Kellogg Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good morning. Welcome to the <b>Kellogg Company</b> K First Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. If you would like to ask a question during this time simply press star and then number one on your telephone keypad. To remove you question, press start then two. Please limit yourself to one question during the Q&A session. Thank you.

At this time, I will turn the call over to Simon Burton, Vice President of Investor Relations for Kellogg Company. Mr. Burton, you may begin your conference call.

 

Simon Burton:Vice President, Investor Relations:

Thanks Gary. Good morning and thank everyone for joining us today for a review of our first quarter 2016 results. I’m joined here by John Bryant, Chairman and CEO; Ron Dissinger Chief Financial Officer; and Paul Norman, President of Kellogg North America.

The press release and slides that support our remarks this morning are posted on our website at www.kelloggcompany.com. As you are aware certain statements made today such as projections for Kellogg Company’s future performance including earnings per share, net sales, margin, operating profit, interest expense, tax rate, cash flow, brand building, upfront cost, investments, and the inflation are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the second slide of this presentation as well as to our public SEC filings.

As a reminder, a replay of today’s conference call will be available by phone through Monday May 9, and the call will also be available via webcast which will be archived for at least 90 days.

Now, I’ll turn it over to John.

 

John A. Bryant:Chairman and Chief Executive Officer:

Thanks Simon and thank you everyone for joining us. Before I start, I’d like to announce that Simon will be moving into a new role in the business. I’d like to take this opportunity to thank him for all his contributions over the years in Investor relations.

He’s done a tremendous job. To back to Simon, we’ve ask John many of you have already know to come back to Investor Relations. John has 16 years of experience with Kellogg including stints not only in Investor Relations but also a business unit CFO roles in both the US and international regions and before coming to Kellogg, John was a sell-side analyst covering the packaged food industry. So, he brings great experience that will enable us to sustain a strong investor relations program.

So, thank you Simon and welcome John.

Turning to the business. We are pleased to report a good start to the year with operating profit and earnings exceeding our expectations in the first quarter. Earlier pricing actions in Venezuela certainly gave our results a boost but even excluding Venezuela, our profit came in better than anticipated.

Net sales excluding Venezuela came in slightly below our expectations but even where we came up short, we can point to specific factors that we don’t consider to be ongoing.

For example, first in US snacks, we underwent a major reorganization of our DST sales force, changing thousands of employees’ roles, managers, zones, and customers, and this has impacted our display activity in Q1 and into Q2 but it’s a right thing to do and when everyone sails into their new roles, we should see improved selling and merchandising effectiveness.

Second in European cereal, sales was soft in Q1. We think this is largely the consequence of timing of investment. Our innovation came in midway through the quarter and we have our big events such as tie-ins with Euro soccer and Olympics, coming this summer. And finally, in businesses like Eggo and MorningStar Farms, we made portfolio changes and product transitions that weigh down short-term results but it should lead to better performance as the year goes on.

Like I said these are all factors that should prove to be temporary and we expect to see gradual improvement as the year progresses.

Q1 features some very tangibles size of progress and clear evidence of sustainable improvement in results. Our US Cereal business continue to gain share reflecting the benefits of investing in our food and Kellogg sales reps. Our big three US cracker brands collectively grew sales, consumption, and share. We generated growth in our Pringles brands in all four regions reflecting our expansion of that brand’s portfolio and presence around the world.

Our business in Asia grew currency-neutral comparable net sales at a high single digit rate reflecting our commitment to emerging markets. And our joint ventures, that are not consolidated in our net sales results, also provided excellent emerging markets growth.

Mean while Project K and zero based budgeting initiatives in conjunction with underlying productivity initiatives, delivered strong efficiencies that contributed to a higher operating profit margin. So there is a lot be encouraged about in Q1.

Just talk briefly about where this leaves us for the full year. Ron will get into the specifics of that guidance in a moment but here is how I would summarize our outlook on a currency-neutral comparable basis.

Our outlook for operating profit and earnings per share excluding Venezuela has not changed. We are on track. Including Venezuela, our outlook actually improves to sales profit and earnings, owing to an earlier impact from inflationary pricing actions. We will see a little more than sales growth coming from Venezuela due to the pricing and a little less from the rest of the business which we now believe will finish the year with 0% to 2% net sales growth excluding Venezuela.

But remember as the short term factors I mentioned earlier get behind us, we continue to expect to build momentum as we go through the year.

And with that let me turn it to Ron for more details on the financials.

 

Ronald L. Dissinger:Senior Vice President, Chief Financial Officer:

Thanks John and good morning. Slide 4 shows highlight of the financial results for the first quarter.

First quarter currency neutral comparable net sales increased by 6.6%. Like last quarter these results included the impact of pricing actions in Venezuela. Total currency-neutral comparable net sales excluding the impact of Venezuela declined by 1%. First quarter currency-neutral comparable operating profit increased by 34.9%, also including the impact of Venezuela price.

Currency-neutral comparable operating profit excluding the impact of Venezuela increased nearly 2% and exceeded our expectations. Reported operating profit for the first quarter was $438 million including the impact of mark-to-market accounting, Project K upfront costs, and the currency re-measurement to the Venezuela business.

You would see more detail regarding items affecting comparability in the appendices to this presentation.

Comparable earnings were $0.97 per share in the quarter which exceeded our expectations due to operating profit performance. This included $0.36 of currency headwind, $0.34 of which was due to the mid-2015 currency re-measurement in Venezuela. As a result currency neutral comparable earnings were $1.33 per share which represented a year-over-year increase of 36% and which was above our original expectations. It’s worth noting that the currency re-measurement of the Venezuelan business occurred at the end of the second quarter 2015.

So this large year-on-year impact from currencies will continue through the second quarter of this year.

Now let’s turn to slide 5 and the drivers of the first quarter sales. Volume declined slightly in the quarter including a few factors that are temporary as John mentioned. He has included as sales force transition in US Snacks, trade inventory reductions in markets like Mexico and product calls and transitions in US frozen foods. These factors mask good volume growth in our US specialty channels, our Asian cereal business and our international snacks businesses led by Pringles.

 

Price mix contributed 7.3% to sales growth largely due to the impact of pricing in Venezuela. Price mix excluding the impact of Venezuela declined slightly by 0.4% largely a result of a difficult economic environment in Europe. And finally, you can see on the chart that the impact of foreign exchange lowered reported sales growth by almost 12% in the quarter with 10 points of that impact coming from Venezuela.

Slide 6 show the currency neutral comparable gross profit and gross margin for the quarter.

 

Currency neutral comparable gross margin increased by 210 basis points in the first quarter including the impact of significant and earlier pricing actions to cover inflation in our Venezuela business. Excluding the impact of Venezuela, our gross margin decreased by 20 basis points reflecting the investments we are making in our food and packaging around the world as well as some headwinds from transactional currencies. We also experienced the impact of some category and channel mix in the quarter but we should see this reverse a bit as our sales trends improve in certain categories and markets as the year progresses.

We still expect that gross margin excluding Venezuela will improve for the full year as we experience positive contributions from Project K, our zero based budgeting initiatives and net deflation and input costs.

Slide 7 shows the regional operating profit performance for the first quarter. Currency neutral comparable operating profit in North America increased by 8%. This was sue to gross margin growth and lower SG&A driven by Project K savings, the zero based budgeting initiative, and lower net input costs. In Europe, first quarter operating profit increased by 1% building on difficult comparisons last year.

This year’s performance was a result of the timing of brand investment to support commercial programs and innovation which was partially offset by the lower impact of sales.

We were also lapping difficult comparisons in Latin America. Although operating profit increased by 329% due to the impact of pricing in Venezuela. Excluding the impact of Venezuela, operating profit decreased by 27% due to the impact of lower volume driven by trade inventory reductions as well as inflation we saw in costs of goods sold. Asia-Pacific’s operating profit decreased by 6% in the quarter and this included increased levels of investment and capabilities to support growth as well as transactional currency impacts.

 

It’s important to note that our Project K and zero based budgeting initiatives remain on track. The North America business realized savings from zero based budgeting, in line with our plan and our international regions are making good progress assessing their spending and developing their goals for late 2016 and beyond.

Slide 8 details cash flow for the first quarter. Our first quarter cash-flow included the impact of a bond tender offer completed during the quarter. This lowered cash flow by approximately $145 million. Although it’s important to note that we get a cash tax benefit in the second quarter.

So the net cash impact of the tender will be around $95 million. Even with the impact of the bond tender, we are still on track to deliver the $1.1 billion of full year operating cash flow after capital expenditures that we targeted, initially.

And finally our Board recently approved a 4% increase in the dividend which will bring our payout ratio slightly about 50% and we remain committed to returning cash to our shareowners.

Slide 9 shows of low level of core working capital as a percentage of net sales and as you can see we reached 5.6% in the first quarter. This improvement was again driven by the accounts payable initiative that has been benefiting our working capital over the last year and importantly, we have plans to improve this metric further in the periods to come.

Let’s turn to slide 10 and our full year earnings per share. As you can see there is no change in our comparable earnings per share which remains a range of $3.64 to $3.71. What has changed is our currency neutral comparable earnings per share which increases to $4 to $4.7 per share, a year-on-year growth rate of 13% to 15% and this is because of the impact of earlier pricing actions in Venezuela.

In this slide this is depicted in the walk from currency-neutral to comparable as Venezuela’s currency impact going to $0.30 per share from a previous estimate of $0.04 per share. Obviously, Venezuela is a volatile market so this estimate could change. But as a reminder our guidance for comparable earnings per share remains unchanged at $3.64 to $3.71.

Pre tax upfront cost remain consistent with our original guidance of between $200 million and $250 million or approximately $0.40 to $0.50 per share about half of which should be in cost of goods sold, and full year integration costs are still anticipated to be between $0.02 and $0.03 per share.

Slide 11 adds net sales and operating profit showing everything on a currency neutral comparable basis in giving you a sense of what our outlook looks like with and without Venezuela. On this space is including Venezuela our guidance for net sales and operating profit just like our earnings per share moves higher. Specifically currency-neutral comparable operating profit growth goes to 11% to 13% from our previous estimate of 4% to 6% . And the currency neutral comparable net sales growth goes to 4% to 6% from our previous estimate of 1% to 3%.

 

The makeup of our net sales outlook changes with more growth coming from Venezuela and a little less from the rest of the business. We are toning down our outlook outside Venezuela because of some of the first half factors that we have already mentioned such as the sales force transition in snacks, product transitions in frozen foods, and market conditions in Europe and Latin America. The good news is that we still expect the business to build momentum throughout the year but the result of a trimmed down first half sales growth estimate is that we now expect full year comparable sales growth excluding Venezuela to be more like 0% to 2% instead of 1% to 3%.

Looking into other assumptions, we continue to expect improved gross margin for the year. We expect that input cost would be net deflationary and that savings from Project K and zero base budgeting will contribute to margin improvement. As was the case previously, our margin guidance excludes the impact of Venezuela given inflation driven pricing increases there and volatility in the market. Incremental savings from Project K are still expected to be approximately $100 million for the full year, approximately 75% to 80% of which will come in cost of goods sold.

Savings for a zero based budgeting are still expected to be roughly $100 million spread between cost of goods sold, brand building and overhead.

Comparable interest expense should be in a range between $235 million and $245 million and comparable tax rate should be between 27% and 28% , and we still expect to repurchase approximately $700 million to $750 million of shares in 2016. So no changes here. And we continue to expect that full year operating cash flow will be approximately $1.1 billion, full year capital spending would be in a range between 4% and 5% of sales including the investments we are making in Pringles growth and Project K.

Remember we said on the fourth quarter call that our comparable earnings per share delivery would be spread relatively evenly across the quarters. This is changing as we delivered slightly higher earnings per share in the first quarter than we anticipate and this will likely come out in Q2 partially due to the timing of investments.

Now I’ll turn it over to Paul for more detail regarding the North America operating segments.

 

Paul T. Norman:Senior Vice President, Kellogg Company, President, Kellogg North America:

Thank you Ron. Good morning everyone. Slide 13 is one I showed you at CAGNY earlier this year.

As I mentioned then, our priority in North America is to return the business to profitable growth and there are three key drivers of this transformation. We will accelerate the momentum behind advantage brands in cereal, snacks and frozen. We will transform the veggie business and unlock the full potential of the Kashi company and we will expand margins while investing to grow driven by our Project K and zero based budgeting initiatives.

As you’ll hear over the next few minutes, we are making progress in all of these areas. Some may take longer to achieve than others but we are confident we are on the right track and that we will see continued improvement.

Now let’s start with slide 14 and the US morning foods business. Overall, we are pleased with the results in the first quarter and we remain on track with our plan to return to growth in 2016 . Our core six cereal brands in combination drove another quarter of share growth; Special-K, Raisin Bran, Rice Krispies, Frosted Flakes, and Mini-Wheats, all gained or maintained share in the quarter and Special-K led the way with good performance resulting from our redesigned messaging, product renovation, and innovation. And as you know we recently launched new Special-K Nourish in the US.

It’s early but we are encouraged by the initial acceptance. Our See You at Breakfast promotion in January and the Give a Child the Breakfast promotion in March, both performed very well. We did see some volatility in consumption in the cereal category during the quarter and an impact from the timing of Easter at the end of the quarter. But if you look at more recent weeks’ data, the category has picked up again and it’s clearly better than it has been in recent years.

We have confidence that our business will continue to improve in the coming quarters. Our share performance reflects the actions we took last year and we’ve got more activity planned for the remainder of the year. In Q2, this includes two new Raisin Bran and as Pixar’s Finding Dory themed cereal and promotion timed to coincide with the launch of the movie here in June. We also have our Olympic themed activity coming in Q3 that also coincides with the timing of our big Back-to-School promotion.

 

Turning to Pop-Tarts briefly, it’s worth mentioning that the business posted a mid single-digit increase in net sales and share gains in the quarter. As we look forward, we have great new products planned including Orange Crush and root beer flavors. We expect growth to continue for the full year.

In summary, the morning foods business has made significant progress and will continue to improve. We have identified the issues that we needed to address, we’ve taken action and we started to see the benefits . The work is not over but we are committed to continuing the progress we have made so far over the balance of 2016 and 2017.

Turning to US Snacks, on slide 15, our net sales declined in Q1 was a little more than we planned really because of two factors. First, we reorganized our sales force creating a more clearly defined roles for selling, merchandising, and support. This is going to drive more effective selling and merchandising but we did see some disruptions in our sales and display activity as we transitioned thousands of employees to new roles, zones, and customers. This was most visible in cookies and crackers and it continued into the month of April but will be behind us as we get through Q2.

 

Second, our wholesome snacks business continued to decline in Q1. As we have discussed previously, this business remains our biggest challenge in snacks and we are still up against lost distribution particularly from some prior year’s innovations that simply haven’t stuck. As you know, it’s absolutely critical to get the food and the brand positioning right in this category. The good news is the Rice Krispies Treats have been a strong performer and its share was up again in Q1.

And that we have several on-trend innovations and renovations launching here in the back half for all of our big wholesome snacks brands such as Special-K Protein bars, a new Nutri-Grain spice variety and a couple of coco crispy treats one including M&M’s.

These give us reason to believe we can stabilize this business as the year progresses.

Now in the meantime let’s not lose sight of what’s working well in snacks. Our big three brands in crackers, Cheez-It, TownHouse, and Club, together posted good growth in net sales, consumption , and share all led by accelerated base consumption in the quarter. This where we have invested both in brand building and innovation and it continues to pay off. We feel very good about our plans for the rest of the year in crackers including innovations like Cheez-It Sandwich Crackers and Club launching midyear.

 

We are also feel very good about our Pringles business. In Q1 it posted growth in net sales and consumption. In fact we saw double digit consumption gains for our core range aided by efforts to improve assortment on shelf and increase brand building support. We also had the double digit consumption growth in our on the go formats business.

We have more brand investment and exciting promotional events coming giving us confidence in an accelerating growth trends for this brand.

While cookies declined in Q1, it was probably the category most affected by our sales force reorganization. It was also held back by an investment plan that doesn’t really get going until here in Q2. We are re investing in our core foods in the form of renovated products and packaging new products and seasonal rotations and importantly we are returning to advertising behind after several years off air. So the plans are in place for a better performance ahead.

 

We still got work to do on snacks for sure. But we are starting to see signs of the return to growth we expect this year. Growth will accelerate and crackers and pringles with more brand investment, a focus on assortment and formats, and exciting innovation coming here in back half. We have got advertising coming on cookies with the key -- returning.

We’ll get past this sales transition in Q2 and we have got much in the way of improved innovation that should start coming on wholesome snacks later in the year to turn that business as we go forward.

So, now let’s turn to slide 16 and the highlights of the US specialty segment. Our specialty channel’s business posted good mid single digit net sales growth in Q1 with net sales growth in all channels and a balance between price realization an volume growth. Leading the way was double digit growth in the convenience channel which featured strong consumption and share growth in cereal, crackers, Rice Krispie Treats, Pop-Tarts, and salty snacks. Food service also recorded good sales growth led by cereal, wholesome snacks, Pop-Tarts, cookies and salty snacks.

We also saw distribution gains in branding in various categories and we had a strong girl scout cookie season.

Slide 17 shows the North American other segment which includes the US Frozen Foods, Kashi, and Canadian businesses.

Net sales for this segment were down but we’re making good progress in each of the businesses. In frozen foods, our Eggo business was down because of last year’s SKU rationalization and a shift in the timing of innovation this year to Q2 from Q1. But excluding the cold SKUs, Eggo grew consumptions in Q1. Similarly, a Morningstar Farms business drove the impact of resetting the shelf with our new receivable packages but where we have converted to the new packaging, we’re seeing positive results and this conversion is now largely behind us.

 

Frozen foods will see better performance as we get past these and resets and as we see the benefits of advertising on Eggo and MorningStar Farms a promotional tie-in with the movie Finding Dory and some great innovation launching right here in the month of May.

Whilst our Kashi business posted lower sales year-over-year in Q1, we did see sequential improvement led by cereal where we maintained share overall and gained share in the natural food channel. In addition to our renovation efforts, we have got great new products rolling out soon including new Kashi and Bare Naked Cereals, new gluten-free crackers and some great savory granola bars. In addition we are introducing here in May the plant based protein powders we showed you at CAGNY a couple of months ago. All of this means that we expect continued improvement as we progress through the year.

 

And finally in Canada, we saw good performance by both cereal and snacks. Cereal posted gains in net sales consumption and share led by co-brands and the continued recovery of Special-K which grew 6% and gained 40 basis points of share.

So let’s turn to slide 18 and the summary. Hopefully you have a sense for the progress we are making on our priorities. We are continuing to gain share in US cereal and our core six brands are performing well. Our core snacking brands including our big three crackers and pringles are gaining momentum.

The frozen food business is poised to return to growth on the strength of innovation. Kashi performance continues to improve as we get the food right and new products arrive in the market. Significant savings from Project K and ZBB are driving strong gross margin and operating profit growth.

I am confident these taking the right actions across the region to invest, drive growth and increase margins. So finally I would like thank all the members of the North American team for their hard work , we are making great progress together. Now I’ll turn it back to John.

 

John A. Bryant:

Thanks Paul. Now let’s turn to slide 19 and our European business were sales declined slightly in the quarter. However we did see some pockets profits of growth particularly in the Pringles and wholesome snack businesses.

The Pringles business in the region posted high single digit growth in the quarter. This was led by sustained momentum in key markets and expansion of Pringles tortilla into new markets. Pringles posted strong share performance in the region with share gains most pronounced in the UK and Germany.

The wholesome snacks business also posted high single digit sales growth led by continued good performance in the UK, in Russia, and in the Mediterranean, Middle Eastern region. They want some great foods and the business has responded.

However our cereal sales remain soft particularly in the UK and France. Much of this is due to the timing of investments. As I mentioned earlier, our innovation launched later in the quarter and we have promotions tide to the Euro Soccer and the Olympics plans for the summer. Over the balance of the year, we are investing in our foods, specifically we have new innovations including ancient legends and special-K nourish which is similar to the product that recently launched in the US and we will continue to work on the online fundamentals including focusing on increasing our distribution in alternate channels.

 

We also have a plan that has most supporting Q2 and the second half than in Q1. We expect a slight increase in net sales in the coming quarters on sustained growth in wholesome snacks and sequential improvements in cereal as a brand building investment give us a pickup in support of innovation and promotions. We also should see continued expansion of our Pringles business.

Slide 20 highlights performance of our Latin American business in the first quarter. As was the case for much of last year, the impact of pricing and inflationary Venezuela drove double-digit currency neutral comparable net sales growth in the period. We continue to manage the Venezuelan business very carefully navigating local supply and power outages. Despite this, we gained share in Venezuela in the quarter.

 

Excluding the Venezuelan business, sales in the region declined by 2% in the quarter, driven by cereal and softness in three markets. In Mexico where we compared against strong year ago growth, we saw a reduction in trade inventories and the timing of commercial investment and these factors pull down our net sales. However our consumption in Mexico increased and we gain shares across our cereal and snacks categories driven by strong innovation and commercial activation.

In the Mercosur region, we felt the impact of economic softness and trade inventory reductions in Brazil, especially where we lapped typical year ago comparisons. The good news is that amidst this economic softness, we did increase our share of the cereal category and wholesome snacks category in Brazil. So our consumption performance and also I would point out consumption in share gains in Colombia was better than our shipment performance in Latin America. We launched new products late last year and in Q1 of this year which are contributing to the consumption performance specifically the launch was Special-K Protein which I mentioned last quarter has gone very well.

 

Meanwhile the region’s snacks business continued to perform well posting mid single-digit sales growth with growth and expansion in markets like Mexico and Andean and Mercosur regions. The Pringles brand grew in a mid single-digit rate and we believe that we have considerable upside in this brand. As we said on the Q4 call the macroeconomic conditions in the region are challenging but we are seeing some good results in many positive regions especially in our in market performance with the share gains as I mentioned. So we remain on plan to improve results ex-Venezuela as the year progresses.

 

Slide 21 and our Asia-Pacific business. Currency neutral comparable sales growth for the region is approximately 1%. Although sales would have increased at a mid single-digit rate if the impact with the joint ventures in China and Africa were included. In Asia our sales increased at the high single digit rate with strong growth in Korea, Hong Kong and Taiwan, Southeast Asia, and Japan.

We reinvested in the Pringles business and launched new products both of which helped to drive mid single-digit sales growth for the brand in the quarter. In Australia, sales declined Q1 although we saw sequential improvement and year-to-date through April, we have gained share in the cereal category.

We also have innovation plan’s introduction in Australia beginning in the second quarter. This in combination with new support should contribute the improving trend that we will start to see.

In summary, our plans for the overall business are exciting and we expect improving performance for the remainder of the year.

Let’s turn to summary in slide 22. Our last quarter’s earnings call, I mentioned four reasons to believe that we are building momentum in 2016. First, we are investing in our food and packaging. We saw this in Q1 with cereals like Special-K Nourish driving improved performance in the US and Canada.

We rolled at GMO free Kashi in the US and new receivable packaging in MorningStar Farms. In Europe, we saw good success in new Granola and Muesli offerings and we’ll see more consumer driven renovation and innovation as we go through the year.

Second, we are expanding Pringles. This could be seen during Q1 with our -- to cross in every region. This will continue to be an avenue of growth for us in the future.

Third, we are enhancing our sales capabilities.

We took action in Q1 as evidenced by our reorganization in US snacks, the continued progress of additional feet on the street in morning foods, and expanding our presence in high frequency stores in Latin America and Asia. Winning where the shopper shops is a key strategic pillar for us we should see even more benefit from this capability investments as the year progresses.

And finally, increasing our earnings visibility by our Project K and ZBB. This helped drive profitability already in Q1 and behind the scenes, these initiatives are creating a cost discipline and spending behavior that can yield more savings and more earnings visibility going forward.

So I am happy to report that we are on track on all of these. I have also stated that we should see steady improvement in our performance as the year progresses. The plan is designed that way with bigger reinvestments ahead, savings developing as the year progresses, and some hurdles coming early in the year and giving away the better performance later. In short we step a mention to build through the year.

 

And now, I’ll start the questions.

 

Question & Answer

 

 

Operator:

We will now begin the question and answer session. The first question comes from Dave Palmer with RBC Capital Markets. Please go ahead.

 

Dave Palmer:RBC Capital Markets:

Thanks two questions. Good morning. Paul could you go into what exactly were those structure changes and kind of those relate to the investments in freedom street that Kellogg just made in recent years. Thanks.

 

Paul T. Norman:

So specifically regarding the changes in snacks, it was a -- the change was designed to separate sales and merchandising functions within the sales force to enable better focus in execution between selling up and merchandising, is just simple as that. It does come on top of previous investments we made in specifically, sales force in terms of technology which obviously will run lock some of the benefits of the technology as we do this is well.

So, it separate from anything which done in morning foods and feed on the street, but it is the continuation of ups building more effective and efficient working practices within our guilty sales organization.

 

Dave Palmer:

And do you think that there is just a learning curve need to happened for, the merchandising become, is that, what happened?

 

Paul T. Norman:

Obviously, there any disruptive changes. Disruptive and so when you touches many sales people merchandises in the complex with customers. There is some disruption, so many people find him sounds a new roles going on the stores, and so we anticipated that we seeing a bit more in the incremental side in terms of display a specially on the cookies and crackers.

But largely through that now as we coming to the month of May, and so we expect to things to pick up from here.

 

Dave Palmer:

And just certainly back on U.S. cereal and for that matter overall U.S. package food unit exclude each and look through the latest period. Year to date it looks like the overall growth rate in the industry is just less than what it was last year.

Have you seen any good reasons for this and do you think you can drive revenue improvement even with the type of growth that we saw in the first four month or so?

 

Paul T. Norman:

It’s interesting I knew with there a lot customers, I haven’t not a customer yet who doesn’t want to engage with big brands to drive growth so I think our focus across plans we’re on customers. The bigger the idea the better you execute it the more impact you have in store. I think specifically Kellogg’s is a little bit of timing in the cereal business where we are very strong last year in March-April because of the Avengers promotion a big idea this year, is the Finding Dory movie which launches in June.

So there is a little bit of timing in that but we feel very good about the quality of our plans. Our brand communication and our innovation ideas as they come to market here.

 

Dave Palmer:

Great, thank you very much.

 

Operator:

The next question comes from Michael Lavery with CLSA. Please go ahead.

 

Michael Lavery: CLS

Good morning.

 

Paul T. Norman:

Good morning Michael.

 

Michael Lavery:

I know you talked about the dsp changes and some of the disruptions there. How much of an effect did that have on margins and how much of that is temporary.

 

Paul T. Norman:

In the quarter we in terms of gross margin or operating margins.

 

Michael Lavery:

Yeah on the operating margins.

 

Paul T. Norman:

What did you see in the reported dates of the snacks business did pretty well on operating profits through the year. Through the first quarter survey is no real matter impact on margins there was some sales disruption as I said. When it comes to our performance on display, at the top-line that help -- through that and we move forward.

We expect these to be a more effective and more efficient where operating going forward.

 

Michael Lavery:

I guess, I am curious if, it sounds like some of the transformation you made. It doesn’t add any fixed cost. I am just trying to get a sense of even with the performance in a quarter if, if there is at different trajectory for how that business looks.

 

Paul T. Norman:

No, there is no cost addition to these -- impact will be more efficient and effective going forward.

 

Michael Lavery:

Okay, nice, thanks. And then just one other on cash, could you give a little better sense of the moving part there, I know you still got some innovation and marketing efforts there to turn that business around. What’s the latest update in a little bit more detail.

 

Ronald L. Dissinger:

If you look at the Kashi business over the past 18 months or so now or at least 15 months we continue to see sequential improvement in the performance of the business as you are really but to team back in California to several year ago. We are seeing specially a serial business performed a lot better share was track in the first quarter were actually growing the business now in the natural channel and the team is being really working hard at building a pipeline of ideas to get back ahead, in terms of a fruit focused initial based operations so that new Kashi and serious launching here now. We have about launching at the end of the second quarter they have some inspired crackers that spoke about before we have bites coming from at the turn of the quarters while in the third quarter.

 

I may the brand new range which you shipping now of a Kashi go line and Kashi branded protein powders to a line into new segments with the brand. Of note of band business is growing at a mid single to high single-digit clag so the business is by making does is well, well more part of Kashi companies stretch out in fruit snacks, a very small business we have about that growing at the strong double-digit rate as well and we invented that made it organic invested back in the fruit there is well service been a lot of reinvestment in food to renovate and now a lot of innovation about to come which gives us the confidence we are going to get this business back to grow for the coming months in ‘16 and into ‘17.

 

Michael Lavery:

Okay. Thank you very much.

 

Operator:

The next questions comes from Rob Moskow with Credit Suisse. Please go ahead.

 

Robert Moskow:Credit Suisse:

Hi. Get focused my question on your serial because the decline in your experiencing now. It seem to be on top of declines a year ago and maybe even a year after that and John you made management changes in Europe you’ve tried introducing some innovation along a way. -- as to what’s happening there.

Why hasn’t it stabilized like the US has and what should give us confidence that the new innovation you are talking about for second quarter and why is that going to stabilize the business may be start there for me.

 

John A. Bryant:

Sure. We come back and look at the US business a last couple of years we said the two big brands in US that we needed to fix one was Special-K, one was Kashi and both cases were we put on trend food in the market places seen consumers respond that very positively and seen that those results come through in the US results last year and into this year.

Same is true in Canada and as I said in the prepared remarks in Australia we are also seeing significantly improved results through first quarter on the back of improved food that’s more on trend food consumers are looking for. The same will be true in the UK. So we have four large cereal markets US, Canada, Australia and UK. UK is the last one for us to turn but we believe again putting the right food in the market place for consumer is gonna make the difference.

 

The ancient legends foods that we had at K is more granola great taste visibly nutrition type food as the is Special-K Nourish that’s being important part of the Special-K turnaround in the US and Special-K red berry’s renovation in the US will also have going into the UK market as well. Our -- those foods changes that are got cut into the shelf in the way part of Q1. So we do expect to see the business respond to that either in the -- European cereal business get back to growth in this year. But a many respects that several weakness in Europe is masking some very strong in other positive European business.

So, we have singles, up high single digits and hold some snacks up high single digits.

We clearly have the ability to execute, if we have great food in the market place, we’ve great food behind cereal, I confidence, and we’ll see a European top-line trends improved as we go through this year.

 

Robert Moskow:

Okay, can I ask the follow up on wholesome snacks. You talked about some innovation that’s coming but I think you mentioned Choco Krispies with M&M’s can you give us some examples of wholesome snacks that are little more wholesome that are coming in the back half. I think you said, special-K Trail Mix there is a lot trail many item out there. Is there any really innovative coming?

 

John A. Bryant:

With the -- turning on wholesome as you said is going take a bit of time and it does mean a focus on food and focus on co brand. So, Krispies treats is a great brand applies in a certain segment within wholesome snacks being doing very well and is the question of feeling of its growth. So, that’s being fixed.

When you come across the Nutri-Grain, looking forward on Nutri-Grain, its we’re investing in the core soft big pause and we have two initiatives coming. One from another one with which is very closing to what Nutri-Grain stands for.

Beyond that as you lead towards the healthy, if you like proceed a domains of wholesome snack, we’ve already renovated many of our Special K products and since those renovations they’re doing better. We are now bringing Protein to special-K and then the one or two brands that really I think need to step up and step in here to broad and outdoor fall in our growth. Who are actually coming from cash as they made it. Because they really been option over the last two three years and therefore we renovating our core cash another Kashi Granola of those will bring new to the world savory buss on Kashi or bringing new Granola bikes from as we going to the end of the second quarter here and you will see more innovation coming on from Kashi and they make it in that what I will let’s stop the performance area and snacks.

You have to look at the whole picture to think about how we innovate and renovate across their with segment again the turns not going to come over night but so we spend a lot of time with a lot of customers talking about our view for the future and that is lot of encouragement coming about how for you completed win as we look forward.

 

Robert Moskow:

Okay. Thank you.

 

Operator:

Next question comes from Ken Goldman with JP Morgan. Please go ahead.

 

Ken Goldman:JP Morgan:

Hi, thank you for taking the question. You talked about Special-K serial doing well. At least in numbers and I know it doesn’t tell the whole story the brand seem to see of a little bit, in recent month and I will take the trending someone negatively again. I don’t know that’s truly reflecting you are seeing but if it is processing Kashi still, doing much better but still negative year-on-year to so.

I guess the question is one need to the happened in terms of the innovation or marking for these brands to sustainable growth like positive take away year-on-year. So we don’t really talked about them sort of restoration progress any more.

 

Ronald L. Dissinger:

I am not sure the date to you looking at Special-K was up about 3% and gain 30 basis point to share the red berries initiatives that, that part of it the full still growing it’s not to 5% so the brand is growing that maybe some timing of activity year-on-year revenue launched that berries so you may see something in near in data that might look strange but the underline trends that we see them and now with nourish just giving up we have some great seasonal items coming in the Q Q3 as well on special-K. We think the brand is back on its strive. I mean other tickets going to growing double-digit year in year out, but it should be a contributed to growth.

Plus our core portfolio are going forward. So we feel good that we have got a --. I mentioned in Canada there is been something similar and the Canadian business is taking up as well so when we think cross six brands and growing across all major customers, cases a huge components part of that. So we are happy with the progress we have made.

 

John A. Bryant:

Maybe this is comment of -- I think when the category was soft and this true for all the large markets. It really had to do some of the adults brands not doing well. And now the other brands are doing much better with -- coming back with Special-K even brand like Raisin bran doing -- of and doing adults back in the category and driving head of consumption.

I think this is what happen across the 2000 help drive academy then. And that’s are focus as we drive forward here.

 

Ken Goldman:

Okay maybe follow up offline about the Special-K stuff bit. John one follow up for me you made some comment at the end of the prepared remarks about some -- it sounded to me, is that maybe you are sensing some upside possibly not this year but downwards to the guidance of 100 million is that a way, we just think about it, or is it just ready to be confident in the how outlook here.

 

John A. Bryant:

On what components in a $100 million there is no doubt about that, so we are still on track with a North America to deliver against that as I mentioned on our fourth quarter call, our international regions which start progressing their zero base budgeting initiatives early in the year they have done so they are identifying target -- all the spends, -- spends across similar categories as to what we did in North America that is progressing extremely well. We do expect to see little bit of savings from the international regions in 2016 but most of that will come into 2017. North America by the way also in the first quarter was on plan we had embedded the zero base budgets savings into their plan and they were on a slightly above plan frankly so we are in good shape on the program just on zero base budging it both delivers savings but also provides a great tool of mechanism just the challenge historical assumptions and to challenge in maybe some -- with that’s happing we are not getting a return and we were -- good return so is not always just the savings that comes out of the so much as the underlying methodology and driving and pushing in key assumptions.

 

Ken Goldman:

Okay great thanks very much.

 

Operator:

The next question comes from Alexia Howard with Bernstein. Please go ahead.

 

Alexia Howard:Sanford Bernstein:

Good morning everyone. You mentioned negative category in channel mix shift off course some headwinds that gross margin this quarter. Could you elaborate a little bit on that is well and just as the follow up. The serial category seems to be getting into some more favorable position a few months ago and now it seems to inform back again how -- you get into retailers talking about shrinking the size of the categories what are your distribution and shall face and our trends at the moment in and what’s the outlook there.

Thank you.

 

Paul T. Norman:

Alexia first on the category and channel mix so across the business we are seeing a little bit more adverse mix as a result of some of our big develops to real markets and the trends in those business assume the Paul mentioned are the transition that we are doing in US snacks very profitable business for us both in the gross in margins stand point and profitability stand points. So as I go through that transitions sells were down a little bit more than we expected that had an adverse impact are on mixing is growing in some of our emerging markets was seeing a little bit adverse impact in --. As I said in the prepared remarks we expect just to improve as we progress with the course of the year and we build momentum on our sales outlook.

 

 

Paul T. Norman:

This is Paul. On the, the question about space install and retailers we are not seeing anything at a macro level but different retailers obviously have different strategy just to how they manage the --. So we have see -- for example number of sizes reduced in certain retailers but we -- and increasing space for natural and organic which is benefited obviously brand like -- for us.

So really is a -- always looking to maximize -- and we spend a lot-lot time turn a maximize the -- holding power behind the fastest moving biggest. So let me -- question about sales fundamental and back to this -- of customers want big brands to grow we need bigger better ideas to help them grow and so nothing at a macro level but every reach at different in terms of best strategy.

 

Alexia Howard:

Great, thank you very much and Simon will miss you and looking forward -- working with --.

 

Operator:

The next question comes from David Driscoll with Citi. Please go ahead.

 

David Driscoll:Citigroup:

Great thank you and good morning everyone. Two questions for me just like little one and kind a bigger one for you John, just a little question are can you give us some sense over the costs savings -- throughout 2016 and then on North America I think we began the laps some of the big currency -- valuation in the second half of the year what can kind of gross do you expect in profits after your lap all back currency issue in Latin.

 

John A. Bryant:

Yes, so first in terms of that costs save -- seen zero based budgeting and project-K as well its -- relatively. evenly over the course of the years. So we saw saving I was looking for the first quarter and will see saving of the progress to, there as well. In terms of Venezuela as I mentioned we did this measurement at the middle of 2015.

So will be passed that after the second quarter. We do expect our sales trends to improve and as our sales trends improved that will improved our profitably performance remember we guided 4% to 6% operating profit growth on our Venezuela business we delivered 2% in the first quarter so as we expect to see. More growth going to the balance to the year.

 

David Driscoll:

Okay.

 

Paul T. Norman:

Basically terns to you Latin American question that for second in margin in Latin America. As you look at the cross the company, you can see its investing back in the emerging markets so. Asia-Pacific in Latin America will not immerse much say.

Margin expansion as we are from North America and Europe. We did Latin America within 2016 is better say that we are seeing little bit more economic softness and more challenge and the sudden part of Latin America and we would like to it seen. We do expect to see. A operating profit growth on a comfortable basis expense as well in the region but pull we more losing with in sales growth in the sense of range.

Again expand as well, just reflecting the typical in the market place.

 

David Driscoll:

That make sense. Big picture John. Last time want to be you major competitors reported. Asia with operating margin at 27% is up 700 basis points year-over-year.

You guys are run in just over 15% on your operating margin. Can you just kind of frame of forest. What’s the long term opportunity at Kellogg, are we right to think that there is really is a substantial operating margin improvements opportunity at Kellogg and just loved be here your perspective on kind of what’s happening in this industry right now?

 

John A. Bryant:

As we discussed at day and we’re committed to expanding operating margins at the time we’ve set a goal of 17% to 18% operating margin by 2020. Clearly, we look very closely at what other companies are doing at been and our competitors, one of the core values of the Kellogg Company as we have the humility and hunger to learn, and we’ll look for closely of what’s happening a and with the other companies in the industry, and if we see opportunities to improve the atomics of their business to drive short of value creation we’ll assuming pursue those.

 

David Driscoll:

Okay, thank you so much.

 

Simon Burton:

Garry, this is Simon, I think we got time for one last question please.

 

Operator:

The final question comes from Bryan Spillane with Bank of America. Please go ahead.

 

Bryan Spillane:Bank of America Merrill Lynch:

Hey, good morning everyone. Actually just one question on phasing Ron, I think you’ve said earlier that there maybe a little bit of get back in 2Q on the second quarter. So, in terms of, I think when we start the year, you talked about the EPS beings pretty much the same each quarter to the year, you over delivered a little bit in the first quarter and get back would be in 2Q. So, could you just elaborate little bit more.

Did I here that correctly, and if so was that still we’ve got some of the though sale drag it kind of leeks from 1Q and the 2Q, and I don’t know maybe there are some other expenses, other item that would just affect 2Q specifically versus the balance the year.

 

Paul T. Norman:

Bryan, your thinking about it correctly. One we start of the year on the fourth quarter call I said expect our comparable earnings per share and that includes impact of currency we spread relatively even we across the fourth quarter of the year. We did deliver a little bit more in the first quarter and we said that might come out of the second quarter and some of that is related of the timing of the investments and activations that we are doing against our commercial programs in our innovations we move into the second quarter.

So expect the second quarter to be a little bit lower that the average of the fourth quarters now.

 

Bryan Spillane:

Okay. Thank you.

 

Operator:

This concludes our question and answer session. I would like to turn the conference back over to John Bryant for any closing remarks.

 

John A. Bryant:

Thank you all to your questions that interest in the Kellogg company. At this time I like to share with you the news that Ron Dissinger our Chief Financial Officer for the past 7 years has decided to retire after 30 great years with the company. Ron is been the key member of evaluation team combining a strong business acumen the disciplined approach to finance and I am sure you all have enjoy working with Ron as much as I have.

It may not surprise that Ron will be retiring in a very careful delivered way. We remain the company’s CFO through the end of 2016. This will give us proper time to do it through search but internally and externally for his successor. Ron will also stay on at 2017 to insure an orderly and effective transition, so we will have good continuity.

Please join me congrats trying on Ron on a wonderful career and thanking him for his outstanding service and that wraps up our call. Thank you and have a great day.

 

Operator:

This conference is now concluded. Thank you for attending today’s presentation you may now disconnect.

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