BATTLE CREEK, MICH. — The Kellogg Co.’s top executive listed three drivers responsible for sales slipping 4.1% in the first quarter ended April 1. The biggest driver was a lower consumption trend across all U.S. categories, which affected virtually every packaged food company, said John A. Bryant, chairman and chief executive officer.
|John A. Bryant, chairman and c.e.o.
“This was the continuation of long-term trends, exacerbated by some transitory issues, such as holiday timing and delays in tax refunds,” he said in a May 4 earnings call. “In our business, we saw the worst of it in January, moderating but still soft in February, and then in March and April, showing signs of returning to the run rates we saw in Q4 and full-year 2016 adjusted for Easter timing. Shipments, too, seemed to normalize in March and April.”
An expected reduction in trade inventory, another driver, was due to early shipments in the fourth quarter in the United States and the timing of shipments related to distributor transitions in some international markets.
“We should be largely past these impacts,” Mr. Bryant said.
Customer-specific interruptions in the first quarter, the third driver, mostly was related to Kellogg making price-pack changes to Pringles to cover input costs, product reformulations and currency.
“These negotiations have been resolved, though the impact could linger a bit into Q2 as we ramp back up normal orders and promotional activity in these accounts,” Mr. Bryant said.
Net sales of $3,254 million in the first quarter were down from $3,395 million in the previous year’s first quarter. Net income of $262 million, or 75c per share on the common stock, was up 50% from $175 million, or 50c per share, in the previous year’s first quarter. Earnings increased because of year-ago interest costs related to a bond tender and a lower tax rate. Higher up-front costs related to the Project K restructuring program and adverse currency translation partially offset the earnings increase.
“Even despite this disappointing top line, we still managed to grow currency-neutral profit and earnings,” Mr. Bryant said of the first quarter. “Project K and zero-based budgeting continued to deliver savings as planned, and we generated positive price/mix. We expect margin expansion to continue. This is what gives us confidence that we remain on track to deliver on our profit, earnings and cash flow guidance.
“Meanwhile, we are confident that our top-line performance will improve in coming quarters. We’re past some of the discrete factors that affected shipments in Q1. We’re already seeing signs of improvement in consumption trends, and we have stronger commercial plans.”
The Kellogg Co. forecast a decline in currency-neutral comparable net sales of about 3% in 2017, which compared with a previous forecast of a 2% decline.
Kellogg is transitioning to a warehouse model from direct-store delivery in its U.S. Snacks segment. Kellogg already uses the warehouse model for Pringles and the rest of its North American business.
“Simply put, there’ll be some overlap between the reinvestment in our warehouse and brand building and the cost of operating D.S.D. during the Q2 and Q3 transition period,” said Fareed A. Kahn, chief financial officer and senior vice-president for The Kellogg Co. “This is because we can’t eliminate D.S.D. cost until we have the bulk of our customers transitioned into the warehouse model, and by and large, those savings will come in Q4.”
U.S. Snacks and U.S. Morning Foods both saw optimistic signs despite first-quarter sales declines. Net sales of $719 million in U.S. Morning Foods were down 6.3%. Consumption trends improved in March, however, and Kellogg plans to launch products under its Special K and Frosted Mini-Wheats brands in the second quarter. Net sales of $781 million in U.S. Snacks were down 6.1%, but Kellogg gained share in crackers.
The U.S. Specialty Channels segment had net sales of $395 million, up 5.1%.
“Our Specialty Channels business in Q1 delivered a seventh consecutive quarter of sales and profit growth even against a tough year-ago comparison,” said Paul T. Norman, senior vice-president of Kellogg and president of Kellogg North America. “The net sales growth was delivered through equal parts of volume and price mix, and via market expansion in core channels, as well as expansion in emerging growth channels, all of which was aided by innovation.”
The North America Other segment had net sales of $393 million, down 5.1%. Soft category-wide consumption for the frozen foods category in January and February, trade-inventory reductions for Kashi, and price elasticity impact in Canada all affected North America Other negatively.
North America net sales in total were $2,288 million, down 4.2%.Net sales for Kellogg Europe were down 14% to $512 million, but net sales increased 16% to $222 million in Latin America and 7.3% to $232 million for Asia Pacific. The December 2016 acquisition of the Parati Group, a Brazilian food group, drove the sales increase in Latin America.