Reviving Special K snack sales is one of Kelloggs key tasks in US

Reviving Special K snack sales is one of Kellogg's key tasks in US

There were some cautiously positive noises coming out of Kellogg yesterday (5 May) as the US food group announced its first-quarter results - but a number of questions still hang over the Special K and Pringles maker.

Kellogg's numbers included another quarter of falling sales from its closely-watched US morning foods division, hit for a number of quarters now by a stagnant breakfast cereal market in the US.

However, John Bryant, Kellogg's chairman, president and CEO, said the company was seeing some improving trends within its cereal business, with the rate of decline receding and a number of its flagship lines gaining market share.

The group's US snacks arm saw sales fall again in the first quarter but the company said there were signs of improvement.

Kellogg's international business provided a boost, with sales from each of its divisions in Europe, Latin America and Asia Pacific rising, notwithstanding a few local challenges, including cereal in southern Europe and falling sales in Australia.

International markets provided the growth engine to Pringles - much as Kellogg had intimated when it acquired the business in 2012 - with the brand seeing sales rise around 7% despite flat sales in North America.

Kellogg's domestic morning foods business is no longer its biggest when measured in annual sales, now second by its US snacks arm. However, it is the largest by operating profit and that, plus of course the company's origins, makes the unit perhaps the most scrutinised by the market.

Discussing the division's performance in the first three months of 2015, a cautious Bryant, despite another quarter of falling sales, sought to show signs of improvement, pointing to areas such as sales, merchandising and new products.

"What we're seeing in our business is stronger performance," Bryant told analysts yesterday after the results were announced. "Seven of our ten largest brands under the Kellogg brand gained share in the quarter and the Kellogg brand itself gained about 30 basis points of share. We are seeing improved distribution and merchandising from reinvesting back into our US sales force. Displays are up in Q1 last year. Quite frankly, we were down in Q1 last year, so part of it is the comp as well. That's helping us there. And 44% share of innovation is a sort of share of innovation that we'd like to see in our US cereal business but not what we had necessarily last year, so I think we are seeing some good performance within the cereal business, particularly across the legacy Kellogg brands."

The fact sales are falling at a slower rate than previous quarters does appear to indicate Kellogg's investment in areas such as sales, distribution and products - funded by savings from its Project K restructuring programme - seem to be having an effect.

That said, Sanford Bernstein analyst Alexia Howard did suggest any comparison between the first-quarter results of Kellogg's US morning foods division and its performance in the fourth quarter of 2014 was "not entirely fair". Before these most recent numbers, Kellogg's US morning foods arm included the under-pressure Kashi unit, which has now moved to the North America Other division. That unit saw sales tumble over 6% in the first quarter of the year. Kashi sales fell again in the first three months of 2015, although Bryant insisted the brands "velocities" were "stabilising" after the lost distribution last year.

Above all, it would be premature to call a recovery from Kellogg's US morning foods business. Bryant acknowledged as such, remarking that "improvement will be a process" but even any improvement could be short-lived, given the competition in what appears to be a category in structural decline.

Kellogg's biggest business by sales - US snacks - hinted at signs of improvement in the first quarter. Sales were down 1.1% but that compared to a 3.1% drop in the last three months of 2014.

Bryant sounded slightly more circumspect here, saying the division was "on plan" but saying the company "expected" new products to boost sales in the second half of the year.

Kellogg's US snacks business has suffered amid changes in consumer habits. Brands such as Kind have emerged to meet those needs and some of Kellogg's competition have reacted better.

Pringles' sales in the US were flat year-on-year but that was up against the first quarter of 2014 when sales rose at a high single-digit rate. Where Kellogg has faced - and is facing - issues is with its Special K and Kashi snack portfolios. Kellogg has worked on areas such as recipes and packaging. Bryant again hinted at some signs of green shoots but underlined any recovery will take some quarters. "We continue to face some challenges in our US snacks business, but we're seeing some success and we've already made changes, and we have some more to come. As I said before, improvement will take some time and will be progressive. However, we're focusing our investment to drive improvement in 2015 and into 2016."

It is then too early to call any kind of sustainable revival from Kellogg's two biggest businesses. Analysts have broadly welcomed the strategic move to take cost out of the company and re-invest behind its brands but success is not guaranteed.

The conference call with analysts to discuss the first-quarter results also included some broader strategic questions about the company and its performance.

Fund manager Kurt Feuerman at AllianceBernstein claimed there had been a "lack of urgency and direction in light of the continued lacklustre results". Reflecting on the friendly merger between Heinz and Kraft Foods Group, Feuerman also asked whether Kellogg's management were "hiding behind its poison pill" of the stake the private Kellogg Foundation holds in the business.

Bryant brushed off the questions, describing Project K as "the largest restructuring program in the company's history", pointing to the re-investment in the business and signs of the moves were paying off.

Feuerman retorted the efforts were not "enhancing shareholder value" and made a comparison between Kellogg's earnings per share since Bryant took charge and those generated by rival General Mills. Would Kellogg considered a merger with a peer?

Bryant said: "We always will do what we think is the best way to create shareholder value and our belief is driving exactly like programmes to achieve that outcome and that's what we're absolutely focused on as a company. I think you're seeing improving trends in this quarter and that's our goal as we go forward."

The fact these questions are being asked of Kellogg is striking.