Kellogg Company News
For release: October 25, 2004
Media/Analyst Contact: Simon D. Burton, CFA (269) 961-6636
KELLOGG EXCEEDS EXPECTATIONS AND RAISES GUIDANCE
BATTLE CREEK, Mich. - Kellogg Company (NYSE: K) today reported third
quarter earnings growth driven by increased sales, investment, and effective
execution. The Company raised its earnings guidance for the full year of 2004
due to these strong results and continued business momentum.
Reported net earnings for the quarter increased by 7% to $247.0 million
from $231.3 million in the comparable period of last year. Diluted earnings per
share were $0.59, an increase of 5% from last year's $0.56 per share. Reported
net earnings for the first nine months of the year increased by 18% to $704.2
million, or $1.69 per share, compared to $599.1 million last year, or $1.46 per
share. Earnings per share growth during the first nine months of 2004 was 16
percent.
"We are very pleased with our strong results in the third quarter and
the first nine months of the year. We are especially pleased that we could
generate strong sales and earnings growth while continuing to make significant
investments in our business," said Carlos Gutierrez, Kellogg's chairman and
chief executive officer. "It is this investment, and our business momentum, that
helps to provide visibility for the remainder of the year and into 2005."
Net sales in the third quarter increased by 7.2%, to $2.45 billion.
Excluding the effect of currency translation, Kellogg's internal sales growth
was 4.8 percent. This internal growth rate built on very strong 4.5% growth
posted during the third quarter of last year.
Kellogg North America's internal net sales growth was approximately 5%
in the third quarter and for the first nine months of the year. The third
quarter's growth builds on growth of 3% in the comparable period of last year.
North America Retail Cereal posted an increase in internal sales of 1%, which
builds on very strong 10% growth in the third quarter of 2003. This growth
resulted from the introduction of new products throughout the year and
successful brand-building programs. The North America Retail Snacks business
also had another good quarter, posting internal sales growth of 9 percent.
Cookies, Crackers, Wholesome Snacks, and Toaster Pastries all reported increased
sales despite some weak category trends. The wholesome snacks business again
benefited from the introduction of various varieties of fruit snacks, and
Pop-Tarts achieved an 84% share of the toaster pastries category in measured
channels. The North America Frozen and Specialty Channels business posted
internal net sales growth of 6% as Eggo, Morningstar Farms and the Food Away
From Home businesses all contributed strong sales gains.
Kellogg International reported net sales growth of approximately 10%,
or 4% excluding the effect of currency translation. Each of our geographic
segments continues to implement and execute the Company's Volume to Value
strategy through significant investment in innovation and brand building. The
European business posted currency-adjusted sales growth of approximately 2% in
the third quarter and 4% for the year-to-date period. The pan-European snacks
business posted good growth as a result of various successful new product
introductions and continued investment in brand building. Sales growth in the
U.K., the region's largest market, was somewhat limited by the timing of
promotional campaigns and product introductions. The Company reported sales
growth of 6% in Latin America, or approximately 11% on a currency-neutral basis.
The Company's Mexican business, which is the area's largest, reported strong
growth in both its cereal and snacks businesses. The Asia Pacific business
posted flat local-currency sales in the third quarter and 1% growth for the
first three quarters of the year.
"Each of our North American cereal, snacks, frozen and specialty
channels, and Kellogg International businesses posted excellent results,"
commented Mr. Gutierrez. "They are all implementing our strategy and it is
reflected in this growth."
Operating profit in the third quarter increased by approximately 6% to
$457 million; operating profit for the year-to-date period has increased by 10
percent. The Company's gross profit margin in the third quarter increased by 80
basis points, despite increased reinvestment in cost-reduction initiatives. In
addition, gross margin was also pressured by high commodity costs. The Company
offset these headwinds through improvements in mix, productivity savings, and
operating leverage.
"Our goal is sustainable, long-term growth, and investment in Volume to
Value is an essential component of this," said Mr. Gutierrez. "We have continued
our significant investment in brand building and innovation throughout this year
and have continued to absorb the costs associated with cost-reduction
initiatives. It is gratifying that we can make this investment in the future and
still report such strong results."
Cash flow, defined as cash from operating activities less capital
expenditure, was $472 million in the third quarter; the full-year and third
quarter totals are approximately equal to last year's results. However, the
Company has contributed approximately $80 million more to benefit plans this
year than it had at this point in 2003. Core working capital measured as a
percentage of rolling twelve-month sales improved for the thirteenth consecutive
quarter. Year-to-date, the Company has paid down $272 million of debt.
Mr. Gutierrez said, "Each of our employees is focused on cash flow
generation and understands their contribution. Through our Manage For Cash
strategy we are becoming more efficient generators of cash flow, which is
dramatically increasing our financial flexibility."
Kellogg Raises 2004 Guidance and Previews 2005
Kellogg raised its guidance for full-year 2004 earnings per share to
$2.11-2.13, from its previous range of $2.07-2.11, due to strong business
momentum and excellent year-to-date results. In the fourth quarter, the Company
expects low single-digit sales growth and net earnings lower than last year,
solely due to significant reinvestment in cost-saving initiatives, a dramatic
increase in brand-building activity, and a much higher tax rate than in the
fourth quarter of 2003.
Kellogg also gave preliminary guidance for earnings per share in 2005
of $2.28-2.32; this range is in line with the Company's long-term target of high
single-digit growth. The Company expects to post low single-digit net sales
growth, before the effects of currency translation and the one fewer shipping
week in the fourth quarter. In keeping with its Volume to Value strategy, the
Company expects to increase investment in brand building and innovation again in
2005.
Mr. Gutierrez concluded, "We constantly strive to meet our goal of
long-term sustainable growth and we continue to execute our strategy and invest
in the future. It is a testament to our 25,000 employees worldwide that we can
report such strong results while laying the foundation for future growth."
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, costs, strategy, investment, 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)
====================================================================================================================================
Year-to-date Year-to-date
Quarter ended Quarter ended period ended period ended
Sept. 25, Sept. 27, Sept. 25, Sept. 27,
(Results are unaudited) 2004 2003 2004 2003
====================================================================================================================================
Net sales $2,445.3 $2,281.6 $7,223.1 $6,676.5
Cost of goods sold 1,319.1 1,247.6 3,981.7 3,710.8
Selling and administrative expense 669.4 603.2 1,926.0 1,773.4
------------------------------------------ -----------------------------------------
Operating profit 456.8 430.8 1,315.4 1,192.3
Interest expense 76.2 87.0 230.5 268.5
Other income (expense), net (3.5) 7.6 (9.8) 2.2
------------------------------------------ -----------------------------------------
Earnings before income taxes 377.1 351.4 1,075.1 926.0
Income taxes 130.1 120.1 370.9 326.9
------------------------------------------ -----------------------------------------
Net earnings $247.0 $231.3 $704.2 $599.1
========================================== =========================================
Net earnings per share:
Basic $.60 $.57 $1.71 $1.47
Diluted $.59 $.56 $1.69 $1.46
Dividends per share $.2525 $.2525 $.7575 $.7575
========================================== =========================================
Average shares outstanding:
Basic 412.4 408.3 411.7 407.6
========================================== =========================================
Diluted 416.7 410.9 415.8 410.0
========================================== =========================================
Actual shares outstanding at period end 412.6 408.2
=========================================
====================================================================================================================================
Kellogg Company and Subsidiaries
SELECTED OPERATING SEGMENT DATA
(millions)
================================================================================================================================
Year-to-date Year-to-date
Quarter ended Quarter ended period period
Sept. 25, Sept. 27, Sept. 25, Sept. 27,
(Results are unaudited) 2004 2003 (a) 2004 2003 (a)
================================================================================================================================
Net sales
North America $1,610.3 $1,525.6 $4,776.1 $4,533.4
Europe 510.5 451.1 1,517.7 1,308.5
Latin America 192.9 181.5 547.1 497.0
Asia Pacific (b) 131.6 123.4 382.2 337.6
------------------------------------------------- ----------------------------------------
Consolidated $2,455.3 $2,281.6 $7,223.1 $6,676.5
================================================= ========================================
- --------------------------------------------------------------------------------------------------------------------------------
Segment operating profit
North America $317.4 $312.8 $906.4 $856.1
Europe 97.1 86.8 275.5 227.6
Latin America 54.2 44.8 150.5 131.3
Asia Pacific (b) 19.4 16.8 62.2 54.0
Corporate (31.3) (30.4) (79.2) (76.7)
------------------------------------------------- ----------------------------------------
Consolidated $456.8 $430.8 $1,315.4 $1,192.3
================================================= ========================================
====================================================================================================================================
<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
Sept. 25, Sept. 27,
(unaudited) 2004 2003
=================================================================================================================
Operating activities
Net earnings $704.2 $599.1
Adjustments to reconcile net earnings to
operating cash flows:
Depreciation and amortization 293.5 272.0
Deferred income taxes 7.6 57.5
Other 96.7 59.9
Postretirement benefit plan contributions (140.7) (59.9)
Changes in operating assets and liabilities 67.8 54.4
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,029.1 983.0
- -----------------------------------------------------------------------------------------------------------------
Investing activities
Additions to properties (169.5) (121.2)
Dispositions of businesses - 14.0
Other 1.0 8.3
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (168.5) (98.9)
- -----------------------------------------------------------------------------------------------------------------
Financing activities
Net issuances of notes payable 223.9 (135.0)
Issuances of long-term debt 7.0 498.1
Reductions of long-term debt (503.0) (710.9)
Net issuances of common stock 242.0 80.4
Common stock repurchases (229.3) (76.3)
Cash dividends (313.1) (308.8)
Other (2.7) -
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (575.2) (652.5)
- -----------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (3.6) 9.7
- -----------------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 281.8 241.3
Cash and cash equivalents at beginning of period 141.2 100.6
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $423.0 $341.9
=================================================================================================================
=================================================================================================================
Supplemental Financial Data:
Cash Flow (operating cash flow less property additions)* $859.6 $861.8
=================================================================================================================
<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) Sept. 25, December 27,
2004 2003
(unaudited) *
==========================================================================================================================
Current assets
Cash and cash equivalents $423.0 $141.2
Accounts receivable, net 920.6 754.8
Inventories:
Raw materials and supplies 192.7 185.3
Finished goods and materials in process 448.6 464.5
Other current assets 256.3 242.1
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 2,241.2 1,787.9
Property, net of accumulated depreciation
of $3,655.5 and $3,439.3 2,648.5 2,780.2
Goodwill 3,094.9 3,098.4
Other intangibles, net of accumulated amortization
of $36.7 and $35.1 2,024.5 2,034.4
Other assets 460.1 441.8
- --------------------------------------------------------------------------------------------------------------------------
Total assets $10,469.2 $10,142.7
==========================================================================================================================
Current liabilities
Current maturities of long-term debt $78.6 $578.1
Notes payable 544.7 320.8
Accounts payable 797.6 703.8
Accrued advertising and promotion 387.9 323.1
Other current liabilities 880.3 840.2
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,689.1 2,766.0
Long-term debt 4,271.0 4,265.4
Deferred income taxes 1,050.4 1,062.8
Pension benefits 176.0 165.3
Nonpension postretirement benefits 271.5 291.0
Other liabilities 139.9 149.0
Shareholders' equity
Common stock, $.25 par value 103.8 103.8
Capital in excess of par value - 24.5
Retained earnings 2,622.0 2,247.7
Treasury stock, at cost (115.7) (203.6)
Accumulated other comprehensive income (loss) (738.8) (729.2)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 1,871.3 1,443.2
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,469.2 $10,142.7
==========================================================================================================================
<FN>
* Condensed from audited financial statements.
</FN>