Ronald L. Dissinger, CFO, reported that Q3 net sales had decreased modestly, but this was offset by an increased operating profit, driven by savings from company initiatives like Project K and Zero-Based Budgeting as well as by price increases in Venezuela.
“We should see our operating margin exceed 15% in 2016, putting us well on the path toward our goal of increasing our margin,” he said.
Kellogg’s Q3 2016 GAAP (or "reported") earnings per share were up 41% from the prior-year quarter, while non-GAAP, currency-neutral comparable earnings increased by nearly 18% year-on-year.
“Our third quarter earnings exceeded our expectations,” said John Bryant, Kellogg’s chairman and CEO. "Our sales were affected by trade-inventory reductions in US cereal, a challenging UK market, and portfolio transformations that have taken longer than anticipated to execute.”
However, he said that the company did realize growth in sectors like US Snacks, and every region posted operating-profit margin expansion. Expanding Pringles worldwide, for example, was a priority for this year, and Q3 reflected good growth.
“Most importantly, we continued to make progress against priorities that will enable improved performance in Q4 and in 2017,” said Bryant.
“We continue to believe we have the right plans to bring sales at least to flat in 2017, and enough productivity initiatives to drive us well on our way to a 350 basis point improvement goal we have set for 2015 to 2018 on a currency-neutral comparable basis, excluding Venezuela,” added Dissinger.
With 2015 sales of more than $13bn, Kellogg is the world’s leading cereal company and the second largest producer of cookies and crackers.
Project K and Zero-Based Budgeting
Another key priority was increasing earnings visibility through big productivity and savings initiatives, which Bryant believes is starting to show results.
“We're shifting our brand-building to higher ROI brands and investments and we're starting to turn around our price realization,” he said. This was most evident in North America, where gross profit margin improved year-on-year.
Dissinger also reported that year-to-date cash flow through Q3 was more than 10% higher than that of the year-ago period.
“We're still on track to deliver our targeted $1.1bn of full-year operating cash flow after capital spending. And full-year capital spending should come in at the low end of our previous guidance range of $525m to $625m, reflecting greater efficiency and prioritization of projects,” he said.
“So good progress is being made, even if our top-line has not yet reflected it,” concluded Bryant.