The Battle Creek, Mich.-based Kellogg Co, the world's leading producer of cereal and a leading producer of convenience foods, has reported that Q2 net earnings were in line with guidance, driven by strong sales, gross profit margin, and cash flow.

Reported net earnings were US$173.8m, compared to last year's US$114.6m.

"The Q2 represented further progress in our efforts to revitalize Kellogg," said Carlos M. Gutierrez, chairman and CEO: "We exhibited solid performance in three priority areas: net sales, gross profit margin, and cash flow. This allowed us to reinvest for future growth, while still achieving our earnings targets."

On a comparable basis, the growth rates for net sales, operating profit, and EPS were 4%, 4%, and 11%, respectively. On a reported basis, net sales, operating profit, and EPS were up 7%, 24%, and 50%, respectively. Comparable-basis net sales growth of 4% continues a strong trend that began in late 2001. On this basis, US retail cereal was up 6%, US retail snacks increased 3%, and international grew 4%.

"Our internal sales growth continues to show acceleration from last year, as improved execution, increased brand-building investment, and a focus on value instead of volume lifted growth in each of the three major drivers of our business, US Cereal, US Snacks, and International. This was a top priority for 2002, and our broad-based gains in the Q2 were very encouraging."

During the quarter, gross profit margin increased by 110 basis points from year-ago levels, on a comparable basis. Gutierrez commented: "Another key priority for 2002 was improving our gross profit margin. The significant gross profit margin improvement in the Q2 was again driven by an improved sales mix, cost synergies, and operating leverage. This allowed us to increase our advertising and promotion investment substantially, including in categories and countries that received little resources last year."

Cash flow from operating activities less capital expenditures was US$224m in the Q2, lower than the year-ago period's US$288m, because of the timing of an interest payment. Through the H1 2002, cash flow is up more than 40% year-over-year.

Gutierrez said: "The entire organization is committed to managing the business for cash flow, as evidenced by our continued discipline on capital expenditure and our reductions in working capital as a percentage of sales. We have used our strong cash flow to reduce our debt from US$6.8bn following the Keebler acquisition in March 2001, down to US$5.8bn at the end of the Q2."

With earnings right on target for the Q2 and H1, the company reiterated its EPS guidance of US$1.73 for the FY 2002.

Kellogg's board of directors has authorised a share repurchase programme for up to US$150m during 2002, to allow Kellogg to use proceeds from options exercised to offset their dilutive impact.

Gutierrez concluded, "As we have said repeatedly, 2002 is a year of acceleration following the enormous transitions we made last year. We have done the things we said we'd do, and our progress is clearly reflected in our improved results. As we aim for consistency and do what is right for the long-term health of our business, a stronger Kellogg is indeed emerging."