Kellogg's Net Falls on Wheat Prices, More Advertising

Kellogg Co., the largest U.S. cereal maker, said fourth-quarter profit fell 5.2 percent as wheat costs soared and the company spent more on advertising.

Net income fell to $182.4 million, or 45 cents a share, from $192.4 million, or 47 cents, a year earlier. Sales increased 7.9 percent to $2.58 billion, Battle Creek, Michigan-based Kellogg said today in a statement.

The price of wheat used in Kellogg's cereals, cookies and Eggo waffles was 50 percent higher last quarter, and Chief Executive Officer David Mackay also spent more on marketing. The company said ``significant'' price increases for agricultural products will reduce 2007 profit by as much as 22 cents a share.

``Commodity costs remain a concern given high grain costs and Kellogg's grain-heavy portfolio,'' A.G. Edwards analyst Christopher Growe wrote in a note. ``Kellogg has managed through this headwind the past three years with terrific results.''

The company boosted its 2007 earnings forecast to $2.68 to $2.73 a share, a penny more than it estimated in October. Kellogg said it would continue to invest in advertising to promote new products.

Shares of the company, which makes Special K cereal and Cheez-It crackers, fell 60 cents to $50.21 at 4:00 p.m. in New York Stock Exchange composite trading. The stock rose 16 percent last year, trailing a gain of 17 percent by General Mills Inc., the No. 2 U.S. cereal maker.

Analyst Estimate

The fourth-quarter profit met Growe's estimate of 45 cents a share. He is among analysts top ranked for accuracy by StarMine Inc.

For the full year, net income rose 2.4 percent to $1 billion, or $2.51 a share. In October the company forecast 2006 profit of $2.48 to $2.50 a share.

Gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 43.3 percent in the fourth quarter from 43.6 percent a year ago. Selling, general and administrative costs rose to 30 percent of sales from 29.3 percent.

North American sales rose 6.5 percent, helped by snacks, frozen and specialty foods. Sales in Europe gained 14.6 percent, boosted by cereal and snacks in the U.K. Revenue increased 6.3 percent in Latin America and 4.9 percent in Asia.

The company may have a hard time raising cereal prices to compensate for higher commodity costs, said Arun Daniel, a senior analyst at ING Investments LLC in New York with $40 billion in assets, including Kellogg shares.

$5 Cereal

``When you have cereals getting $5 a package, you're pushing your limits on pricing,'' he said.

Mackay said the company's share of the U.S. cereal market rose 0.2 percentage point from a year earlier to 34 percent.

Executives on the company's conference call said higher agricultural prices will reduce 2007 earnings by 8 cents to 22 cents a share.

Wheat prices were 54 percent higher in the fourth quarter compared with a year earlier after drought damaged crops in the U.S., Australia and other countries. Crude oil prices have dropped 20 percent in the past year.

Diesel costs haven't dropped as much, Mackay said in an interview today. ``You can't correlate the two as you used to be able to,'' he said. ``We're seeing less of a benefit than you might normally deduct given what's happened to oil.''

Corn and other grains ``are all up significantly,'' Mackay said, as demand for alternative fuels such as ethanol pushes up demand.

New Products

The company introduced a number of new products in January including Rice Krispies With Real Strawberries and Special K Chocolatey Delight.

``Right across the board, we've got a lot of innovation coming,'' Mackay said.

Kellogg said in September that it will eliminate 220 jobs in a cereal factory in Manchester, England, through 2008. It cut more than 700 positions in two U.S. bakeries in 2005 and 2006, according to a Nov. 3 regulatory filing.

Mackay, 51, and his two CEO predecessors, Jim Jenness and Carlos Gutierrez, turned the company's focus to profit growth from an emphasis in the late 1990s on increasing shipments. They developed healthier, higher-profit foods, pushing Kellogg past General Mills as the largest U.S. cereal maker in 2002 with new items such as Special K Red Berries.

Kellogg is rated ``buy'' by 15 analysts tracked by Bloomberg. Seven have ``hold'' recommendations.
source:www.bloomberg.com