Kellogg sees challenges, despite bumper first quarter

Posted by Josette Dunn on 30th April 2010

Kellogg struck a cautious note yesterday (29 April) as it posted a bumper 30% jump in first quarter profits.The US cereal giant booked first-quarter net income of US$418m, or $1.09 a share, up from $321m, or $0.84 per share, a year earlier.

Commenting on the group’s strong profit performance, chief executive David Mackay said that the company had delivered “solid” results despite facing anticipated pressure on the top line.

Total revenue rose 4.7% to $3.32bn. However, excluding the positive impact of currency exchange, sales gained just 2% on flat volumes.

International sales grew by 9% while sales in North America, Kellogg’s largest geography, were up 3%.

During a conference call with analysts, Mackay revealed that Kellogg’s dollar sales had continued to feel the benefit of price hikes last year in the first quarter.

“Positive gross pricing was a result of lapping some of the earlier price increases we implemented in 2009, so we got some benefit from that. As we look to later quarters, that won’t be there,” he cautioned.

Kellogg also admitted that sales at its North American retail cereal unit had come under pressure during the quarter.

US retail cereal sales delivered internal net sales growth of just 0.5% for the quarter, reflecting increased competition in the cereal category as Ralcorp Holdings’ Post Cereals and PepsiCo’s Quaker have stepped up their competition in the category.

Mackay added that the group’s base US sales had suffered in the quarter as the company pulled under performing products, including certain extensions of the Special K and All Bran brands.

“Our base was [also] hurt by consumers buying more on deal and SKU rationalisation,” he added. “In general terms we’d like to see our base get better and we would like to see that in the second half.”

Kellogg said that, for the full year, it anticipates revenues rising by 2-3%.

Management also warned that it expects cost inflation to increase as higher factory costs, spending associated with disruption in Brazil and Venezuela and higher commodity costs begin to weigh.

Nevertheless, Kellogg reiterated that it expects to generate savings in a range of 4-5%, with a 100 basis point margin improvement in the 12 month period.

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