Kellogg has reported stronger-than-expected second-quarter sales but the US cereal and snacks group struck a note of caution on margins and sees pressure on costs continuing into 2022.

The Special K and Pringles owner expects the pressure on margins to grow in the second half of 2021 and Steve Cahillane, Kellogg’s chairman and CEO, said the company is “planning for an ongoing challenging cost environment well into next year”.

Kellogg yesterday (5 August) booked a 2.6% rise in second-quarter net sales to US$3.56bn, helped by exchange rates.

On an organic basis, sales dipped 0.4% during the quarter, which ran to 3 July, but that result beat the consensus forecast among Wall Street analysts of a 4.4% decline, as Kellogg benefited from pricing and the mix of sales, plus a boost from emerging markets.

Kellogg now expects to book organic net sales growth of up to 1% for 2021 as a whole, an improvement on its previous forecast of flat, pointing to the “recent momentum in the business”.

However, the owner of brands from MorningStar Farms meat-free to Cheez-It crackers stuck to its forecasts for adjusted operating profit and earnings per share, which the company sees as coming in at down 1-2% and up 1-2% respectively.

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By GlobalData

The company sees its gross margin in 2021 being “slightly below” the level booked in pre-pandemic 2019. Kellogg told analysts yesterday margin pressure will grow in the second half of the year amid the costs of raw materials, freight and labour seen across the industry.

On a conference call with analysts to discuss Kellogg’s financial results, Bryan Spillane of BofA Securities asked the company’s management for its view on costs into 2022 and what actions the business could take.

“We always like to say that our first line of defence against something like this is productivity, right? So we’ve been working hard at productivity and looking for every area where we can be more efficient,” Cahillane said.

He also set out why he believes revenue growth management is important. Revenue growth management includes moves, for example, managing prices, the size of packs and promotions.

“Obviously, everything about RGM and the capabilities we’ve been building is very important right now, because the surge in inflation that we’re all seeing, which is clearly industry-wide, is … quite significant and, on balance, probably the most we’ve seen in nearly a decade,” Cahillane said.

“All these things are going to be very important, but we’re going to continue to invest in our brands. Because as you’ve heard me say before, we can go to the trade and talk about rising commodity prices and all these things, which are very factual, but the more we spend against our brands in terms of innovation and making sure that they pull off the shelf, the more we earn the right to have those discussions with our retailers.”

He added: “As it moves into the future into 2022, it’s hard to say how long this persists. It’s very pervasive. There are certain things that are clearly going to unwind. Containers will eventually find their rightful places in the world, labour shortages should mitigate, but it’s hard to predict and we’re planning for an ongoing challenging cost environment well into next year.”

CFO Amit Banati said Kellogg had “almost now fully hedged” for its costs for 2021 but outlined to analysts the areas where the company had been seeing expenses grow.

“I think from a hedging standpoint, for ’21, we’re almost fully hedged. I think in terms of inflation, we’ve seen a little bit of inflation on our commodities but I think the area that’s turned inflationary is packaging, on flexible scans. That has turned inflationary since our last outlook,” he explained.

“We’re seeing freight rates continue to rise and, more importantly, there are widespread shortages and so just securing the supply of freight is coming at much higher rates than what we had expected. Then the other one, which is hard to forecast is just the labour shortages and that’s kind of through the supply chain.”

On sales, Cahillane described Kellogg’s second quarter as “another quarter of strong organic top-line growth” compared to 2019. Banati noted Kellogg’s “organic net sales CAGR was 4.5% in quarter two”.

Cahillane said Kellogg’s European operations had seen “strong net sales growth”, driven by cereals and snacks, “on a 2-year CAGR basis”.

He added the company’s emerging markets businesses saw a “surprisingly strong” performance in the first half of the year. “Our portfolio is much more affordable today than it has been in years. It’s much more locally relevant in terms of the foods that we bring to market.”

However, Kellogg’s full-year forecast for group organic sales implies a slowdown from the 1.9% print it booked for the first six months of the year.

Cahillane said: “We are seeing decelerating at-home demand and so we’ve taken that into account. We’ve also taken into account the strong delivery in emerging markets and the likelihood that – continuing that type of performance would be great but, obviously, we’re trying to be prudent and we’re trying to be cautious based on supply disruptions that we have seen in the first half that could happen again in the second half.”