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Kellogg (K) Q1 Earnings Beat Estimates, Buyout Boosts Sales

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Kellogg Company (K - Free Report) delivered mixed first-quarter 2019 results. Earnings declined year over year, while sales increased on the back of acquisitions. Further, the bottom line beat the Zacks Consensus Estimate.

Shares of the company fell nearly 3% during the pre-market trading session on May 2. The downside stemmed from bottom-line decline as well as trimmed view for 2019. Management made changes to outlook after considering the adverse impacts from planned divestitures.

Q1 in Detail

Adjusted earnings of $1.01 per share beat the Zacks Consensus Estimate of 95 cents. However, the bottom line fell 17.9% year over year, thanks to higher tax rate, adverse currency translation impacts, increased interests and lower returns from pension assets. On a constant-currency (cc) basis, adjusted earnings fell 15.4% to $1.04.

The company delivered net sales of $3,522 million, which rose 3.5% year over year. The upside can be attributed to gains from the consolidation of Multipro to the tune of about 7%, which offset adverse currency impacts. Moreover, consumption trends across many businesses witnessed improvements. Sales improved 7.2% to $3,645 million at cc. Further, organic revenues inched up 0.3%.However, the top line fell short of the consensus mark of $3,524 million.

The company’s gross profit came in at $1,107 million, down nearly 11.6%. Adjusted gross profit fell nearly 3% to $1,198 at cc. Adjusted gross margin at cc was 32.9 %, down 340 basis points.

Adjusted operating profit fell almost 7% to $465 million, thanks to increased distribution and input costs along with currency headwinds. The metric slipped 4.6% to $477 million at cc.

Segment Discussion

Sales in the North America segment amounted to $2,289 million, down nearly 1.8%., Sales fell 1.5% on an organic basis. The region reported declines across categories like snacks, cereals and frozen foods. Also, adjusted operating profit declined almost 3.4% at cc due to lower sales volume as well as higher input and distribution costs.

Revenues in the Europe segment totaled $497 million, down 4.4% year on year due to unfavorable currency movements. Nevertheless, organic sales rose 4.4. Adjusted operating profit improved roughly 10% at cc on higher organic sales and improved gross margin.

Revenues in the Latin America totaled $225 million, down 3% year on year. The downside was caused by currency headwinds. Nevertheless, organic sales jumped approximately 4.3%. Adjusted operating profit fell almost 2.6% at cc, due to expanded input costs and investments.

Revenues in the Asia, Middle East & Africa segment totaled $511 million, up around 60% year over year. The upside can be attributed to Multipro’s consolidation, which was countered by currency woes. Organic sales improved 4.1%. Adjusted operating profit improved 26.7% at cc.

Other Financials

Kellogg ended the quarter with cash and cash equivalents of $272 million, long-term debt of $8,183 million and total equity of $3,097 million.

During the quarter, the company generated cash from operating activities of $70 million.

2019 Outlook

Although the company continued to face headwinds in the North American region, management is impressed with the solid growth witnessed in the emerging markets. Moreover, innovations and revitalized brands are yielding results. Further, to induce greater agility, the company is on track with restructuring the portfolio.

That said, Kellogg made adjustments to guidance for 2019 after considering the impact of sales of certain snacks, cookies, crusts and ice cream businesses. These divestitures were announced in April and are likely to be completed by the end of July. Accordingly, sales in 2019 are expected to grow 1-2% at cc compared with the earlier view nearly 3-4% growth. Organic sales are likely to grow 1-2%.

Further, adjusted operating profit (at cc), which was earlier anticipated to remain roughly flat year over year, is now expected to decline 4-5%. Consequently, Kellogg envisions adjusted earnings to drop 10-11% (at cc).

Price Performance

This Zacks Rank #3 (Hold) stock fell 5.9% in the past six months compared with the industry’s decline of close to 1.1%.

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