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Kellogg Company’s ( K - Analyst Report ) adjusted fourth quarter 2012 earnings of 67 cents per share beat the Zacks Consensus Estimate of 65 cents per share by 3.1%. The fourth-quarter earnings also beat the prior-year quarter earnings of 64 cents by 4.7%, driven by robust organic sales growth performance. Kellogg re-affirmed its 2013 outlook.
Adjusted earnings exclude integration costs related to the Pringles acquisition, mark to market gains, and impact of accounting changes for pensions and post-retirement plans. Including these charges reported loss was 9 cents per share. Kellogg acquired the Pringles snack business from consumer giant, Procter & Gamble ( PG - Analyst Report ) in June last year.
We were expecting a positive earnings beat this quarter from Kellogg as the stock had the impressive combination of Zacks Rank #2 (Buy) and +6.15% ESP (Expected Surprise Prediction) (Read: Zacks Earnings ESP: A Better Method).
Revenue & Margins
The world’s largest cereal maker reported revenue of $3.56 billion in the quarter, up 18.2% year over year driven by a balanced growth in volume and price. Volumes added 2.6% while price/mix added 2.7% to sales growth. Revenues beat the Zacks Consensus Estimate of $3.44 billion.
Acquisitions added 13.0% to top-line growth. Currency added 0.2% to revenue growth, much better than its negative impact in the past few quarters. Accordingly, organic revenue growth (excluding impact of acquisitions, dispositions and foreign exchange) was 5.3%.
Improving volume trends in North America, significant growth in Latin America, some improvement in Europe and strong performance of its Pringles business drove the top-line growth in the quarter.
Kellogg’s adjusted operating profit declined 7.6%, higher than company expectations of a decline of 4%-6%. Commodity cost inflation, upfront costs in Australia, and double digit increase in brand building investments led to the operating profit decline.
Most of the business segments delivered decent year-over-year revenue growth in the quarter.
North American Business: Kellogg North America’s sales increased 12.3% from the prior-year quarter to $2.31 billion in the fourth quarter. Organically, segment sales increased 5.5%.
The organic sales growth was driven by both price/mix and volume growth, gaining from improving business trends as well as increased brand support. Price/mix added 2.1% to revenue growth, while volumes grew an impressive 3.4%, much better than last quarter’s 0.5%.
Organically, the U.S. Morning Foods and Kashi business grew 6.3%, U.S. Specialty was up 10%, and North America Other segment was up 11.2%. However, the U.S. snacks business grew only 0.7% due to strong year ago comparisons.
Organically operating profit declined 1.6% organically to $348 million as sales growth was offset by high commodity inflation and increase in brand building investments.
International: Kellogg International sales improved 30.9% from the prior-year quarter. Organically, revenues improved 4.8%. Europe improved 2.7% organically, better than last quarter’s performance. Asia Pacific grew 4.6% organically while Latin America grew 9.4 % in the quarter.
Kellogg International's operating profit decreased 21.9% as growth in Latin America was offset by declines in Europe and Asia Pacific. Importantly, organic operating profit declined 72.3% in Asia pacific due to up-front costs associated with the closure of a plant in Australia, higher brand building investments and increased commodity costs inflation.
In fiscal 2012, the company witnessed a 7.6% increase in revenues to $14.20 billion, marginally beating the Zacks Consensus Estimate of $14.07 billion. Organically, revenue grew 2.5%, within the company’s guidance range of 2%-3% growth.
Adjusted earnings were $3.37 per share, which also beat the Zacks Consensus Estimate of $3.33. Adjusted earnings were almost flat from the year ago levels. Including the impact from Pringles and product recall costs, earnings were $3.28, near the higher end of the company’s guidance range of $3.18 and $3.30.
Kellogg maintained its previously provided outlook for 2013. For 2013, Kellogg expects net sales growth to be approximately 7%, while reported earnings (excluding impact of mark-to-market adjustments but including Pringles integration costs) are expected to grow between 5% and 7%. Reported operating profit ((excluding impact of mark-to-market adjustments) is expected to increase at a higher rate than earnings growth.
Other Stocks to Consider
Kellogg carries a Zacks Rank #2 (Buy) but is not the only bullish firm this earnings season. We also see likely earnings beats coming from the following industry peers:
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