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Kellogg to cut seven per cent of workforce by 2017

Kellogg Co., the world’s largest maker of breakfast cereals, said it would cut about seven per cent of its workforce by 2017 and also trim production capacity, after reporting another quarterly decline in sales in its cereals business.

Shares of the maker of Corn Flakes, Keebler cookies, Froot Loops cereals and Eggo waffles rose as much as four per cent.

The company’s cereals business, which includes Special K, Corn Flakes and Rice Krispies, has been battling stiff competition from General Mills and private-label cereal brands. Increasing popularity of yogurt, frozen egg sandwiches and other breakfast items has also hit the business.

Sales at Kellogg’s U.S. morning foods business, which includes cereals, fell 2.2 per cent in the third quarter ended Sept. 28.

The job cuts are a part of a four-year cost-cutting program, called Project K, that the company launched Monday. The program includes consolidating factories and product lines, moving them closer to its regional hubs.

Kellogg did not name these locations, but said that about two-thirds of the expected pre-tax charges of $1.2 billion to $1.4 billion over the course of the program would come from supply chain-related actions (all figures US$).

“The primary source of savings will be from consolidating facilities and eliminating excess capacity. It will not be from reducing headcount in our operating plants,” Alistair Hirst, senior vice-president of the company’s global supply chain, told analysts on a post-earnings conference call.

Kellogg had about 31,000 employees globally at the end of 2012.

The company also said it would invest in building its cereal brands and developing its business in emerging markets.

“Overall, net-net it was an okay quarter but the big surprise was the cost cutting, and I think investors are viewing that positively,” Edward Jones analyst Brian Yarbrough said.

Project K follows a three-year initiative, K-Lean, that Kellogg had launched in 2009 to save $1 billion in annual costs. However, the company’s quality control weakened due to too many job cuts, leading to product recalls.

Between 2009 and 2011, Kellogg recalled packages of cereals, cookies and protein bars.

JPMorgan analyst Ken Goldman said the new cost-cutting plan could expose the company to supply chain risks.

“This would carry a risk for any company, but perhaps especially for Kellogg, which suffered numerous supply chain hiccups partially as a result of its last cost savings effort,” he wrote in a note, reaffirming his “underweight” rating on Kellogg’s stock.

Yarbrough, however, said he expected the company to execute the latest plan more efficiently.

“There is an opportunity to increase margins, increase profitability and they haven’t been really efficient, so this shows they are going after some of that,” he said.

Earnings beat

Kellogg reported a better-than-expected adjusted profit for the third quarter on Monday, helped by cost cuts.

Net income rose to $326 million, or 90 cents per share, in the quarter from $318 million, or 89 cents per share, a year earlier.

Excluding certain integration costs and expenses related to Project K, Kellogg earned 95 cents per share. Analysts on average had expected 89 cents.

The company said revenue was flat at $3.72 billion, in line with Wall Street estimates.

Kellogg also forecast full-year adjusted earnings at the low end of its previous estimate of $3.75-$3.84 per share, citing weaker-than-expected sales in certain food categories that it did not name.

Analysts on average were expecting $3.77, according to Thomson Reuters I/B/E/S.

The company cut its 2013 revenue growth forecast to four to five per cent from five per cent and said current-quarter sales in North America would remain under pressure.

— Siddharth Cavale reports on the U.S. consumer and retail sectors for Reuters from Bangalore, India.

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