Kellogg Co. (K)

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Kellogg 1Q Net Up 1.3% On Cost Cutting, N America Sales

NEW YORK (Dow Jones)--Kellogg Co.'s (K) cost-saving measures helped the nation's largest cereal maker glide past earnings expectations despite headwinds from a peanut recall and challenges in its European retail negotiations. Kellogg's first-quarter net income edged up 1.3%, with strength in its North American sales countering weaker international revenue that was hit by a stronger dollar. In an interview, Chief Executive David Mackay said the difficulties arose with the European retailers as the company raised prices and had been in the process of negotiating promotions and other programs for the year as it typically does. Those issues have been resolved through "discussion and negotiation," he said, although he didn't provide details or the names of the retailers. Kellogg lost some shelf space in the short term, Mackay said, but expects to ultimately get it back. "We'll move on with a positive program for those customers as we go forward," he said. Negotiations between manufacturers and retailers have been getting increasingly difficult as retailers push back on price increases or demand more promotions. The tensions have been higher in Europe where a handful of retailers dominate the market and private label has greater penetration than in the U.S. Recently European grocer Delhaize pulled more than 250 Unilever products from its shelves, although that spat was also ultimately resolved. Mackay said the company is focused on working with its retailers to emphasize how its brands were good "value" in the current environment. Kellogg said its goal to cut annual costs by $1 billion by the end of 2011, combined with its "business momentum," will give the packaged-food company increased earnings visibility moving forward. Soleil Securities analyst Ed Roesch said the cost-savings were yielding "reasons for optimism," adding: "There were some nice positive surprises in the numbers." Kellogg shares recently traded up 9% to $43.09. The stock hit a six-year low in March and has risen about 10% since. Kellogg also reaffirmed its 2009 guidance, which included an increase in upfront charges for cost-reduction initiatives. "The first quarter was expected to be one of the most challenging quarters," Mackay said in the earnings call. But "we performed well despite the tough economic conditions." During recessions, some consumers trade down to cheap private-label brands to save money, reducing market share for branded-food companies like Kellogg. However, Kellogg has benefited some in the downturn as consumers skip restaurants to eat groceries at home. And lower commodity prices are giving the company some breathing room. Kellogg, whose brands include Rice Krispies, Pop-Tarts and Eggo waffles, posted net income of $319 million, or 84 cents a share, compared with $315 million, or 81 cents a share, a year earlier. The latest results were lowered by 5 cents a share due to the cost of recent peanut-related recalls because of fears of salmonella contamination. Revenue decreased 2.7% to $3.17 billion. "Internal sales" - which excludes currency fluctuations, acquisitions and differences in the number of shipping days - grew 4%. Analysts polled by Thomson Reuters expected earnings of 79 cents a share on $3.19 billion in revenue. Operating margin remained flat at 16.7%. Sales in North America rose 2.9% on strong cereal sales, but snacks were hit by the peanut recalls. International sales declined 14% on the stronger dollar, rising 4% on an internal basis, led by double-digit growth for the Asia Pacific region. Kellogg also backed its 2009 guidance of a 3% to 4% internal net sales growth and mid-single digit internal operating profit growth. The guidance also includes an approximately 6 cents per share cost in 2009 from peanut-related recalls and an increase in upfront charges for cost-reduction initiatives from 14 cents a share to 22 cents a share. -By Kelly Nolan, Dow Jones Newswires; 201-938-4049; [e-mail] (Joan E. Solsman and John Kell contributed to this story.) (END) Dow Jones NewswiresApril 30, 2009 13:55 ET (17:55 GMT)