Kellogg bullish on full-year prospects

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Related tags: Cent, Profit, United states dollar, Kellogg

Kellogg, the cereal and snacks maker, has raised its full-year
profit forecast after an excellent third quarter performance which
saw both sales and profits rise significantly. The gains came as a
result of new product launches, brand promotions and increased
advertising spend.

A good third quarter performance in both sales and profits has prompted breakfast cereal maker Kellogg​ to raise its full-year earnings estimates.

The company said that sales of $2.28 billion during the quarter, up 4.5 per cent excluding currency gains and perimeter changes, had helped drive up net profits by 13.7 per cent to $231.3 million during the quarter.

As a result, Kellogg said it expected to see earnings per share of $1.89-1.91 for the year as a whole, up from its original estimate of $1.88-1.90. Kellogg also gave preliminary estimates for 2004, forecasting earnings per share of $2.05-2.09, in line with its ongoing target of high single-digit growth.

The company said that the third quarter performance was all the more welcome as the profits had come after the impact of significant investments in its brands and of additional costs related to productivity initiatives designed to improve the business further in 2004.

Carlos Gutierrez, Kellogg's CEO, said that the quarter had been marked by strong sales growth in almost every product segment and region. In the core US market, for example, a decline in cookie sales was more than offset by strong gains in the cereals sector, with an 11 per cent increase during the three-month period driven by new products, more effective advertising and a number of promotional offers.

"Despite growth in wholesome snacks and crackers, our US snacks business posted an internal sales decline of 4 per cent as a result of continued weak cookie sales, the elimination of numerous products and the discontinuation of a major custom-manufacturing account,"​ said Gutierrez. "All other US businesses collectively posted 3 per cent internal net sales growth in the quarter, led by Pop-Tarts toaster pastries."

Outside the US, sales were ahead 15 per cent in dollar terms or nearly 7 per cent in local currency terms, mainly as a result of the continued development of the Volume to Value strategy which focused on brand building and innovation, and drove an improvement in mix.

The company's European business posted currency-adjusted sales growth of almost 4 per cent to $451.3 million after the region's biggest market, the UK, saw strong sales growth and share gains as a result of marketing initiatives and new product introductions.

Elsewhere in Europe, there were good performances in France, Spain, and Italy.

In Latin America, Kellogg's sales growth was around 10 per cent, or almost 17 per cent on a currency-neutral basis, with sales reaching $176.1 million during the three months. This was led by significant internal sales growth in the Mexican business, where both the cereal and snacks segments were very strong.

The other segment of Kellogg International - Australia, Canada and Asia - collectively posted local-currency sales growth of approximately 5 per cent, while dollar sales were 19 per cent higher at $211.9 million for the quarter.

Driven by the increase in sales, operating profit in the quarter grew by nearly 4 per cent to $431 million, Kellogg said, although gross margins were impacted by the effect of asset write-offs and other costs related to capacity rationalisation and productivity initiatives.

Operating profits from the US businesses were 2.9 per cent higher at $290.7 million, while European gains were $86.8 million, up 13 per cent on the previous year's third quarter. Latin American operating profits were flat at $44.8 million, while the remaining businesses showed a 39 per cent hike to $38.6 million.

Meanwhile, an improvement in product mix and productivity savings more than offset the effect of higher commodity, energy, and benefits costs, and softened the impact of increased advertising and promotional expenditure.

"Key to sustaining our top- and bottom-line growth is improving our underlying profitability and reinvesting in our brands,"​ said Gutierrez. "During the third quarter, our profitability was strong enough that we could invest significantly in brand building, absorb up-front costs related to productivity initiatives, and still post solid earnings growth."

Cash flow also improved significantly, rising 3 per cent to $470 million in the quarter, a good performance given the 26 per cent gain posted in the third quarter of last year.

Related topics: Kellogg, Markets

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