Financial results

Kellogg’s Q2 net profit driven by RXBar and Mulitpro acquisitions

By Douglas Yu contact

- Last updated on GMT

Pic: Kellogg
Pic: Kellogg
The Chicago-based star brand RXBar, led by Peter Rahal, has once again driven growth for Kellogg during its latest quarter, even though the company reported a 0.4% drop in overall organic net sales in Q2 to $3.16bn.

CEO Steven Cahillane noted, however, the sales decline was only temporary as Kellogg is still recovering from its transition out of direct store delivery (DSD) model in the US. He added he remained positive for the company’s rest-of-the-year outlook.

“If you exclude the mechanical impact of our DSD exit, we delivered a fourth consecutive quarter of organic net sales growth,”​ said Cahillane.

Kellogg’s currency-neutral Q2 net sales, on the other hand, increased by 6.3% to $3.37bn, while its half-year organic net sales grew by 0.1%, reaching $6.43bn.

In addition to RXBar, which Kellogg acquired last year for $600m, Kellogg’s recent consolidation of its West African distributor Mulitpro also helped lift the company’s Q2 performance, according to Fareed Khan, Kellogg’s CFO.

“Two businesses contributed almost seven points of growth,”​ said Khan.

He added Kellogg’s operating profit margin decreased by 0.3% year-over-year in Q2, “reflecting a strong double-digit investment in brand building.”

Bringing RXBar abroad and local acquisition opportunities

Cahillane said RXBar’s consumption was up triple digits during the quarter, which makes it the fastest-growth brand in the category.

“It’s a very strong brand. In terms of measured Nielsen share, it’s gone up substantially, more than doubling year-over-year,”​ he said, adding the competitive snack environment is likely to generate many “me-too’s.

It’s always though as a marketer to come up and copy something and get the same level of authenticity… [However,] we are seeing that happen. We are not seeing any that are gaining traction right now, but we are far from complacent,”​ said Cahillane.

He noted RXBar has started several initiatives around innovation: “The kids line, which is out now; the nut butter line, which is just launching.

“In the back half of this year and early next year, you’ll see us introduce it in European markets and in Canada,” ​added Cahillane.

The Kellogg executive also used the RXBar acquisition as an example when asked why the company did not make a bid for Tyrrells, which Hershey divested earlier, to strengthen its potato chips portfolio as its Pringles faces more competition abroad.

“We think about our M&A strategy historically… and it’s a build versus a buy type of thing,”​ noted Cahillane.

“RXBar in the US filled a white space for us… but if we see opportunities that can add shareholder value in the developing markets, we will clearly look at them – probably more snacks-led in the US, more kind of wholesome-led, health and wellness-led in developing markets.”

Core cereal brands stabilize category sales

Cahillane said Kellogg has slowed down the cereal market’s downward trend with its core brands.

The company’s US morning foods sector posted a 3.2% decline in organic net sales, reaching $643m in Q2.

“Our share of the cereal category stabilized with our six core brands collectively resuming share growth in the quarter,”​ said Cahillane.

“The cereal category has cut its declines in half from last year, but history shows that it needs more and better health and wellness innovation, and communication to get back into growth.

“Our cereal trends continue on an improved track from last year. Key to this has been the stabilization of our UK cereal business, which gained share again in Q2,”​ he added.

Wholesome snacks growth

On the snacks side, Kellogg saw an 8.6% organic sales decline due to its transition out of the DSD system. However, Cahillane noted the segment has increased its volume growth.

He said: “Pringles sustained its strong growth in Q2, led by our core flavors and immediate consumption pack formats. In wholesome snacks, we recorded another quarter of double-digit consumption growth, led by Rice Krispies Treats… In crackers, we moved into year-on-year consumption growth, led by Cheez-It. And we are seeing improvement in cookies performance as well.”

Kellogg expects its full-year 2018 sales to grow by 4% to 5%, with RXBar and Mulitpro accounting for four to six percentage points of its growth.

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