Kellogg (K) is the worldwide leading manufacturer and marketer of ready-to-eat cereals and the second largest biscuits maker in the US. Currently, Kellog has a market share of 33% in the US RTE Cereal market.
Compared to rivals, the company is late to the game of expanding into emerging markets. Its sales exposure to emerging markets is only about 15%, which is reflected in its moderate organic growth rates. Forex plays a relatively small role due to its heavy dependence on North America (>70% of EBIT).
The company introduced a cast savings program called "K-Lean" for the period 2008-2010. In line with this program, Kellogg took out millions of dollars form the supply chain. But the company apparently has cut too deep and eliminated some necessary safe guards, which affected businesses. Weak Q3 2011 results and a profit warning in November for both 2011 and 2012 were the consequence.
Since then, management has begun to undo previous restructuring by reinvesting in supply chain and accelerating innovations. Q4 results should serve as the first evidence that reinvestment measures have yielded. The strong pricing (+6.6%) was inspiring, especially when taking into account that volume did not suffer too much.
- Q4 beat expectations: Sales +7.4% yoy to USD 3.02bn, EBIT +21%, and EPS +25% to 64 cents. EBIT margin +60 basis points (BPS) to 13.2%, and gross margin -100 bps to 40.9% on high input costs. Organic sales growth was strong at 6.0% (est. 5.0%) with pricing/mix + 6.6% and volume -0.6%: North America organic sales +6.7%. Latin America +15.1%, Asia/Pacific +8.2%, and Europe -1.3%.
- FY11 results: Sales +6.5% to USD 13.2bn with organic growth of 4.5%. On a currency-neutral basis, EBIT -2.9% and EPS barely changed at USD 3.38. All figures are in-line with Kellogg's reduced targets.
- Outlook for FY12: Organic sales growth of 4-5%, flal or slightly higher EBIT, EPS (ex. FX) +2-4%, implying EPS of USD 3.44-3.52, with the midpoint matching consensus estimate of USD 3.48.
FY 2012 outlook (steady organic sales growth but only flat EBIT) suggests that the company stays in the investing mode, which should further fuel top-line growth. Against the backdrop of easing input cost pressure (which indicates gross margin improvement) and Kellogg's USD 650 mln share buyback program, the 2-4% EPS forecast is overly conservative and could lead to earnings upgrades during the course of the year.
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