Kellogg has said it feels better about the prospects for Europe in the second half

Kellogg has said it feels better about the prospects for Europe in the second half

Kellogg revealed it is making good progress in Europe and said it feels better about the region's prospects in the second half of the year.

The US cereal giant this morning (2 August) booked a drop in first-half profit as weakness in Europe, in addition to raw material costs, weighed on earnings.

In Europe, where Kellogg has experienced challenges from difficult economic conditions and poor consumer sentiment, operating profits fell 26.1% to US$150m. In North America, operating profits climbed 5.3% to $140m.

President and CEO John Bryant told analysts on the firm's earnings call today that the company has been "disappointed" by Kellogg's start in Europe.

"Europe's operating profit declined, half of this was the result of lower production to reduce inventory levels. The remainder was due to lower sales and consumer pressure. Europe has been a very difficult operating environment for us."

Bryant pointed to its performance in Southern Europe and in particular Italy and Spain, as being "a bit softer than we would have liked", which said reflects "the tough environment in that part of the world".

Nonetheless, Bryant said the company was seeing "much better progress" in Europe in the second quarter.

"The results are much more in line with our expectations. We have seen improvement in the UK and France. The UK business declined much less than it did in the first quarter as some of our commercial plans and pricing actions started to gain traction."

Bryant said Kellogg has a raft of cereal innovation coming through in the second half in the UK, with line extensions on All Bran, Crunchy Nut and Krave, and in Spain and Italy the firm is relaunching its Special K brand - its biggest brand in those two countries.

He added: "We have improved some price points in some critical markets, so I think we are making some good progress and it's coming through as a better result in Q2 than in Q1."

"We feel better about the second half because of all of this activity and because of other innovations we have planned. We think this activity will drive performance that will continue to improve as we progress through the second half."

However, he struck a cautious note, adding: "As you've heard from other companies, the continent continues to be a challenge given the economic environment. Southern Europe, in particular, is difficult but we are taking action and watching developments closely."

Separately, Bryant said the company is "fully-covered" with regard to the increase in commodity costs for the year - a factor in the decline of the firm's first-half earnings.

"Some commodity prices have increased significantly due to weather conditions. We are now fully covered and have included the impact of the recent inflation outlook for the year."

He declined to comment on whether the company had the ability to cover the inflation outlook for its next financial year and whether additional pricing in cereal will be required.

"We really can't talk about prospective pricing. We buy a lot of different items, of which grains is just one, we might have some inflation on that one but we also have items that are non-inflationary.

"We as a company and as an industry, are driving tremendous productivity to try to offset our need to take pricing as much as possible and I'm sure that will continue to be the approach of the company and of the industry in general. This is one more thing for us to manage our way through but we'll talk about our outlook for 2013 at the end of the year."

Kellogg's share price increased 3.30% to $49.41 at 11:30 ET today.