BATTLE CREEK, MICH. — The results of the Kellogg Co.’s Project K efficiency effort and the switch to zero-based budgeting (Z.B.B.) in North America drove the company’s earnings during the second quarter of fiscal 2016, ended July 2. The successful savings programs have given management breathing room as they strive to grow the businesses’ top line.
For the second quarter, net income at Kellogg was $280 million, equal to 80c per share on the common stock, up 26% from $223 million, or 63c per share, in the same period a year ago.
Sales for the quarter fell 6.6% to $3,268 million.
|Ron Dissinger, c.f.o. of Kellogg|
“So, when we started the year, we said we had about $100 million worth of Project K savings,” said Ron Dissinger, chief financial officer, during a conference call with financial analysts on Aug. 4 “We are still on track to deliver against that. And we said from a Z.B.B. savings standpoint, we expected about $100 million of Z.B.B. savings.
“We are now at a range of $150 million to $180 million worth of zero-based budgeting cost savings. So that has allowed us to cover sales coming down to the low end of the 0% to 2% range, and increase our operating profit guidance to the high end of the 4% to 6% range.”
As Kellogg reaps the benefits of its savings efforts, John Bryant, chairman and chief executive officer, said the company is executing against four priorities, including making investments in improving food and packaging. Examples of the effort include the conversion of the entire Kashi portfolio to non-G.M.O., frozen foods where new packaging was rolled out, and Special K, where the brand has been reframed away from weight management and toward promoting “inner strength.”
Despite the Special K transition, the brand remains challenged, said Deanie Elsner, president of U.S. Snacks for Kellogg.
|Deanie Elsner, president of U.S. Snacks for Kellogg|
“We have done a lot of work over the last year, renovating some of the Special K s.k.u.s, and launching on-trend foods like Special K Nourish Chewy Nut Bars,” she said. “And we are seeing positive results. Our Nourish bars are 80% incremental to the Special K bars line. And importantly, their velocities in Q2 were three times greater than the rest of the Special K bar portfolio. So when we get the food right, this brand can grow.
“The challenge is that there are food forms in this brand that are simply not as well-aligned to how our consumers are eating today. That is why in Q2, consumption for certain lines of Special K declined at a double-digit rate. Stabilizing Special K is mission-critical for us. In 2017, we will make a more aggressive portfolio change to the Special K brand, but we expect to continue experiencing some drag from Special K in the second half of 2016.”
A second priority is expanding the company’s Pringles business. Recent efforts include a tortilla platform and the introduction of more single-serve options.
Enhancing the company’s sales capabilities is its third priority.
|John Bryant, chairman and c.e.o. of Kellogg|
“We completed the reorganization of our D.S.D. selling and merchandising organization, which will offer improved effectiveness,” Mr. Bryant said. “We continued to expand distribution in high-frequency stores, particularly in emerging markets. This investment in execution will benefit us going forward.”
Finally, Mr. Bryant added that Kellogg’s effective productivity programs have given management greater earnings visibility.
“Not only did we record a higher operating profit margin in the quarter, we also made good progress launching and executing initiatives that will improve our margins for the rest of the year and beyond,” he said.
For the first six months of the year, Kellogg’s net income rose 1.3% to $455 million, or $1.29 per share. Sales for the period were $6,663 million, a decline of 5.5% compared to the year prior.