Kellogg Company News
For release: April 22, 2004
Analyst /Media John P. Renwick, CFA (269) 961-6365
Contacts: Simon D. Burton, CFA (269) 961-6636
KELLOGG ANNOUNCES OUTSTANDING GROWTH IN FIRST QUARTER
BATTLE CREEK, Mich. - Kellogg Company (NYSE: K) today reported better-
than-expected first-quarter 2004 earnings, which were 34% higher than the
year-ago period on the strength of 11% sales growth. The strong start prompted
Kellogg earlier this month to raise its earnings expectations for the full year,
despite ongoing commodity-cost inflation and the Company's decision to incur
increased asset write-offs and up-front costs related to additional
cost-reduction projects.
Reported net earnings for the quarter were $219.8 million, or $0.53 per
diluted share, a 34% increase from last year's $163.9 million, or $0.40 per
share. This performance was principally attributable to sales growth momentum
across the Company, a result of brand-building investment, successful product
innovation, and solid execution.
"This truly was an outstanding quarter in every respect," said Carlos
Gutierrez, Kellogg's chairman and chief executive officer. "Our sales growth was
exceptional and broad-based. We overcame substantially higher commodity and
benefits costs, and we reinvested for the future by boosting our brand building
and absorbing expenses related to cost-reduction projects. And through it all,
we were able to significantly exceed our original forecasts for earnings and
cash flow."
Reported net sales in the quarter increased by 11% to $2.4 billion.
Internal net sales growth, which excludes foreign-currency translation, was
6.5%, the Company's highest internal growth rate in five years.
Kellogg North America reported net sales growth of 6%, or 5% excluding
the impact of foreign currency. The segment's retail cereal sales rose 4% in
local currencies, as new products and effective consumer promotions drove
category share gains in both the U.S. and Canada. Retail snacks posted local-
currenncy sales growth of 6% in North America, led by new products in the U.S.
and Canada. The North America Frozen & Alternative Channels businesses
collectively posted local-currency sales growth of 4%, driven by gains by the
Eggo and Morningstar Farms brands and the foodservice channel.
Kellogg International reported net sales growth of 24% in the quarter,
or 10% in local currencies. In Latin America, sales were up 17% on a
local-currency basis, driven by strong growth in both cereal and snacks in
Mexico. Europe's local-currency sales growth was 7%, led by cereal and snacks
growth in the U.K. Sales in the Asia Pacific region were up 11% in local
currencies, with notable gains in Japan and Australia.
Operating profit was $420 million in the quarter, a 21% increase over
the year-ago period. Higher net sales, a favorable product mix, and productivity
savings more than offset the impact of increased raw materials prices and a
double-digit increase in brand-building investment. Net earnings growth was
augmented by the effect of lower interest expense and a modestly reduced
effective tax rate.
Cash flow, defined as cash from operating activities less capital
expenditures, was $211 million in the quarter, exceeding the year-earlier
quarter by 33 percent.
Kellogg Reaffirms 2004 Outlook
Kellogg reiterated its EPS outlook for 2004. Earlier this month, the
Company raised its full-year 2004 earnings-per-share guidance to $2.07-2.11,
from a previous range of $2.05-2.09. This revised guidance represents growth of
8-10%, or modestly above the Company's long-term target of high single-digit
growth. Underscoring the quality of these expected earnings, Kellogg also
announced that this range now includes a higher estimate for up-front costs and
write-offs related to capacity rationalizations and cost-reduction initiatives.
Whereas these costs and write-offs were previously projected to be $0.05 per
share, they are now expected to amount to $0.10-0.12 per share.
Mr. Gutierrez concluded, "By getting off to such a strong start, we now
have a front-loaded earnings forecast for the year, one that should give
investors confidence in our ability to post another year of dependable growth.
This is particularly gratifying given the enormous cost pressures we face in the
form of commodities and benefits costs. Meanwhile, our plans call for continued
reinvestment in brand building and cost-savings initiatives, which should allow
us to sustain our momentum beyond 2004."
About Kellogg Company
With 2003 sales of nearly $9 billion, Kellogg Company is the world's
leading producer of cereal and a leading producer of convenience foods,
including cookies, crackers, toaster pastries, cereal bars, frozen waffles and
meat alternatives. The Company's brands include Kellogg's, Keebler, Pop-Tarts,
Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Austin, Morningstar Farms,
Famous Amos, Carr's, Plantation, Ready Crust, and Kashi. Kellogg products are
manufactured in 17 countries and marketed in more than 180 countries around the
world. For more information, visit Kellogg's web site at
http://www.kelloggcompany.com.
Forward-Looking Statements Disclosure
This news release contains forward-looking statements related to
business performance, sales, brand building, costs and write-offs, cost savings,
operating profit, earnings and growth. Actual performance may differ materially
from these statements due to factors related to the substantial amount of
indebtedness incurred to finance the Keebler Foods acquisition (which could,
among other things, hinder the Company's ability to adjust rapidly, make the
Company more vulnerable to a downturn, and place the Company at a competitive
disadvantage to less-leveraged companies); competitive conditions and their
impact; the effectiveness of advertising, pricing and promotional spending; the
success of productivity improvements and business transitions; the success of
innovation and new product introductions; the recoverability of the carrying
value of goodwill and other intangibles; the availability of and interest rates
on short-term financing; commodity and energy prices and labor costs; actual
market performance of benefit plan trust investments; the levels of spending on
systems initiatives, properties, business opportunities, integration of acquired
businesses; changes in consumer behavior and preferences; U.S. and foreign
economic factors such as interest rates, statutory tax rates, and foreign
currency conversions or unavailability; legal and regulatory factors; business
disruption or other losses from terrorist acts or political unrest; and other
factors.
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF EARNINGS
(millions, except per share data)
================================================================================================================
Quarter ended Quarter ended
March 27, March 29,
(Results are unaudited) 2004 2003
================================================================================================================
Net sales $2,390.5 $2,147.5
Cost of goods sold 1,355.5 1,231.1
Selling and administrative expense 614.8 569.0
-------------------------------------------------
Operating profit 420.2 347.4
Interest expense 78.2 92.0
Other income (expense), net (1.3) 0.7
-------------------------------------------------
Earnings before income taxes 340.7 256.1
Income taxes 120.9 92.2
-------------------------------------------------
Net earnings $219.8 $163.9
=================================================
Net earnings per share:
Basic $.54 $.40
Diluted $.53 $.40
Dividends per share $.2525 $.2525
=================================================
Average shares outstanding:
Basic 410.8 407.7
=================================================
Diluted 414.4 409.3
=================================================
Actual shares outstanding at period end 411.0 406.3
=================================================
Kellogg Company and Subsidiaries
SELECTED OPERATING SEGMENT DATA
(millions)
================================================================================================
Quarter ended Quarter ended
March 27, March 29,
(Results are unaudited) 2004 2003 (a)
================================================================================================
Net sales
North America $1,598.3 $1,509.7
Europe 491.2 394.5
Latin America 168.3 144.7
Asia Pacific (b) 132.7 98.6
-------------------------------------------------
Consolidated $2,390.5 $2,147.5
=================================================
- ------------------------------------------------------------------------------------------------
Operating profit
North America $288.7 $259.0
Europe 82.4 58.3
Latin America 46.2 39.7
Asia Pacific (b) 25.8 16.9
Corporate (22.9) (26.5)
-------------------------------------------------
Consolidated $420.2 $347.4
=================================================
================================================================================================
<FN>
(a) 2003 results were restated to conform to 2004 operating segment
presentation as follows:
1) U.S. and Canadian results combined into North America, 2) certain
U.S. export operations reclassified from U.S. to Latin America, and 3)
certain SGA expenditures reallocated between Corporate and North America.
(b) Includes Australia and Asia.
</FN>
Kellogg Company and Subsidiaries
CONSOLIDATED STATEMENT OF CASH FLOWS
(millions)
=====================================================================================================================
Year-to-date Year-to-date
period ended period ended
March 27, March 29,
(unaudited) 2004 2003
=====================================================================================================================
Operating activities
Net earnings $219.8 $163.9
Adjustments to reconcile net earnings to
operating cash flows:
Depreciation and amortization 85.5 85.7
Deferred income taxes 7.2 13.4
Other 28.4 28.0
Postretirement benefit plan contributions (110.3) (46.8)
Changes in operating assets and liabilities 23.0 (55.9)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 253.6 188.3
- ---------------------------------------------------------------------------------------------------------------------
Investing activities
Additions to properties (42.2) (29.9)
Dispositions of businesses - 14.3
Other 0.4 1.2
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (41.8) (14.4)
- ---------------------------------------------------------------------------------------------------------------------
Financing activities
Net issuances (reductions) of notes payable 448.1 10.5
Reductions of long-term debt (502.1) -
Net issuances of common stock 87.7 14.7
Common stock repurchases (82.2) (62.0)
Cash dividends (104.0) (102.9)
Other 0.0 2.4
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (152.5) (137.3)
- ---------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (4.4) (0.4)
- ---------------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 54.9 36.2
Cash and cash equivalents at beginning of period 141.2 100.6
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $196.1 $136.8
=====================================================================================================================
=====================================================================================================================
Supplemental Financial Data:
Cash Flow (operating cash flow less property additions)* $211.4 $158.4
=====================================================================================================================
<FN>
* We use this non-GAAP measure of cash flow to focus management and investors
on the amount of cash available for debt reduction, dividend distributions,
acquisition opportunities, and share repurchase.
</FN>
Kellogg Company and Subsidiaries
CONSOLIDATED BALANCE SHEET*
===========================================================================================================================
(millions, except per share data) March 27, December 27,
2004 2003
(unaudited) *
===========================================================================================================================
Current assets
Cash and cash equivalents $196.1 $141.2
Accounts receivable, net 873.8 754.8
Inventories:
Raw materials and supplies 191.0 185.3
Finished goods and materials in process 433.7 464.5
Other current assets 278.2 242.1
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 1,972.8 1,787.9
Property, net of accumulated depreciation
of $3,511.2 and $3,439.3 2,735.8 2,780.2
Goodwill 3,098.3 3,098.4
Other intangibles, net of accumulated amortization
of $35.8 and $35.1 2,033.7 2,034.4
Other assets 464.3 441.8
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $10,304.9 $10,142.7
===========================================================================================================================
Current liabilities
Current maturities of long-term debt $78.7 $578.1
Notes payable 769.0 320.8
Accounts payable 710.7 703.8
Accrued advertising and promotion 381.1 323.1
Other current liabilities 886.2 840.2
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,825.7 2,766.0
Long-term debt 4,263.4 4,265.4
Deferred income taxes 1,063.4 1,062.8
Pension benefits 160.0 165.3
Nonpension postretirement benefits 285.7 291.0
Other liabilities 134.7 149.0
Shareholders' equity
Common stock, $.25 par value 103.8 103.8
Capital in excess of par value 1.0 24.5
Retained earnings 2,363.4 2,247.7
Treasury stock, at cost (164.4) (203.6)
Accumulated other comprehensive income (loss) (731.8) (729.2)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,572.0 1,443.2
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,304.9 $10,142.7
===========================================================================================================================
<FN>
* Condensed from audited financial statements.
</FN>