Kellogg income inches up in year, raises '07 outlook

by Eric Schroeder
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BATTLE CREEK, MICH. — Net income of The Kellogg Co. in the year ended Dec. 30 totaled $1,004.1 million, equal to $2.53 per share on the common stock, up 2% from $980.4 million, or $2.38 per share, in fiscal 2005. The gain came despite higher fuel, energy, commodity and benefit costs that weighed on results.

Net sales for the full year were $10,906.7 million, up 7% from $10,177.2 million in 2005.

"In 2006, our company posted another year of strong, above-target rates of growth," said David Mackay, chief executive officer. "We managed this while continuing to invest in future growth and while absorbing another year of significant cost inflation."

For the fourth quarter, net income eased 5% to $182.4 million from $192.4 million in the same period a year ago. Net sales in the fourth quarter were $2,583.9 million, up 8% from $2,394.3 million.

Kellogg North America sales rose 8% in 2006, and 7% in the fourth quarter. Internal sales also increased by 8% in 2006, which built on strong growth of 8% in 2005; internal sales growth in the fourth quarter was 6%. The company posted its seventh consecutive year of U.S. ready-to-eat cereal category share gains, which resulted in North America Retail Cereal posting strong internal sales growth of 3% in 2006. However, North America Retail Cereal internal sales fell 2% in the fourth quarter after increasing by 8% in the fourth quarter of fiscal 2005.

North America Retail Snacks sales growth was 11% in 2006 and 12% in the fourth quarter.

The Frozen and Specialty Channels businesses posted sales growth of 8% for the full year and for the fourth quarter. The Eggo business posted high single-digit sales growth in 2006 after posting double-digit growth in each of the previous two years. The Specialty Channels businesses posted high single-digit internal sales growth for the full year and the fourth quarter, Kellogg said.

Operating profit in the North America segment was $1,340.5 million in fiscal 2006, up 7% from $1,251.5 million in fiscal 2005. For the fourth quarter, operating profit rose 18% to $319.4 million.

Kellogg International sales rose 6% in 2006, boosted in part by growth of 11% in the fourth quarter. Internal sales growth was 5% for the full year, building on 4% growth in 2005. Internal sales growth in the fourth quarter was 6%. Outside the U.S., the company increased its category share in many of the regions in which it competes.

Net sales in Latin America grew 9% in 2006, building on 11% growth last year. Internal growth in the fourth quarter was 7%, building on exceptional growth of 14% in the fourth quarter of fiscal 2005. Kellogg said full-year growth was driven by mid single-digit sales growth in the Mexican market and double-digit internal sales growth in various other parts of the region.

Operating profit in Latin America was $220.1 million for the full year, up 9% from $86 million in fiscal 2005. At $42.6 million, fourth-quarter operating profit was unchanged from the same period a year ago.

Kellogg said its European business posted sales growth of 5% for the full year, its best result in 10 years. In the fourth quarter, internal sales grew 6% behind innovation and effective brand- building programs. In the U.K., the region’s largest business, sales of both cereal and snacks increased at a mid single-digit rate in the full year.

Full-year operating profit in Europe was $334.1 million, up 1% from fiscal 2005. The narrow gain came despite a 31% drop in operating profit during the fourth quarter of fiscal 2006.

Sales growth was virtually unchanged in the Asia Pacific business for the full year but up 1% in the fourth quarter, as competitive environment in the snacks business in Australia weighed on results.

Operating profit in Asia Pacific was $76.9 million for the full year, down 11% from $86 million in fiscal 2005. For the fourth quarter, though, profit rose 18% to $15.4 million.

Gross margin for the full year of 2006 was maintained at 44.2%, 70 basis points lower than in 2005.

Overall, Kellogg’s operating profit increased by 1% in 2006 to $1,765.8 million. For the fourth quarter, operating profit was $344.5 million, virtually unchanged from $344.3 million in the same period a year ago.

In 2006, cash flow, defined as cash from operating activities less capital expenditures, was $957 million. Kellogg, which repurchased $664 million of its stock in 2005, repurchased $650 million in 2006.

Looking ahead, Kellogg said it now expects full-year 2007 earnings per share to fall within a range of $2.68 to 2.73, up from the $2.67 to $2.72 per share it projected in October. This includes estimates for significant commodity cost inflation and continued investment in brand building and innovation. The company said full-year internal sales growth could be 4%, which would be slightly higher than its long-term targets.

"We faced a difficult cost environment in 2006 and still achieved another year of results that met, or even exceeded, our targets," Mr. Mackay said. "Equally as important, though, is that we achieved these results while making significant investment in the business, and in future growth. This again demonstrates the flexibility of our approach to business and the dedication of our employees around the world. We will face more inflation in 2007, but we remain confident that we have the right strategy, operating principles, and business model. It is our continued focus and strong execution, driven by the strength of our organization, that give us confidence that we will deliver dependable rates of growth in 2007, and beyond."

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