Kellogg 1st-qtr profit drops 2 percent as costs rise and weaker demand in Europe hurts sales

NEW YORK (AP) — Food maker Kellogg Co. said Thursday that first-quarter net income fell 2 percent, hurt by declining demand in Europe and higher raw material costs.

The cereal and snack maker, known for its Frosted Flakes cereal, Eggo waffles and Keebler cookies, had cut its 2012 guidance on Monday due to high ingredient costs, weak consumer spending and an economic slowdown in Europe, problems a wide range of companies are facing.

“It was a difficult quarter for us, but we have pragmatic guidance going forward and we’re focused on getting this business back on track,” said CEO John Bryant in an interview with the Associated Press.

Like most food makers, Kellogg has raised prices over the past year to offset higher costs. Prices and changes in “mix” — selling products that are more profitable — rose 4.4 percent.

But raising prices can turn off consumers. In the U.S., Kellogg’s cereal and other morning foods revenue declined as consumers turned to cheaper options.

Kellogg Co. currently gets most of its revenue from North America, where growth in the packaged food industry has been relatively weak. But in February, the company announced that it would pay $2.7 billion to buy Pringles potato snacks from Procter & Gamble Co.

The Pringles purchase, expected to close this summer, would catapult Kellogg to the No. 2 ranking among savory snack makers after PepsiCo Inc.’s Frito-Lay.

The acquisition is intended to have a dual benefit for Kellogg. The deal will strengthen the company’s footprint overseas as Pringles are sold in more than 140 countries and the brand gets two-thirds of its revenue from abroad.

Kellogg is also hoping the addition helps it move beyond the breakfast table, as the appetite for on-the-go snacks grows rapidly in emerging markets like China and India. Kellogg’s cupboard of savory snacks currently include Cheez-It, Keebler’s Club crackers and its new Special K crackers.

Europe is currently Kellogg’s largest international market. Disputes with grocery stores and other retailers over higher prices also led to lower in-store support in the region, Bryant said. But he said that has been resolved and the company expects better results going forward, although the weakening European economy will still hurt the business.

“We have issues that we are addressing in this region and though the improvement will take some time, we’re optimistic that we’re taking the right actions to improve performance,” Bryant said in a call with investors.

verall, commodity costs — for ingredients like wheat and needs like packaging and fuel — rose 7 percent year over year. Kellogg expects that to moderate in the second half of the year.

For the three months ended March 31, Kellogg says net income fell to $358 million, or $1 per share, from $366 million, or $1 per share last year, matching analyst expectations, according to FactSet.

The Battle Creek, Mich., company’s revenue fell 1 percent to $3.44 billion from $3.49 billion. Analysts expected revenue of $3.52 billion.

Revenue in Kellogg’s biggest division by sales, U.S. morning foods and Kashi, fell 2 percent to $941 million, while revenue in other U.S. and North American divisions rose. Revenue fell 13 percent to $538 million in Europe.

Kellogg reiterated its guidance issued on Monday. It expects a profit of $3.18 to $3.30 per share this year. That includes a charge of 6 cents to 11 cents per share from its Pringles deal. Analysts expect $3.41 per share, excluding one-time items.

Kellogg expects 2012 revenue, excluding the effect of changing currency values as well as acquisitions and sales of company divisions, will grow 2 percent to 3 percent, down from the 4 percent to 5 percent range it predicted earlier this year.

Shares dipped 21 cents to $50.28 in midday trading Thursday.