Fiscal '09 earnings up 6% at Kellogg

by Eric Schroeder
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BATTLE CREEK, MICH. — Net income at The Kellogg Co. in the year ended Jan. 2 was $1,212 million, equal to $3.17 per share on the common stock, up 6% from $1,148 million, or $3.01 per share, in fiscal 2008.

Net sales were $12,575 million, down 2% from $12,822 million.

The stronger earnings came despite a weaker fourth quarter, in which net income fell 2% as a result of higher ingredient costs and one less reportable week compared with the same period of fiscal 2008. Earnings in the fourth quarter totaled $176 million, or 46c per share, down from $179 million, or 47c per share. Sales in the fourth quarter eased to $2,900 million from $2,933 million.

“We continued our momentum in 2009, delivering another year of growth despite facing one of the most challenging economic environments in decades,” said David Mackay, chief executive officer. “We maintained our focus on building and strengthening our core business, while successfully completing the first year of our three-year billion dollar plus cost reduction challenge.”

Kellogg North America operating profit in fiscal 2009 was $1,569 million, up 8% from $1,447 million in fiscal 2008. Sales were $8,510 million, up from $8,457 million.

In a Feb. 4 conference call with analysts, John Bryant, executive vice-president and chief operating officer, described fiscal 2009 as “a particularly strong year” for both retail cereal and snacks, while noting weakness in frozen and food service.

“Ready-to-eat cereal continues to be a strong category responding well to brand building, nutrition, and innovation,” Mr. Bryant said. “Cereal is also a great value, and we are seeing growth in all of our core markets around the world. By our estimate, the ready-to-eat cereal category in the U.S. grew around 2% to 3% for the quarter, and approximately 3% for the full year. Our category share increased approximately 20 to 40 basis points for the quarter, and 10 to 20 basis points for the year.”

Mr. Bryant said Kellogg continues to drive growth and support for its top eight brands plus Kashi, which on a combined basis grew more than 7% in the quarter and even more for the full year.

“Our North American ready-to-eat cereal business delivered a healthy 4% internal net sales growth for the full year and was up 6% for the quarter driven by double-digit increase in advertising,” he said. “In addition to the growth in our (large) brands, there are two other factors that impacted our North America cereal shipments in the fourth quarter.

“Firstly, as we have mentioned before, we continue to manage the tail of our portfolio, exiting On-the-Go and Straws because performance was not meeting expectations.

Secondly, we did build our trade inventories at the end of the quarter in preparation for January events. We believe about 2% of our fourth-quarter North America cereal shipments was due to trade inventory.

“Our innovation and renovation pipeline is solid. Froot Loops and Apple Jacks with Fiber hit store shelves in August. Frosted Mini-Wheats Little Bites Original Flavor, Special K Granola and Cinnabon Cereal will be introduced in the first quarter. Kashi is also introducing GOLEAN Crisp! and two new Bear Naked granolas.”
Looking at the North America snacks business, Mr. Bryant said Kellogg posted a full year internal net sales increase of 3%.

“Our Pop-Tarts brand is performing well, delivering mid-single-digit internal net sales growth for the year,” he said. “Crackers grew mid-single-digits for the year driven by another strong year from Cheez-Its. In the first quarter, we are launching two new s.k.u.s of Wheatables Nut Crisps and two new s.k.u.s of Cheez-Its.

Cookies posted a slight gain for the year, driven by the Fudge Shoppe and Mother’s brand. We saw some softness in the fourth quarter due to heavy promotional activity and ranging.

“Within snacks, our best performing category was wholesome snacks, which grew double-digit for the year and achieved strong share gains. The introduction of Fiber Plus, Special K Chocolatey Pretzel and Cinnabon Bars helped drive Wholesome snack growth for the year.”

Turning to the frozen and specialty channels business, Mr. Bryant said Kellogg experienced a tough year.

“The negative trends in the food service industry and the Eggo supply disruption contributed to a 13% decline in the quarter to finish the year down 1%,” he said. “A combination of a flood and extensive enhancements and repairs at our Eggo facilities significantly impacted production in the second half of the year. While all of our plants are operational we have not been able to achieve previous capacity levels so demand continues to exceed supply. We are evaluating our inventory plans and working hard to increase capacity. However, as a result of the supply disruption the impact on the top line will continue through the first half of 2010 and the estimated impact is included in our 2010 guidance.”

Kellogg Europe operating profit was $1348 million, down 11% from $390 million in fiscal 2008. Sales were $2,361 million, down 10%.

Kellogg Latin America operating profit was $179 million, down 14% from $209 million. Sales were $963 million, down 7%.

Kellogg Asia Pacific operating profit was $86 million, down 7% from $92 million. Sales were $741 million, up 3%.

The company raised its earnings guidance for 2010 to growth of 11% to 13%, on a currency neutral basis, up from 10% to 12%. The company also reaffirmed its 2% to 3% internal net sales growth guidance, as well as its 2010 internal operating profit growth guidance in the high single-digit range.

“We enter 2010 with confidence in hitting our growth expectations, driving solid top-line growth, investing in our brands as well as implementing further cost-savings initiatives throughout our three-year billion dollar plus cost savings challenge,” Mr. Mackay said. “With excellent financial visibility, we remain confident in our ability to deliver long-term sustainable, dependable performance.”

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