Kellogg CEO David Mackay has insisted he feels “confident” about the challenging cereal category in the US and believes trends will start to improve in the second half of 2010 after a weak second quarter.
The company’s net earnings fell 15%, which it attributed primarily to the impact of a product recall last month. “Excluding the impact of the recall, sales would have been flat,” Mackay told analysts yesterday (29 July).
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The Kellogg boss said he was “disappointed” with the company’s performance over the quarter but maintained that he remained committed to doing the “right thing for the long-term health of the company.”
Speaking on the firm’s earnings conference call yesterday (29 July), Mackay said: “Although we anticipated a difficult quarter, the severity of the impact to our business was greater than we expected.”
Mackay insisted the results were “not indicative of the potential of the company” even as Kellogg lowered its guidance to 8-10% growth in earnings per share for 2010, down on the original 11-13% forecast.
Kellogg expects to see a stronger second half based on easier comparatives, combined with increased innovation and advertising.
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By GlobalData“We have a stronger innovation line up for the first half of 2011 than we had in first half of 2010,” said Mackay. However he was unable to give details of the developments as the company has not yet shared them with its retail partners.
Mackay said retailers are using the cereal category to drive traffic using promotions which has “not helped the category as a whole”. However, he added that you “can’t win in the long term through price” and that customers are highly responsive to brand building and innovation.
“No-one’s promotions are really working as well because there’s just too many offers in the market,” said Mackay, describing the increased promotional environment the company has been experiencing in the US.
However some of this pressure is likely to abate this quarter, according to Sanford Bernstein analyst Alexia Howard.
“We have recently heard that Walmart is dialing back on the intense price rollbacks that were seen on competitors’ cereal products this quarter,” Howard wrote in a note to clients yesterday.
Meanwhile, justifying the company’s plans to expand its advertising spend by the “mid-single digits”, Mackay said he sees “real opportunities to build digital” and to “increase the level of communication with Hispanics”, among other opportunities.
He said Kellogg will continue to experience fall-out from the voluntary recall it conducted in late June after customers complained that the boxes had an unusual smell and flavour into August as it works to get its products back on the shelves.
However, Mackay added that he didn’t think the recall would impact the company’s brand equity in the long term. “Because we acted so responsibly, I believe, and voluntarily withdrew all of the product, I don’t believe there will be a long-term impact on those very strong [brand] equities,” he said.
Surveying the US cereal sector as a whole, Mackay said he expects “a stronger back half as we anticipate category trends will gradually improve”.
However, some analysts are sceptical about the prospects for recovery in the sector.
Barclays Capital analyst Mark Lane said: “We’ll need more convincing evidence from management on the call as to why a bounce-back in core strength is more imminent, given cereal category dynamics are likely to remain challenging through year-end.”
Elsewhere, Kellogg is focused on getting its Eggo brand back on shelves following supply issues. “We are in the the process of resetting some freezers in the third quarter, getting back up to a fuller distribution level in Eggo and incremental volume is highly profitable for us. Obviously, we’re turning back on advertising and brand building support, so that’s going to mitigate the operating profit benefit from getting back into the Eggo business. But it’s a big opportunity for us in the back half of the year,” he said.
