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| K > SEC Filings for K > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
North Latin Asia Pacific Consoli-
(dollars in millions) America Europe America (a) Corporate dated
2009 net sales $ 2,176 $ 617 $ 258 $ 178 $ - $ 3,229
2008 net sales $ 2,127 $ 746 $ 283 $ 187 $ - $ 3,343
% change - 2009 vs.
2008:
Volume (tonnage) (b) .4 % -5.5 % 3.7 % -.7 % - -.5 %
Pricing/mix 2.9 % 4.1 % 4.5 % 3.6 % - 3.1 %
Subtotal - internal
business 3.3 % -1.4 % 8.2 % 2.9 % - 2.6 %
Acquisitions (c) .1 % - - 5.6 % - .4 %
Foreign currency
impact -1.1 % -16.0 % -16.9 % -12.9 % - -6.4 %
Total change 2.3 % -17.4 % -8.7 % -4.4 % - -3.4 %
North Latin Asia Pacific Consoli-
(dollars in millions) America Europe America (a) Corporate dated
2009 operating profit $ 426 $ 104 $ 57 $ 21 $ (55 ) $ 553
2008 operating profit $ 380 $ 122 $ 60 $ 22 $ (54 ) $ 530
% change - 2009 vs.
2008:
Internal business 13.9 % 3.5 % 12.3 % 35.9 % -1.0 % 13.5 %
Acquisitions (c) -.1 % - - -19.6 % - -.9 %
Foreign currency
impact -1.5 % -18.7 % -17.8 % -20.2 % - -8.2 %
Total change 12.3 % -15.2 % -5.5 % -3.9 % -1.0 % 4.4 %
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(a) Includes Australia, Asia and South Africa.
(b) We measure the volume impact (tonnage) on revenues based on the stated weight of our product shipments.
(c) Impact of results for the quarter ended July 4, 2009 from the acquisitions of Navigable Foods, Specialty Cereal and certain assets and liabilities of IndyBake.
Our consolidated net sales decreased by 3%, driven by a significant negative
impact from foreign currency translation. Excluding this negative impact,
internal net sales grew by 3%, driven by the continued momentum of our pricing
initiatives. While our overall volume was down slightly compared to last year,
we increased global ready-to-eat cereal volume by 2%.
Our North America operating segment had internal net sales growth of 3%. The
retail cereal product group grew by almost 4% as we experienced broad based
growth in our core brands such as Frosted Mini-Wheats, Special K, and Raisin
Bran. The retail snack product group (cookies, crackers, toaster pastries,
cereal bars, and fruit snacks) grew by 3% driven by our FiberPlus innovation,
Nutri-Grain bars and Pop-Tarts. Our snacks growth was negatively impacted by the
peanut-related recall which resulted in our sandwich crackers being off the
shelf during most of the quarter, but back on by the end of the quarter. See the
"Voluntary product withdrawal" section for further information. The frozen and
specialty channels (frozen foods, food service and vending) grew 5% driven by
solid growth in Eggo waffles and Eggo Bake Shop innovations.
Our International operating segments collectively achieved net sales growth of
almost 2% on an internal basis. Europe's internal net sales declined by 1%. Net
sales and volume were negatively impacted by retailer disputes, which though
resolved, impacted the second quarter. While Europe has been a tough operating
environment, we expect growth in net sales in the second half of the year. Latin
America's internal net sales growth was 8% attributable to both volume and price
increases. Internal net sales in Asia Pacific grew 3%. Growth in India and South
Africa was dampened by a decline in growth in Australia/New Zealand which was
negatively impacted by challenging customer negotiations.
Consolidated operating profit increased by 4% on an as reported basis and by
almost 14% on an internal basis, when excluding the impact of foreign currency
translation and acquisitions. While we continue to experience significant
commodity cost pressures and have increased our up-front costs, we have been
able to more than offset those by savings from our cost reduction initiatives,
the timing of advertising expenditures and pricing. During the second quarter of
2009, our up-front costs were $40 million, which were $18 million higher than
the previous year. Up-front costs represent both exit or disposal activities and
other cost reduction initiatives. For the full year, we expect total up-front
costs to be approximately $150 million.
Reported operating profit in each of our operating segments was negatively
impacted by foreign exchange. North America's operating profit growth was driven
by price and savings from our cost reduction initiatives, which was partially
offset by higher up-front costs. Internal operating profit increased in Latin
America due to strong top line growth, partially offset by commodities
inflation. Despite a decline in net sales, Europe's internal operating profit
increased, benefiting from lower up-front costs, savings from cost reduction
initiatives and media deflation. Internal operating profit growth in Asia
Pacific increased due to sales growth in Asia, while reported operating profit
was negatively impacted by the acquisition of Navigable Foods. For further
information on our acquisitions, see pages 34 to 35 in our 2008 Annual Report on
Form 10-K.
The following tables provide analysis of our net sales and operating performance
for the year-to-date periods of 2009 compared to 2008. The year-to-date net
sales performance was similar to the quarter's results, as growth in net sales
was driven by price. The drivers of the increased operating profit are savings
from our cost reduction initiatives, media efficiencies and pricing.
North Latin Asia Pacific Consoli-
(dollars in millions) America Europe America (a) Corporate dated
2009 net sales $ 4,387 $ 1,174 $ 488 $ 349 $ - $ 6,398
2008 net sales $ 4,275 $ 1,423 $ 536 $ 367 $ - $ 6,601
% change - 2009 vs.
2008:
Volume (tonnage) (b) -.8 % -4.7 % 1.9 % 4.2 % - -1.1 %
Pricing/mix 4.5 % 4.6 % 6.4 % 2.5 % - 4.5 %
Subtotal - internal
business 3.7 % -.1 % 8.3 % 6.7 % - 3.4 %
Acquisitions (c) .1 % .5 % - 6.4 % - .5 %
Foreign currency
impact -1.2 % -17.9 % -17.2 % -18.0 % - -7.0 %
Total change 2.6 % -17.5 % -8.9 % -4.9 % - -3.1 %
North Latin Asia Pacific Consoli-
(dollars in millions) America Europe America (a) Corporate dated
2009 operating profit $ 829 $ 199 $ 106 $ 46 $ (98 ) $ 1,082
2008 operating profit $ 783 $ 234 $ 105 $ 53 $ (100 ) $ 1,075
% change - 2009 vs.
2008:
Internal business 7.6 % 6.0 % 19.0 % 24.3 % 1.4 % 10.0 %
Acquisitions (c) -.1 % - - -12.9 % - -.7 %
Foreign currency
impact -1.6 % -20.9 % -18.0 % -23.9 % - -8.6 %
Total change 5.9 % -14.9 % 1.0 % -12.5 % 1.4 % .7 %
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(a) Includes Australia, Asia and South Africa.
(b) We measure the volume impact (tonnage) on revenues based on the stated weight of our product shipments.
(c) Impact of results for the year-to-date period ended July 4, 2009 from the acquisitions of United Bakers, Navigable Foods, Specialty Cereal and certain assets and liabilities of IndyBake.
Margin performance
Margin performance for the second quarter and year-to-date periods of 2009
versus 2008 is as follows:
Change vs. prior year
Quarter 2009 2008 (pts.)
Gross margin (a) 43.5 % 43.2 % 0.3
SGA% (b) -26.4 % -27.4 % 1.0
Operating margin 17.1 % 15.8 % 1.3
Year-to-date 2009 2008 Change
Gross margin (a) 42.3 % 42.5 % -0.2
SGA% (b) -25.4 % -26.2 % 0.8
Operating margin 16.9 % 16.3 % 0.6
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(a) Gross profit as a percentage of net sales. Gross profit is equal to net sales less cost of goods sold.
(b) Selling, general and administrative expense as a percentage of net sales.
We strive for gross profit dollar growth to reinvest in brand-building and
innovation expenditures. We maximize our gross profit dollars by managing
external cost pressures through product pricing and mix improvements,
implementing productivity savings and technological initiatives as well as
entering into commodity hedges and fixed price contracts to reduce the cost of
product ingredients and packaging. For the quarter, our gross profit was down
due to foreign exchange and $25 million of higher up-front costs in cost of
goods sold. Excluding the impact of foreign exchange, our gross profit would
have been higher by $95 million. On a year-to-date basis, gross profit was down
$102 million, but would have been higher by $204 million excluding the impact of
foreign exchange.
As illustrated in the preceding table, our consolidated gross margin increased
by 30 basis points in the quarter. Our recent acquisitions lowered gross margin
by approximately 20 basis points for the quarter. We also continue to experience
inflationary cost pressures for fuel, energy, commodities and employee benefits.
During the quarter, higher costs, including increased investment in up-front
costs, were more than offset by savings from cost reduction initiatives and
price increases. Due to the current economic environment we have incurred a
slight decline in mix. On a year-to-date basis, gross margin is down 20 basis
points compared to last year. Excluding a 20 basis point impact for acquisitions
our gross margin would have been flat. We expect our full year margin to be up
approximately 50 basis points compared to the prior year by continued price
realization and cost savings which will offset cost pressures.
Operating margin improved from the prior year both for the quarter and
year-to-date periods due to lower up-front costs in SGA, savings from cost
savings initiatives as well as decreased spending in advertising as a result of
timing, media deflation and efficiencies.
Foreign currency translation
The reporting currency for our financial statements is the U.S. dollar. Certain
of our assets, liabilities, expenses and revenues are denominated in currencies
other than the U.S. dollar, primarily in the euro, British pound, Mexican peso,
Australian dollar and Canadian dollar. To prepare our consolidated financial
statements, we must translate those assets, liabilities, expenses and revenues
into U.S. dollars at the applicable exchange rates. As a result, increases and
decreases in the value of the U.S. dollar against these other currencies will
affect the amount of these items in our consolidated financial statements, even
if their value has not changed in their original currency. This could have
significant impact on our results if such increase or decrease in the value of
the U.S. dollar is substantial.
The recent volatility in the foreign exchange markets has limited our ability to
forecast future U.S. dollar reported earnings. As such, we are measuring diluted
earnings per share growth and providing guidance on future earnings on a
currency neutral basis, assuming earnings are translated at the prior year's
exchange rates. This non-GAAP financial measure is being used to focus
management and investors on local currency business results, thereby providing
visibility to the underlying trends of the Company. Management believes that
excluding the impact of foreign currency from EPS provides a better measurement
of comparability given the volatility in foreign exchange markets.
Below is a reconciliation of reported EPS to currency neutral EPS for the
quarter and year-to-date periods ended July 4, 2009:
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