Q4 2017 earnings

Kellogg reports ‘good finish to 2017’, boosted by RXBar

By Gill Hyslop contact

- Last updated on GMT

Kellogg Company reported a good finish to FY2017, exceeding analyst expectations. Pic: ©GettyImages/anton5146
Kellogg Company reported a good finish to FY2017, exceeding analyst expectations. Pic: ©GettyImages/anton5146

Related tags: Kellogg company, John harvey kellogg, Will keith kellogg

Kellogg Company has reported its net sales increased nearly 4% YOY for the quarter ended December 30, driven in part by the acquisition of protein bar maker RXBAR.

The Battle Creek, Michigan-based company also noted “productivity savings accelerated with the closing of the Direct to Store Delivery (DSD) system in US Snacks”.

A statement from the company reported a 3.6% year on year increase in net sales to $3.21bn for the quarter ended December 30, exceeding analysts’ estimates of estimate of $3.08bn.

According to Steve Cahillane, Kellogg Company’s CEO, the increase was due to productivity initiatives that boosted profit margins, including the acquisitions of RXBAR in October 2017 and Parati in December 2016, as well as the decision to move its entire snacks segment in North America from a Direct Store Delivery (DSD) system to a warehouse scheme in February 2017.

The company reported net income for the period was $428m – or $1.23 per share – compared to a net loss of $53m (15 cents per share) a year earlier as a result of the deconsolidation costs of its Venezuelan unit.

Reinvesting in core brands

Following a soft first half, "we’re pleased to report a good finish to an important year,”​ said Steve Cahillane, who took over from John Bryant as Kellogg Company’s CEO in September last year.

“Our transition out of Direct Store Delivery in US Snacks freed up resources that we are reinvesting behind our brands.”

He added the acquisition of RXBar gave the company a new foothold into the health and wellness arena, while the integration of Parati tripled Kellogg’s presence in Brazil.

“There is so much we can do with this new growth platform,”​ Cahillane noted of RXBar.

Building presence in emerging markets

“We continued to expand our emerging markets scale and presence, [including] the investment in rapid growth for our joint ventures in Africa and China; and the expansion of Pringles across the globe.

“We continued to stabilize our core developed international cereal markets, and we completed the acquisition of RXBAR, a new growth platform for us in health and wellness.”

Sales from Kellogg’s North America unit that comprises frozen foods, nutritious foods unit Kashi, and RXBAR, rose more than 9% to $412m.

Conversely sales at Kellogg’ US morning foods declined.

Coaxing cereal growth

The Corn Flakes maker’s cereals business has suffered for several years now, as fewer Americans eat breakfast cereals, opting for foods with lower sugar.

 “What was the disappointing was that the cereal category did not improve on its year-to-date decline rate in Q4,”​ he said, adding its going to take exciting food news centered around health benefits and taste to grow this category, such as the company’s launch of Special K with probiotics in December last year.

“So that’s where our focus is.

Highlights

  • Net sales down 0.7% to $12.92bn for FY 2017
  • Operating profit rose 39.5% to $1.95bn for FY 2017
  • Revenue was $3.21bn in Q4 compared to $3.10bn in Q4 2016.
  • EPS was $0.96 in Q4 versus $0.91 in the same period last year.

“We know we can stabilize this business, we did it in 2016 and we did it this year in our other core developed cereal markets.

“We expect to see Morning Foods operating profit way down by increased commercial investment in 2018, but with gradually improving sales performance,”​ he said.

For 2018, Kellogg expects net sales to remain unchanged year-over-year. Adjusted earnings are forecast to increase 9% to 11%, with the recent US tax reform contributing five to six percentage points of growth.

Analysts comment

Andrew Lazar, senior analyst of Packaged Food at Barclays commented Kellogg’s operating profit growth outlook for 2018 is not “overly aggressive and should provide flexibility for the company to reinvest behind its broader turnaround initiative. We also are curious about the broader three year outlook on sales and margin under [the company’s] new CEO.”

Pablo Zuanic, an analyst at US investment and trading firm Susquehanna International Group added: “Guidance for FY18 is mostly in line with our estimates (consensus had not adjusted for foreign exchange). Kellogg is one of the most discounted food stocks we cover, so the optionality comes from a hypothetical turnaround under the new CEO.”

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