A priority for Kellogg Co. in the year ahead is to stabilize its snacks business, admittedly “an area of weakness” for the Battle Creek-based company, said John Bryant, chairman and chief executive officer.
“We’ve had a disappointing couple of years in U.S. Snacks,” Mr. Bryant said during a Feb. 10 earnings call with financial analysts. “We have had a headwind from Special K in snacks over the last couple of years. You’ve seen that come through in our cracker business, with Special K Cracker Chips; it has come too in our wholesome snacks business with Special K bars.
“The good news is where we have renovated those foods, similar to what we’ve done in cereal, we’re seeing the business stabilize.”
With a new leadership team in place, Kellogg is confident in returning the snacks business to modest top-line growth in 2016. The company noted sequential improvement in consumption in its crackers, cookies and wholesome snacks businesses in the recent quarter.
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“We have had strong growth in Cheez-It over the last several years,” Mr. Bryant said. “We’re seeing good growth in Pringles; we’re seeing good growth in Rice Krispy Treats and wholesome snacks. Our cookie business is stable over the last couple quarters, so actually we’ve seen better trends within the business.
“So as we go forward into 2016, we expect to return this business to top-line growth, although modest. And we absolutely expect to return the business to bottom-line growth.”
Kellogg’s snacks strategy includes product innovation, expanded distribution and stronger in-store execution. The company is set to debut new Nutri-Grain bars and a Special K Chewy Nut Bar in the year ahead.
“Our wholesome snacks piece is more about ensuring all of our foods are on trend,” Mr. Bryant said. “There is work that has been done there, we have done that work, we have seen better results and there’s still more to do.”
Meanwhile, Kellogg’s cereal business posted solid growth in the quarter, led by significant improvement in Special K consumption.
“This was driven primarily by changes to messaging and the renovation work we did last year on Red Berries,” Mr. Bryant said. “And the good growth we saw all year on Raisin Bran was the result of the introduction of Raisin Bran with cranberries, which should have good results for the entire franchise.”
The company credits strategic investments in brand building and product development for the boost in breakfast products.
“We’re going to continue to drive sales in 2016 with the introduction of new products like Special K Nourish… a cereal with positive nutrition and ingredients the consumer can see, and the food includes fruits, nuts and on-trend grains like quinoa,” Mr. Bryant said. “We have a range of new products launching in 2016; some are on-trend foods such as Special K Nourish and Harvest Delights Mini-Wheats. Some are fun additions, including Smorz, Disney Dory-themed cereal and Orange Crush Pop-Tarts.”
For the fiscal year ended Jan. 2, Kellogg net income was $614 million, equal to $1.74 per share on the common stock, down 3percent from $632 million, or $1.76, in the prior year. Net sales were $13,525 million, down 7percent from $14,580 million the year before. Full-year currency-neutral comparable earnings $3.81 per share, which was in line with the prior year, and currency-neutral net sales increased by 1.2percent.
For the fourth quarter, Kellogg recorded a loss of $41 million, which compared with a loss of $293 million in the fourth quarter of 2014. Adjusted comparable earnings were 79c per share, down 6percent from comparable e.p.s. in the fourth quarter of 2014, the company said.
Net sales for the quarter were $3,142 million, down nearly 11percent from year-ago sales of $3,514 million. Fourth-quarter currency-neutral comparable net sales increased by 4.2percent.
Within Kellogg North America, operating profit for the company’s U.S. Morning Foods business decreased 1percent for the year and increased 5percent for the quarter, while U.S. Snacks profit was down 5.8percent for the year and nearly 13percent for the quarter, and U.S. Specialty Channels profit declined 2.3percent for the year and gained 5.3percent for the quarter. Operating profit for North America Other, which includes Kashi, U.S. frozen and Canada, was down 40percent for the year and 45percent for the quarter.
The U.S. Morning Foods segment’s comparable sales declined 1.6 percent in the full year and increased 1.5percent in the fourth quarter, reflecting improving trends in the cereal business. Comparable sales for the U.S. Snacks segment declined 1.6 percent for the full year and 1.9percent for the quarter; however, consumption improved sequentially in each of the categories in the segment, the company said. The U.S. Specialty Channels business reported 0.7percent increase in sales for the year and a 1.5percent increase for the fourth quarter. Currency-neutral comparable net sales for the North America Other segment were down 3.2percent for the year and 2percent for the quarter, driven by a decline in trade inventory as a result of new packaging for MorningStar Farms, as well as continued weakness in the Kashi business.
Kellogg North America comparable net sales on a currency-neutral basis were down 1.6 percent for the year and 0.4percent for the quarter.
Within Kellogg’s International business, the Latin American segment achieved currency-neutral sales growth of 25 percent for the year and 45 percent for the fourth quarter, Europe reported a 0.6percent decline in currency-neutral sales for the year but a 1.6 percent increase for the quarter, and Asia Pacific saw currency-neutral sales advance 4percent for the year and 3.3percent for the quarter.
Kellogg reaffirmed its previous guidance for adjusted 2016 earnings per share growth of 6percent to 8percent, net sales growth of 1 percent to 3 percent, and operating profit growth of 4percent to 6percent, all on a currency-neutral basis. The company expects to generate a total of $200 million in savings in 2016 through its Project K and zero-based budgeting programs.
“The momentum we built in 2015 was the result of better innovation, better support, better execution and some of the visibility provided by our cost savings programs,” Mr. Bryant said. “We expect that this level of execution and the momentum to continue in 2016.”
Date: February 12, 2016