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BATTLE CREEK, MICH. — A strong first quarter at Kellogg Co. has left the company in “the enviable position of being able to raise our outlook for the full year,” said Steven A. Cahillane, chairman, president and chief executive officer.
Speaking to investment analysts May 4, Mr. Cahillane said the company benefited in the quarter ended April 1 from service levels improving and bottlenecks and shortages easing more quickly than had been anticipated.
“We continue to grow net sales organically above our long-term targets, and this growth spans across our regions and our category groups,” he said. “We also continue to make progress toward recovering our profit margins.”
Net income in the first quarter was $298 million, equal to 87¢ per share on the common stock, down 29% from $422 million, or $1.24, in the first quarter last year. Sales were $4.05 billion, up 10% from $3.67 billion.
The earnings decrease versus a year ago reflected numerous unusual items, including a negative year-on-year swing in mark-to-market impacts and incremental up-front costs related to the pending separation of the cereal business together with lower pension income, higher interest expense, and adverse foreign currency translation. Adjusted for one-time items and the currency translation, adjusted earnings per share were up 3%.
Kellogg said the company enjoyed the strong net sales growth across each of its regions — Asia, Middle East and Africa; Europe; Latin America and North America — thanks to “inflation-driven price realization.” By category, Kellogg’s growth drivers were global snacks, noodles in Africa and recovering cereal sales in North America.
Of the sales increase, price/mix contributed 15.6 percentage points while currency was a 3.3-point drag and volume was down 1.9%.
“With supply bottlenecks and shortages beginning to moderate, the company was able to improve its service levels and mitigate inefficiencies,” Kellogg said. “Coupled with productivity initiatives and revenue growth management actions intended to cover high input-cost inflation, this has led to earlier progress toward recovering profit margins. The result was better operating profit than expected, prompting management to raise its full year outlook.”
First-quarter operating profit in North America was $366 million, up 8% from $399 million a year earlier. Sales were $2.39 billion, up 13% from $2.11 billion a year earlier. Volume was down negligibly with essentially the entire gain accounted for by price/mix.
By category, snacks sales in North America were up 15% in the first quarter, frozen foods were up 1% and cereal was up 17%.
“Pringles well outpaced the US salty snacks category’s double-digit growth, led by our multipacks and our core four flavors,” Mr. Cahillane said. “In crackers, Cheez-It had lapped an exceptionally strong year-earlier quarter, but we did see double-digit consumption growth by our Club and Town House brands. And in portable wholesome snacks, our decision to discontinue various Kashi bars and the prioritization of capacity-constrained Pop-Tarts SKUs, masked continued momentum in Rice Krispies Treats and a resurgent Special K bars business.”
Mr. Cahillane attributed modest growth in frozen foods sales to supply disruptions in Eggo frozen breakfast business and especially the company’s Morningstar Farms business.
“The cereal category grew at a double-digit rate in the quarter, and we gained nearly three points of share year-on-year as our resumed commercial activity is producing share gains across our portfolio led by Rice Krispies, Special K, Raisin Bran and Frosted Flakes,” Mr. Cahillane said.
For the full year, Kellogg has raised its financial guidance in the wake of the first-quarter results. The company expects net sales growth in a range of 6% to 7%, up from previous guidance of 5% to 7%. Operating profit is expected to rise 8% to 10%, up 1 percentage point on both sides. Earnings per share are expected to decrease 1% to 3%, versus previous guidance down 2% to 4%.
“This improved outlook reflects the higher operating profit outlook, while still incorporating significant year-on-year pressure from the impact on pension income and interest expense of lower financial asset values and higher interest rates,” Kellogg said.
The company is taking a cautious view of its sales growth prospects later in the year.
“We maintain our assumption for decelerating growth as the year progresses, which reflects a likely return of elasticity toward historical levels as well as lapping a particularly substantial revenue growth management actions in the second half of last year,” said Amit Banati, vice chairman, senior vice president, chief financial officer and principal financial officer.
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