Kellogg Company (K) (NYSE: K) announced second-quarter 2016 results, and increased its guidance for comparable profit margin for 2016 through 2018.
«We’re making good progress on our priorities: We have continued to improve our foods to insure they are on trend; we’ve continued to expand the Pringles business worldwide; we’re enhancing our sales capabilities; and we are designing and executing productivity initiatives that are contributing to more profit-margin expansion than we previously anticipated,» said John Bryant, Kellogg Company’s chairman and chief executive officer. «We have carefully constructed a plan to boost our profit margins higher and sooner, giving us enhanced earnings visibility.»
* Expected operating profit, operating profit margin and earnings per share are provided on a non-GAAP, currency-neutral comparable basis only because certain information necessary to calculate such measures on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company. Please refer to the «Non-GAAP Financial Measures» section included later in this press release for a further discussion of our use of non-GAAP measures, including quantification of known expected adjustment items.
Kellogg’s Q2 2016 GAAP (or «Reported») earnings per share were up significantly from the prior-year quarter, driven mainly by lower one-time costs and higher profit margins. Non-GAAP, comparable earnings per share were off slightly from the year-earlier quarter, due to the negative impact of currency translation, mostly related to our Venezuelan business. Non-GAAP, currency-neutral comparable earnings increased strongly year-on-year, and ahead of the Company’s expectations, owing primarily to better profit-margin performance in North America.
Second-quarter 2016 reported net sales decreased, primarily due to the effect of currency translation resulting from the remeasurement of the Venezuelan business in mid-2015. Currency-neutral comparable net sales increased strongly in the quarter, as a result of inflation-related sales growth in Venezuela; currency-neutral comparable net sales excluding the impact of Venezuela decreased modestly.
LEA TAMBIÉN: España: Lizarran renueva su propuesta culinaria
Quarterly reported operating profit increased due to favorable one-time costs, as well as to strong performance in inflationary Venezuela and cost savings in North America. Currency-neutral comparable operating profit increased strongly, with half of the gain attributable to the Venezuela profit performance, and the rest coming primarily from the margin expansion in North America.
Currency-neutral comparable operating profit and earnings were ahead of the Company’s expectations in the second quarter.
Full Year 2016 Outlook*:
The Company is raising its full-year guidance for earnings per share on a currency-neutral comparable basis, to $4.11-$4.18, from previous guidance of $4.00-$4.07.
The increase is driven by higher currency-neutral comparable operating profit, which is now expected to increase by 15-17%, from our previous estimate of 11-13%.
This increased guidance is based on two factors: The better-than-expected first-half profit performance in inflationary Venezuela, and an increased forecast for operating profit margin for the rest of the business.
The company believes its currency-neutral comparable operating profit growth excluding Venezuela will come in at the high end of the 4-6% growth range previously communicated. The company now expects higher savings from Zero-Based Budgeting in North America, along with the roll-out of a similar program in its international regions.
These savings are expected to more than offset the impact of a trimmed net sales outlook excluding Venezuela, now expected to come in at the low end of the 0-2% range previously communicated.
Because of further weakening in currency exchange rates for Venezuela and for other currencies, particularly in the aftermath of Britain’s vote to exit from the European Union, currency translation is expected to have a more negative impact than previously estimated.
The company expects full-year cash flow from operating activities to be approximately $1.7 billion. The company reaffirmed that it expects full-year cash flow to be approximately $1.1 billion, including capital expenditure. Capital expenditure for the year is still expected to be between 4% and 5% of sales, which translates approximately into $525-$625 million; this includes the impact of the cash required by Project K and an increase in capital spending equal to approximately one percent of sales to support the growth of the Pringles business.
Profit-Margin Outlook for 2017-2018*:
The company also announced that it has plans to accelerate and increase the previously announced goals for expanding its currency-neutral comparable operating profit margin.
It now believes it will increase this margin by approximately 350 basis points from 2015 levels, and that it will realize the increase through 2018, an acceleration of two years from its previous guidance. This acceleration comes from a combination of expanding Zero-Based Budgeting across North America and International segments, pursuing a more disciplined approach to revenue growth management, and other potential initiatives.
These actions are expected to drive accelerated currency-neutral comparable operating profit and earnings growth in 2017 and 2018, even as they contribute to holding net sales flat during that time period.
About Kellogg Company
At Kellogg Company (NYSE: K), we are driven to enrich and delight the world through foods and brands that matter. With 2015 sales of more than $13 billion, Kellogg is the world’s leading cereal company; second largest producer of cookies and crackers; a leading producer of savory snacks; and a leading North American frozen foods company. Every day, our well-loved brands nourish families so they can flourish and thrive. These brands include Kellogg’s®, Keebler®, Special K®, Pringles®, Kellogg’s Frosted Flakes®, Pop-Tarts®, Kellogg’s Corn Flakes®, Rice Krispies®, Kashi®, Cheez-It®, Eggo®, Coco Pops®, Mini-Wheats®, and many more. To learn more about our responsible business leadership, foods that delight and how we strive to make a difference in our communities around the world, visit www.kelloggcompany.com.
Non-GAAP Financial Measures
This filing includes non-GAAP financial measures that we provide to management and investors that exclude certain items that we do not consider part of on-going operations. Items excluded from our non-GAAP financial measures are discussed in the «Significant items impacting comparability» section of this filing. Our management team consistently utilizes a combination of GAAP and non-GAAP financial measures to evaluate business results, to make decisions regarding the future direction of our business, and for resource allocation decisions, including incentive compensation. As a result, we believe the presentation of both GAAP and non-GAAP financial measures provides investors with increased transparency into financial measures used by our management team and improves investors’ understanding of our underlying operating performance and in their analysis of ongoing operating trends. All historic non-GAAP financial measures have been reconciled with the most directly comparable GAAP financial measures.
Non-GAAP financial measures used include comparable net sales, comparable gross margin, comparable SGA, comparable operating profit, comparable operating profit margin, comparable effective tax rate, comparable net income attributable to Kellogg Company, comparable diluted EPS, and cash flow. These non-GAAP financial measures are also evaluated for year-over-year growth and on a currency-neutral basis to evaluate the underlying growth of the business and to exclude the effect of foreign currency. We determine currency-neutral operating results by dividing or multiplying, as appropriate, the current-period local currency operating results by the currency exchange rates used to translate our financial statements in the comparable prior-year period to determine what the current period U.S. dollar operating results would have been if the currency exchange rate had not changed from the comparable prior-year period. These non-GAAP financial measures may not be comparable to similar measures used by other companies.
Comparable net sales: We adjust the GAAP financial measures to exclude the pre-tax effect of acquisitions, divestitures, and shipping day differences. We excluded the items which we believe may obscure trends in the company’s underlying net sales performance. By providing this non-GAAP net sales measure, management intends to provide investors with a meaningful, consistent comparison of net sales performance for the Company and each of our reportable segments for the periods presented. Management uses this non-GAAP measure to evaluate the effectiveness of initiatives behind net sales growth, pricing realization, and the impact of mix on our business results.
This non-GAAP measure is also used to make decisions regarding the future direction of our business, and for resource allocation decisions. Currency-neutral comparable net sales represents comparable net sales excluding the impact of foreign currency.
Comparable gross profit, comparable gross margin, comparable SGA, comparable SGA%, comparable operating profit, comparable operating profit margin, comparable net income attributable to Kellogg Company, and comparable diluted EPS: We adjust the GAAP financial measures to exclude the effect of Project K and cost reduction activities, acquisitions, divestitures, integration costs, mark-to-market adjustments for pension plans, commodities and certain foreign currency contracts, costs associated with the VIE deconsolidation and costs associated with the Venezuela remeasurement. We excluded the items which we believe may obscure trends in the company’s underlying profitability. By providing these non-GAAP profitability measures, management intends to provide investors with a meaningful, consistent comparison of the company’s profitability measures for the periods presented. Management uses these non-GAAP financial measures to evaluate the effectiveness of initiatives intended to improve profitability, such as Project K, ZBB and Revenue Growth Management, as well as to evaluate the impacts of inflationary pressures and decisions to invest in new initiatives within each of our segments. Currency-neutral comparable represents comparable excluding foreign currency impact.
Comparable effective tax rate: We adjust the GAAP financial measure to exclude tax effect of Project K and cost reduction activities, acquisitions, divestitures, integration costs, mark-to-market adjustments for pension plans, commodities and certain foreign currency contracts, costs associated with the Venezuela remeasurement, costs associated with the VIE deconsolidation, and costs associated with the early redemption of debt outstanding. We excluded the items which we believe may obscure trends in the company’s underlying tax rate. By providing this non-GAAP profitability measure, management intends to provide investors with a meaningful, consistent comparison of the company’s effective tax rate for the periods presented. Management uses this non-GAAP measure to monitor the effectiveness of initiatives in place to optimize our global tax rate.
Cash flow: Defined as net cash provided by operating activities reduced by expenditures for property additions. Cash flow does not represent the residual cash flow available for discretionary expenditures. We use this non-GAAP financial measure of cash flow to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities, and share repurchases once all of the Company’s business needs and obligations are met. Additionally, certain performance-based compensation includes a component of this non-GAAP measure.
These measures have not been calculated in accordance with GAAP and should not be viewed as a substitute for GAAP reporting measures.
Forward-looking guidance for comparable net sales, comparable operating profit, comparable operating profit margin, comparable net income attributable to Kellogg, comparable diluted EPS, and cash flow is included in this press release. Guidance for net sales and operating profit excludes the impact of mark-to-market adjustments, integration costs, costs related to Project K, acquisitions, dispositions, foreign-currency translation, remeasurement of the Venezuelan business, and other items that could affect comparability. Guidance for earnings per share excludes the impact of mark-to-market adjustments, integration costs, costs related to Project K, foreign-currency translation, remeasurement of the Venezuelan business, and other items that could affect comparability; it includes the impact of acquisitions and dispositions. We have provided these non-GAAP measures for future guidance for the same reasons that were outlined above for historical non-GAAP measures.
We are unable to reasonably estimate the potential full-year financial impact of mark-to-market adjustments, Venezuela remeasurement, acquisitions or dispositions because these impacts are dependent on future changes in market conditions (interest rates, return on assets, and commodity prices) or future decisions to be made by our management team and Board of Directors. As a result, these items are not included in the guidance provided. Therefore, we are unable to provide a full reconciliation of these non-GAAP measures used in our guidance without unreasonable effort as certain information necessary to calculate such measure on a GAAP basis is unavailable, dependent on future events outside of our control and cannot be predicted without unreasonable efforts by the Company.
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