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February 6, 2012

On the money: Kellogg warns European profits could fall again in 2012

US cereal giant Kellogg has warned the profits from its European operations could fall again this year amid the challenging economic environment on the Continent.

By Dean Best

US cereal giant Kellogg has warned the profits from its European operations could fall again this year amid the challenging economic environment on the Continent.

Kellogg saw operating profit from its business in Europe drop 7% last year due to lower underlying sales, the impact of high input costs and difficult trading conditions, particularly in the UK, the company’s largest market in the region.

Continuing concerns over the economy means consumer confidence in many European markets remains low and Kellogg has warned that profits from its operations in the region could fall again in 2012.

“Europe is our most difficult region as a company. As we look at Europe and 2012, we are hoping to see slight top-line growth in Europe and hopefully, we can hold operating profits stable year-on-year but there may even be a slight decline in operating profits, just recognising the difficulty of the environment,” Kellogg president and CEO John Bryant said on Wednesday (1 February) as the company reported its 2011 financial results.

“We remain confident regarding the long-term prospects in Europe and we won’t be happy until we return this business to its historical rates of growth. However, the entire region is being affected by the current economic situation and although we have stronger plans for 2012, we expect the environment to remain challenging.”

In the UK, Bryant said Kellogg had used promotions to maintain its share of the country’s cereal market in the last three months of the year, although he conceded the company had not innovated or supported its brands enough.

Last month, former Procter & Gamble executive Jonathan Myers became general manager of Kellogg’s operations in the UK and Bryant said the company now has “a better pipeline of ideas and support” planned for the market.

Kellogg’s performance in 2011 elsewhere in Europe was better, Bryant said, with “some growth” in France and Italy and a “high single-digit” increase in sales in Russia. Volumes in Russia fell in the fourth quarter, which was due, Bryant said, to Kellogg no longer producing some non-branded lines. “We’re building a stronger business there over time, it’s continuing to transition from a bulk or non-branded business to a branded business,” Bryant said.

The company, which saw its reported operating profit fall 0.7% in 2011, expects earnings on that metric to be “unchanged or slightly higher”. It has forecast a 4-5% increase in internal net sales, which excludes the impact of foreign exchange. Full-year earnings per share are expected to grow by 2-4%, including the impact of investment in its supply chain, an update of its SAP platform and an increase in the amount of money spent on brand building, Kellogg said.

However, Bryant did remark that, broadly, he expected the cereal sector to be “more challenging” in 2012, although, when questioned on that remark, he said the category has always been competitive but insisted the prospects for the market was positive.

“I think the cereal category is always an intensely competitive category. I think it’s a good long-term category, it’s on trend from the health and wellness nutrition perspective, ageing population, out-of-breakfast snacking and so on. But this really is a sort of low single-digit growth type category. And we’re expecting that sort of performance in 2012 as well,” Bryant said.

He added: “In the fourth quarter, we increased our promoted price points on our medium-sized kid brands. As we’ve done that, we’ve seen some volume loss as consumers get used to the new price points and I expect that to continue probably into the first quarter. So I think that’s more where we’re seeing just some of the impact of the pricing go through the category and consumers get used to the new price points.”

Reflecting on Kellogg’s 2011 results, its investment in its supply chain and plans to spend more on marketing, Barclays Capital analyst Andrew Lazar said the company had made a “positive first step” but “still [had] much to prove”.

“At its core, 2012 remains a reinvestment year for Kellogg and is shaping up to be back-half loaded from an EPS growth perspective, likely a common theme from others as well, particularly since certain important parts of the business, such as the UK, remain under pressure,” Lazar said.

“With weakness in Europe anticipated to persist and a still difficult consumer environment in the US, we do not view these results as providing a definitive rejoinder to investor questions about the health of Kellogg’s business and, more broadly, the ready-to-eat cereal category.”

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