On the money: Kellogg "very cautious" on European outlook
Kellogg CEO Bryant cited "difficult environment" in southern Europe
Kellogg has admitted it is "very cautious" about the prospects for its European markets in 2013.
President and CEO John Bryant said Kellogg had seen its businesses in the UK and France report better results, while the relaunch of Special K in Spain and Italy had led to "early signs of improvement".
Europe has proved a challenge for Kellogg this year. The region was a factor in a profit warning from Kellogg in April, a month before its first-quarter results. In May, the president of Kellogg's European operations left to "pursue other opportunities" and the head of the company's entire international arm took direct responsibility for its operations in the region.
Reporting its third-quarter results yesterday (1 November), Kellogg pointed to some signs of improvement in Europe. The figures did include a 7.7% fall in underlying operating profit from the company's European operations. However, Kellogg claimed the result was a "significant sequential improvement" on the first two quarters of 2012. Underlying net sales in Europe dropped 2.5%, which Kellogg also said was a better performance than earlier this year.
However, the Kellogg chief said he expected the company to report another year-on-year fall in European profits in the fourth quarter and he was cautious about next year. "As you've heard from other manufacturers, southern Europe continues to be a difficult environment and we know it will take some time to improve. So due to this, we remain cautious on Europe as we look into 2013," Bryant said.
Nevertheless, Europe accounted for under a fifth of Kellogg's operating profit in the quarter and the US company's results in North America included positives.
Bryant said Kellogg's "underlying operating results" in the region were "very strong" with a "significant improvement" from its cereal business.
The company also pointed to a "better-than-expected" performance from its snacks brand Pringles, which it acquired in June.
Bryant said Pringles sales in North America increased by 10% in the third quarter on an organic basis. "We're able to leverage some of our very strong relationships across some key customers and we achieved some placements that business had not historically been able to achieve," he said.
Bryant added Kellogg had also increased Pringles' presence in what he called the "specialty channel", which includes discount outlets, convenience stores and vending machines.
"The specialty channels have also seen some very strong growth and we've been gaining some distribution in those channels," he said.
In all, Kellogg reported an increase in third-quarter net income, with earnings per share beating Wall Street forecasts, pushing up its shares yesterday.
Group internal operating profit was lower, thanks to an increase in commodity costs, last month's recall of Mini Wheat cereals and more investment behind its brands.
CFO Ron Dessinger said internal operating profit would have increased 1% without the impact of the recall. Last month, Kellogg recalled boxes of Mini-Wheats cereal over fears they contained fragments of metal. Two years ago, Kellogg had to recall cereal products in the US as a result of an "uncharacteristic off-flavour and smell" coming from the liner in the package.
Talking to analysts yesterday, Bryant said Kellogg was "very disappointed" about the Mini-Wheats recall.
He added: "It was a failure in a piece of equipment. We've been using that sort of equipment for 20 years in this facility and it's the first time we've seen a failure like this. But I think our recent investments have enabled us to identify the issue quickly, to respond to it and I think the company did a great job of very effectively and efficiently dealing with the situation. we do believe that we have definitely made progress in the supply chain. I believe the investments we've made will help us mitigate and reduce the probability of these sorts of events in the future."
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