“There is no question that today’s business environment is as challenging as we’ve ever seen it,” as market prices for commodities, packaging and freight surge, economy-wide bottlenecks and shortages hamper production, and acute labor shortages – including a month-long labor strike at US cereal facilities – result in absenteeism, high turnover and difficulty maintaining production, CEO Steven Cahillane told investors Thursday during the company’s third quarter earnings call.
But, he added, “we’re taking important actions to manage through today’s unprecedented environment and through it all we’re executing well in the market and delivering balanced financial growth, which continued in quarter three” with a 6% increase in net sales led by international momentum and positive price/mix.
Operating profit also was up 9% in the quarter year-over-year – helping the company confidently reaffirm its full-year guidance for operating profits and earnings per share despite a worsening cost, labor and supply environment, Cahillane said.
'Quarter four will be a little different'
While the company maintained its full-year expectations, CFO Amit Banati cautioned, “quarter four will be a little different, contrary to our prior assumptions.”
He explained: “We are seeing no moderation of the economy-wide bottlenecks and shortages in the fourth quarter. In fact, we’re now experiencing incremental disruption and costs further compounded by a labor strike. So, for quarter four, we are forecasting gross profit dollars and operating profit dollars to be below quarter four of 2019 – even if both metrics finish the full year above 2019 levels.”
With that in mind, he added the company likely will come in on the lower end of its guidance range for operating profit (projected to drop 1-2% for the year over last) and earnings per share (up 1-2%).
‘We have always treated our employees with respect and fairness’
This conservative stance takes into account the strike at Kellogg’s US cereal plants, which began Oct. 5 and after negotiations failed on Wednesday is entering its second month.
Representatives for the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM) immediately rejected Kellogg’s most recent offer without presenting it to its 1,400 members who work for the company for a vote.
“We have always treated our employees with respect and fairness, and that includes industry leading compensation and benefits. The offer that we have in front of the Union right now is increased compensation on top of that already industry-leading compensation and benefits and we are not asking to take anything away – despite what you may have heard publicly,” Cahillane said.
He added that while Kellogg is eager for workers to return, it is mitigating the negative impact of the strike by bringing in some outside workers to keep the plants running and “gaining productivity each and every day.”
Leading up to the strike, in anticipation that the company and union might not reach an agreement, Kellogg was able to build inventories slightly – however this was hindered by a fire at its Memphis cereal plant.
Kellogg also is importing cereal to fill orders and ease shortages, but the company’s fill rates and customer service levels “are not where we want them to be … and we aim to get better and better,” Cahillane added.
Ultimately, Cahilllane said, the current constraints on the cereal business are “transitory,” and Kellogg does not have broader structural disadvantages that could harm the business longer-term.