakes consumption and share. We expect gradual improvement in Q4 and into 2020. We are not where we need to be yet in North America cereal, but we’re on it.”
Frozen sales in North America increased 0.5% in the third quarter, led by innovation, increasing consumer awareness of plant-based meat alternatives, and effective commercial programs for MorningStar Farms veggie foods.
“So much has been made lately of the emerging ready-to-cook or refrigerated meat alternatives segment, and there is no question that this segment has terrific momentum and growth prospects,” Mr. Cahillane said. “In fact, we are extremely excited about our new launch Incogmeato in Q1 2020.
“But we’re also excited about the momentum and prospects in the frozen aisle, and not just in burgers but in all meat alternative types. One of our advantages is that we have a very complete portfolio. In Q3, for instance, MorningStar Farms grew consumption by 20% in poultry alternatives, almost 6% in breakfast meat alternatives and more than 30% in hot dog alternatives. We even grew 2% in frozen burger alternatives, the segment that has seen the most competition from new refrigerated entries.”
Kellogg made no changes to its financial guidance for the fiscal year. The company expects net sales growth of about 1% to 2% on a currency-neutral basis. Meanwhile, organic net sales growth is still forecast to be 1% to 2% as well. Guidance on adjusted operating profit is expected to be in the negative 4% to negative 5% range on a currency-neutral basis. Kellogg said currency-neutral adjusted earnings per share is now expected to be at the favorable end of its previous guidance range of negative 10% to negative 11%.
Kellogg companywide in the first nine months posted net income of $815 million, or $2.39 per share, down 43% from $1,420 million, or $4.10 per share, in the same time of the previous year. Net sales of $10,355 million were up 1% from $10,230 million.