Kellogg Company reports solid results, reaffirms full year guidance
Kellogg Company (NYSE:K) today announced solid results that were in-line with the company’s expectations. First quarter 2013 reported net sales increased by 12.2 percent to $3.9 billion. Internal net sales*, which exclude the effects of foreign currency translation, acquisitions, dispositions, and integration costs, rose by 2.2 percent over the same period. First quarter 2013 operating profit was $503 million, a reported decrease of 4.5 percent; underlying internal operating profit*, which excludes the effects of foreign currency translation, acquisitions, dispositions, mark-to-market accounting, and integration costs, decreased by 5.8 percent. As expected, the decline in underlying internal operating profit* was largely due to the recognition of considerable cost-of-goods-sold inflation in the quarter. Results in the first quarter included a majority of the inflation, net of cost savings, that the company expects to recognize for the full year.
Reported earnings for the first quarter 2013 were $311 million, or $0.85 per diluted share, a decline of 13 percent from the $0.98 per diluted share reported in the first quarter of last year. Comparable first quarter 2013 earnings*, which exclude the impact of mark-to-market accounting and integration costs associated with the acquisition of Pringles, were $0.99 per share, in-line with the company’s expectations. This result included a negative impact of $0.03 per share from the Venezuelan devaluation.
“Results in the first quarter were broadly as we expected, and we’re pleased to have a solid start to the year,” said John Bryant, Kellogg Company’s president and chief executive officer. “We saw good comparable revenue growth in many regions around the world and the Pringles business continued to post strong results. As a result, we’re also pleased to report that we’re on-track to meet our guidance for the full-year.”
* Internal sales growth, underlying internal operating profit growth, underlying internal operating profit, and comparable earnings are all non-GAAP financial measures. See the tables herein for important information regarding these measures and a full reconciliation to the most comparable GAAP measure.
Kellogg North America net sales were $2.6 billion in the first quarter, a reported increase of 8.1 percent; internal net sales increased by 1.7 percent. The U.S. Morning Foods segment posted internal net sales growth of 1.6 percent. Internal net sales in the U.S. Snacks segment declined by 1.7 percent. The U.S. Specialty Channels segment posted 3.4 percent internal net sales growth in the quarter and the North America Other segment, which is comprised of the U.S. Frozen Foods and Canadian businesses, achieved 7.4 percent internal sales growth. Reported operating profit in North America increased by 1.2 percent; internal operating profit declined by 3.5 percent, largely as the result of the cost-of-goods-sold inflation.
Reported net sales increased by 28.7 percent in Europe in the quarter; internal net sales increased by 2.6 percent, primarily as the result of good growth in the United Kingdom. In Latin America, reported net sales increased by 13.7 percent and internal net sales increased by 7.4 percent. Reported net sales in Asia Pacific increased by 14.7 percent and internal net sales increased by 0.3 percent, although consumption increased at a faster rate.
Interest and Tax
Kellogg’s interest expense was $60 million in the first quarter. The company recognized a one-time, pre-tax benefit of $26 million in the first quarter of 2012 as the result of hedging activities associated with the acquisition of the Pringles business; this accounted for a majority of the year-over-year increase in interest expense. The reported effective tax rate in the first quarter of 2013 was 28.4 percent.
Cash flow, a non-GAAP measure, defined as cash from operating activities less capital expenditures, was $236 million for the quarter. This was lower than the $277 million posted in the first quarter of 2012; the decline was the result of differences in the timing of capital expenditures. Cash flow for the year is still anticipated to be in a range between $1.1 and $1.2 billion.
Kellogg repurchased $44 million of shares during the first quarter, less than option proceeds of $259 million.
Full-Year 2013 Guidance
The company reaffirmed its guidance for full-year reported net sales growth of approximately seven percent. Earnings per share growth, excluding the impact of mark-to-market accounting, is still expected to be between five and seven percent. Integration costs associated with the acquisition of the Pringles business are still expected to be in a range between $0.12 and $0.14 per share. As a result, earnings excluding the impact of mark-to-market accounting and integration costs are still anticipated to be between $3.82 and $3.91 per share.
Share Repurchase Authorization
The company also announced that the Board of Directors approved a share repurchase authorization of $1 billion, which expires in April of 2014. This authorization supersedes the existing authorization and is intended to allow the company to repurchase shares to offset the impact of proceeds from the exercise of options through the end of 2013, and to begin the company’s 2014 purchase plan