Milling & Baking News - November 8, 2016 - 24

Financial Results X

Kellogg working 'behind the
scenes' for better 2017 results
BATTLE CREEK, MICH. - Kellogg
Co. delivered mixed results in the
recent quarter, with earnings and profit
margin expansion ahead of expectations
tempered by a disappointing top-line
performance. Net income in the third
quarter ended Oct. 1 was $292 million,
equal to 83c per share on the common
stock, which was up from $205
million, or 58c per share, in the
prior-year period. Net sales were
$3,254 million, down 2.2% from
$3,329 million.
While earnings benefited from
a lower tax rate and planned
savings from productivity, Project
K and zero-based budgeting
initiatives, sales were negatively
affected
by
trade-inventory
reductions in U.S. cereal, a
challenging market in the
United Kingdom, and portfolio
transformations in the company's
frozen and Kashi businesses
that have taken longer than
anticipated to execute.
"But we do see growth and sequential
improvement in many parts of our
business," said John Bryant, chairman
and chief executive officer, during a Nov.
1 earnings call with financial analysts.
"Behind the numbers there's great
progress being made, not only against
our strategy as represented by our 2020
growth plan, but also against the key
business priorities we laid out for you one
year ago at our Day at K investor event."
Those priorities in North America have
included stabilizing cereal, revitalizing
snacks, transforming the Kashi and
frozen food businesses, and driving
fuel for growth. The latter refers to
expansion in gross margin and currencyneutral operating profit margin through
Project K network restructuring and
shared services model and zero-based
budgeting.
During the third quarter, Kellogg North
America net sales declined, but operating
profit increased on the strength of cost
savings through Project K and zero-based
budgeting.
"Stabilizing our cereal business was
our priority; while the category has held
at a 1% rate of decline, this is significantly
better than in recent years," said Paul
Norman, president of Kellogg North
America. "We have invested in food. We
have prioritized investment behind our
core brands, and we have gained share as
a result. We are particularly pleased with
how we stabilized Special K."
24 / November 8, 2016 XMilling & Baking News

In snacks, year-to-date consumption
has grown for Cheez-It, Club and Town
House crackers, Rice Krispies Treats and
Pringles, with double-digit growth in onthe-go offerings.
"Frozen and Kashi are still works in
progress," Mr. Norman said. "Much of
the heavy lifting has been done, with

packaging overhauls now largely behind
us in frozen, and Kashi's transformation
of its portfolio already is contributing to
stabilization in cereal. We have plans to
stabilize our other Kashi categories, too."
In the third quarter, U.S. Morning
Foods operating profit increased 6%,
while net sales declined 4%.
To deliver sequential improvement
in net sales and strong operating profit
margin expansion in the U.S. Morning
Foods segment next year, Kellogg is
investing in on-trend food, with a
focus on its top brands, leveraging
new capabilities to win in store, and
boosting margins through productivity
and revenue growth management.
Forthcoming
innovation
includes
limited-edition Dunkin' Donuts inspired
Pop-Tarts in vanilla latte and chocolate
mocha flavors, Kellogg's Cinnamon
Frosted Flakes cereal and Special K
Nourish crispy granola with quinoa.
The U.S. Snacks segment operating
profit advanced 12%, and sales were flat
in the third quarter, as Special K bars
and cracker chips dragged on segment
performance.
"For snacks, our goal next year is to
return to top-line growth, while further
improving our margins," Mr. Norman
said. "Deanie Elsner (president, Snacks)
and her team will continue to drive the
agenda they began this year, focusing
behind our core brands like Cheez-It,
Pringles, and Rice Krispies Treats."

Launching next year are Special
K Protein Bites, Cheez-It Sandwich
Crackers and Pringles Loud corn chips
in such flavors as spicy queso and cheesy
Italian.
"In the first quarter, we will be executing
a comprehensive restage of Special K
Bars behind new food, packaging, and
communication and bringing significant
renovation and innovation to NutriGrain, also," Mr. Norman said.
Third-quarter operating profit in the
North America Other segment,
which includes U.S. frozen foods,
Canada and Kashi, fell 13%, and
net sales declined 6%, due to the
volume impact of price increases
in Canada and continued impacts
of portfolio rationalization and
food and packaging transitions.
"We thought these transitions
would be fully behind us by Q3,
but they are taking longer than
we had expected," Mr. Norman
said. "In frozen, we recorded
good profit margin expansion,
but (we are) disappointed on
the top line. Eggo posted sales
growth, with particular success
in the quarter, behind the Disney
licensed products, but this was more than
offset by the impacted distribution lost on
MorningStar Farms, as we transitioned
over the past few quarters to new
packaging.
"At Kashi, we are encouraged by the
stabilization we are seeing in cereal share in
measured channels as well as the plus 5%
growth in the natural channel."
Mr. Norman said wholesome snacks
have been a greater drag than anticipated.
The company expects to see a return
to top-line growth in the North America
Other segment next year, in part driven
by such new products as Kashi Chewy
Nut Butter Bars and Eggo waffles without
artificial colors and flavors.
"There has been a ton of work behind the
scenes this year in Kellogg North America,
all aimed at getting our portfolio more
on-trend, enhancing our capabilities and
execution, and improving profitability," Mr.
Norman said. "While our top-line growth
hasn't consistently reflected these efforts yet,
it is coming, and we are seeing sequential
improvement to go with impressive margin
expansion. We are making definitive
progress toward the 400 to 450 basis points
of operating margin improvement we are
targeting through 2018."
Overall, year-to-date net income at
Kellogg Co. was $747 million, equal to
$2.13 per share, up from $655 million, or
$1.85 per share, in the comparable period.
Net sales were $9,917 million, down 4.5%
from $10,383 million. MBN
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Milling & Baking News - November 8, 2016

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