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kellogg Q4 2008 Transcript

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  • 1. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 Q4 2008 Earnings Call Company Participants • Joel R. Wittenberg, Corporate Vice President, Treasury and Investor Relations • A.D. David Mackay, President and Chief Executive Officer • John A. Bryant, Executive Vice President and Chief Financial Officer, Kellogg Company President, Kellogg North America Other Participants • Jonathan Feeney • Vincent Andrews • Judy Hong • Robert Moskow • Andrew Lazar • Alexia Howard • Terry Bivens • David Driscoll • Eric Katzman • Chris Growe MANAGEMENT DISCUSSION SECTION Operator Good morning. Welcome to the Kellogg Company Fourth Quarter and Full Year 2008 Earnings Call. All lines have been placed on a mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]. Please limit yourself to one question during the question-and-answer session. Thank you. At this time, I will turn the call over to Mr. Joel Wittenberg, Kellogg Company Vice President of Investor Relations. Mr. Wittenberg, you may begin your conference. Joel R. Wittenberg, Corporate Vice President, Treasury and Investor Relations Thank you, Letania and good morning everyone. And thank you for joining us for a review of our fourth quarter results and for some discussion regarding our strategy and outlook. With me here in Battle Creek are David Mackay, President and CEO; John Bryant, Chief Operating and Financial Officer; and Gary Pilnick, General Counsel. We must point out that certain statements made today, such as projections for Kellogg Company's future performance including earnings per share, net sales, margin, operating profit, interest expense, tax rate, cash flow, brand building, upfront costs, impact of the recall and inflation are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the second slide of this presentation as well as to our public SEC filings. Page 1 of 17
  • 2. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 A replay of today's conference call will be available by phone through Monday evening, by dialing 800-964-4463 for both U.S. and international locations. The pass code is £5355644. The call will be also available via webcast which will be archived for 90 days. Now, let me turn it over to David. A.D. David Mackay, President and Chief Executive Officer Thanks Joel and good morning everyone. We are pleased to report another year of sustainable and dependable performance of the Kellogg Company, despite what has become and continues to be a very difficult environment. Some of our 2008 highlights include broad-based sales growth around the world. Reported sales grew 9% and internal sales grew strong 5% in line with this year's guidance and ahead of our long-term target of low-single digits. Reported operating profits rose by 5% and internal operating profit rose 4% in line with our long-term target. EPS grew at 8% to $2.99 per share, and this includes the estimated impact of the recent recall related to Peanut Corporation of America which reduced EPS by about $0.06. We added to our platform for future growth through several bolt-on acquisitions in Russia, China, the U.S. and Australia. In addition, we invested more then 1 billion in advertising and another $0.14 in upfront cost-saving initiatives. We generated 1.1 billion of cash flow, due to our net after-tax 300 million year-end contribution to our retirement plans. This exceeded our guidance of 1 billion to $1.75 billion. And despite record cost pressures cash return to shareholders once again topped 1.1 billion through another 650 million of share repurchases, about 500 million of dividends. In 2008, we remained true to our business model and strategy, while managing through fast-moving commodity price increases. To achieve our goals and provide future visibility, we drive strong price realization, significant cost savings and positive advertising efficiencies during the year. With our continued momentum and heightened focus on cost-saving initiatives, we move into 2009 confident in our ability to once again achieve our goal of sustainable and dependable growth. We also recognize the challenges and uncertainties created by the current economic environment and the strain that this places on consumers everywhere. These impacts are reflected in our latest guidance. Also this morning, we announced a 650 million share repurchase authorization for 2009. The prior 500 million authorization was cancelled due to the 300 million net effects retirement plan contribution and a $150 million reduction in commercial paper in Q4. These actions improve the company's financial flexibility in this difficult economy. And before I turn it over to John, I would like to say a few words on the recent recall of some peanut-based products. Our top priority is consumer safety. When we became aware that one of our suppliers in Peanut Corporation of America has breached our food quality and safety standards, we quickly issued a precautionary hold announcement which was then followed by a voluntary recall. While we are obviously very unhappy with the situation caused by supplier and its negative impact on our consumers and customers, we believe that our proactive actions were in the best interest of consumer safety. We're managing and continuing to monitor the situation, which is unfortunately impacting much of the food industry. And now, I'd like to turn it over to John to review the financials. John A. Bryant, Executive Vice President and Chief Financial Officer, Kellogg Company President, Kellogg North America Page 2 of 17
  • 3. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 Thanks, David and good morning everyone. Slide four highlights our financial performance for the full year ending January 3, 2009. We exceeded our long-term internal sales target of low-single digit growth. We met our long-term operating profit target of mid-single digit growth and our EPS target of high-single digit growth. Reported sales increased by 9% for 2008, surpassing last year's strong 8% growth. Internal sales growth, which excludes the effect of foreign exchange, our recent acquisitions and the 53rd week, was 5% building on last year's 5% growth. Reported operating profit rose by 5%, lapping last year's 6% growth. Internal operating profit rose 4%, driven by our solid performance and productivity initiatives despite the highest cost inflation experienced in our history and the impact of the recall. Full year earnings per share rose 8%, $2.99 which is well above the guidance that we gave at the beginning of 2008. These strong results were driven by our operating performance and fewer shares outstanding, partially offset by a higher tax rate. The 53rd week profits of about $0.05 were reinvested back into our recent acquisitions. Our $2.99 EPS results included $0.14 of upfront costs. It is important to note that our 2008 results also include the impact of a subsequent event. In January 2009, we became aware that the Peanut Corporation of America had supplied us with tainted products. We initiated a recall which we expect to impact the company around $0.12 per share. Of this $0.12, an estimated impact of $0.06 was booked in our 2008 results and $0.06 is expected to be incurred largely in the first quarter of 2009. Let's turns to slide five, to discuss our fourth quarter and full year net sales growth components in more detail. For the full year, we achieved solid 5.4% internal sales growth. Tonnage contributed about 1% of sales growth, while our price and mix initiatives continue to flow through with solid 4.5% growth. As you know, we took broad-based pricing during 2008 to partially offset rising inflation pressures. For the full year, the price component contributed approximately 3% of net sales, which is ahead of 2007. While we are still achieving solid mix improvements, the current economic environment has slowed the rate of this improvement. Foreign exchange had no impact on sales for the full year, while reduced fourth quarter sales by 7.3%. During 2008, our acquisitions added almost 2% to sales growth and the 53rd week added 1.7% to reported sales. Q4 reported sales rose by 5% versus last year's strong 8% growth and internal sales grew 3% versus last year's 5% growth. Let's turn to slide six to discuss our gross profit performance. Our gross profit for the year was a record $5.4 billion. As expected, gross profit margin declined from 2007 by about 200 basis points to 41.9%, with about half of decline driven by our recent acquisitions, the impact of the recall and higher upfront investments in cost of goods, while the remaining decline was driven by commodity inflation, partially offset by pricing and cost-savings initiatives. For 2009, we anticipate gross margin to be approximately unchanged in 2008, despite another 5% increase in cost pressure. And now, just turn to slide seven to discus operating profit growth. Full year internal operating profit rose 4%, driven by solid internal sales growth, cost savings and lower upfront costs and offset by 10% cost of goods cost pressure and the fourth quarter recall. Fourth quarter operating profit declined 2%. However, the recall had a 10% adverse impact on operating profit in the quarter. Our North American business reported full year internal operating profit growth of 6% due to stronger sales and lower upfront costs. In the fourth quarter, North America internal operating profit declined by 8% while the recall had a 12% adverse impact on operating profit. European internal operating profit was essentially flat for the full year versus last year's tough 14% comparable. The results were significantly impacted by higher commodities inflation as well as higher upfront costs that reduced operating profit growth by about 2%. In Latin America, internal operating profit declined 2% versus 2007. However, 2008 higher upfront costs had an 8% adverse impact on operating profit. And in Asia-Pacific, internal operating profit increased by 11% driven by high-single digit sales growth and a very strong performance in Australia. Page 3 of 17
  • 4. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 Growing the operating profit line, we benefited from fewer shares outstanding and our tax rate rose to about 30%. In addition, full year interest expense declined to $308 million. Let's turn to slide eight to review our advertising. Our commitment to investing in advertising is approver [ph] of our business model and essential to achieving our goals. During the fourth quarter, reported advertising spending declined versus last year's unusually strong 26% increase. In addition to the tough comparable, the decline was driven by our efficiency programs. For the full year 2008, advertising spending rose slightly versus last year's 16% growth. We began to see the benefits of our efficiency initiatives during the second half of 2008. As you know, we are driving these initiatives across brand building to further improve the efficiency and effectiveness by more than $1 billion investment. For 2009, we will continue to drive efficiency initiatives and are also benefiting from modest media deflations. We plan to increase our advertising investments in line with sales growth. If media deflation increases, we may see less growth in advertising spending, despite more impressions. We believe that the combination of improved efficiency and media deflation will drive even more impressions. We'll provide additional details on these initiatives at CAGNY. Let's turn to slide nine to discuss cash flow. For the full year, cash flow before the impact of our net $300 million discretionary year-end retirement plan contribution was $1.106 million, which was above our prior guidance. As you may recall, we generally make contributions to maximize our financial flexibility which is particularly important in this challenging economic environment. Cash flow is benefited from another strong improvement in our core working capital as our cash conversion stock will decline to the new record low of 21.6 days, an improvement of about 2.5 days versus last year. Capital expenditures declined to 3.6% of sales. For 2009, we expect capital expenditures of between 3 and 4% of sales, driven by our K LEAN manufacturing efficiency initiatives. As a reminder, K LEAN stands for lean, efficient, agile network. This program will ensure we're optimizing our manufacturing networks, reducing waste and developing best practices across our global facilities. Also during the quarter, we've reduced our commercial paper balance by $150 million. We continue to maintain good access to the financial markets. For 2009, we anticipate another strong year of cash of cash flow. Our forecast for cash flow is between $1.050 billion and $50 million and $1.150 billion which include the impact of about a $100 million adverse foreign exchange headwind. Let's turn to slide ten to review our cash return to shareholders. During 2008, we returned cash to shareholders through share repurchases and dividends. We repurchased $650 million worth of shares and raised the dividend 10% during third quarter. For 2009, we will continue returning cash to shareholders. As David mentioned, we announced a new $650 million repurchase authorization for the year and cancelled our previous $500 million authorization. In addition, we target a 40 to 50% dividend payout ratio and expect to grow that dividend in line with earnings. Let's turn to page 11 for a summary of 2008. We are very pleased with our 2008 performance in a difficult trading environment. Around the world, broad-based sales growth was ahead of our long-term targets and despite record cost pressure, 2008 operating profit met our expectations. In addition, earnings per share was at the higher end of our increased expectations. As we discussed previously, the 53rd week added about $0.05 to earnings per share which was reinvested into our recent acquisitions. To drive future visibility, we invested back into the business with several bolt-on acquisition, $0.14 upfront costs and more than $1 billion in advertising. And I'll turn it over to David on Slide 12. Page 4 of 17
  • 5. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 A.D. David Mackay, President and Chief Executive Officer Thanks John. In 2008 sales from products launched in the last three years were roughly $2 billion or 15% of sales. And as you can see, we have more exciting innovation planned for 2009. In Cereals, we're launching Special K Blueberry Mutton and Frosted Mini-Wheats Little Bites. Outside the U.S., new cereal innovation includes Nature's Pleasure in the UK, Special K Chocolate in Australia and Extra in Germany. As is the case with innovations, despite many successes we've had a few missteps as well. The advertisement stores [ph] were targeted and half of the bulk consumptions have not met our expectations. In Snacks, we'll continue to drive our successful portion control packs with Kashi 7 Grain CLC cracker packs and Right Bites Cookies 'n' Cream 100 calories packs. Other snacks innovation includes Cheez-It Scrabble Junior and Chip Deluxe Original Chocolate Chips Cookies. In Wholesome Snacks, our FiberPlus bars are off to a solid start, backed by our new advertising program. In addition, we continue to innovate around our successful Kashi brand. We have strong base sales momentum in our frozen business which will continue with innovations like Eggo bite shops and new varieties of Kashi Frozen Meals and Pizzas. If you can turn to slide 13 for the business review, you can see our North American business internal sales growth was a very strong 6% versus last year's 5% comparable. Let's return to slide 14, to discuss each business unit in more detail. Ready-to-eat cereal continues to be a great category, responding to brand building and growing in the current difficult economy. Kellogg continues to perform well in a competitive cereal market during 2008 and we feel good about our account position, with fried inventories declining versus Q3. We estimate full year category growth across all channels of about 5 to 6%. As anticipated, our fourth quarter internal sales declined 3% as we lap last year's tough 8% comparable. However, our estimate of consumption across all channels was actually solid, rising 2%. As many of you have seen, we had a relatively soft IRI market share performance in U.S. cereal in the fourth quarter. And across all channels, we estimate our market share decline by approximately a 100 basis point. We continue to see aggressive broad-based price activities from our largest competitor and as we go into 2009, we expect a tough comp in Q1, but remain committed to our long-term strategy to win in U.S. cereal. For the full year, solid execution and price realization drove the 3% internal sales increase versus last year's 3% growth. While we are happy with our performance, we're disappointed that we lost some of the share on a full year basis. That reflects the strength of the category, aggressive trade activity, and our efforts to clean up some of our retail products. Our Canadian business grew mid-single digits for the full year, despite aggressive competitive pricing. Cereal Canada had a strong Q4 performance and IRI market share rose to more than 45% in the fast-growing cereal category. Recent innovations including Special K Cinnamon Pecan and Rice Krispies Cocoa were strong. And we turn to slide 15 to discuss the North American Snacks performance. As you can see, our Snacks business posted another strong year with 6% internal sales growth. Our performance was driven by successful innovation and price realization. Portion control cookie and cracker packs performed ahead of expectation. We continue to look at other opportunities to optimize and leverage our BSP System, touches [ph] our recent purchase of the Mother's trademarks and recipes on the West Coast. In addition, we recently announced price increases across the rest of the snacks portfolio. Let's turn to slide 16 to look at more detail about our Snacks business performance. Our Pop-Tarts business posted a solid year with low-single digit sales growth driven by higher core sales and price realization. This year's double-digit cracker sales growth resulted in strong IRI market share gain. Page 5 of 17
  • 6. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 Cheez-It and Town House sales grew a double digit for the year, including great performance from Cheez-It Duoz as well Town House Flipsides and my successful cracker innovation in year. Right Bites and Fudge Shoppe were strong contributors to our cookie sales growth and helped gain share for the year. Wholesome snacks sales grew mid-single digit for the year driven by Kashi and partially offset by several SKU reductions, Special K Bliss innovation and Rice Krispies Treats performance was strong. Let's turn to slide 17, to discuss our Frozen and Specialty Channels performance. Frozen and Specialty Channels had a great year with sales rising 9% versus 6% last year. Fourth quarter sales grew a solid 6% despite the impact of elevated retailer inventories at the end of Q3, due to our frozen food price increases. For the year, we achieved double digit Frozen Food sales growth through price realization, innovation and strong advertising. Full year Eggo sales grew at double digits driven by price realizations and by sales growth. And innovations like Bake Shop Swirlz and Bake Shop MiniMuffin Tops are performing well above expectations. These successes resulted in more than one point of IRI market share gain in the frozen breakfast category for the year. Morningstar Farms Veggie Foods also grew double-digit for the year. Kashi Frozen Meals continued to deliver double-digit growth through 2008 driven by increased distribution and new varieties of frozen-unfrozen pieces. We're also very pleased with our food service business which achieves mid-single digit sales growth for the year. Our strong brands and innovations continued to drive the successful business in a difficult environment. You can see on slide 18 that our international internal sales grew 5% for the full year. In Europe, we posted 4% internal sales growth for the year and solid ready-to-eat cereal growth was driven by a mid-single digit increase in our core U.K markets. Our European snacks business delivered double digit sales growth driven by strength in the U.K and Continental Europe. Fourth quarter sales rose 2% with contributions from the U.K, Germany and Switzerland, while sales rose slightly in France. We saw declines in Spain and Italy due to the weak economic and we saw reduced trade inventory across all three markets. For 2009, we anticipate low-single digit sales growth in Europe for the flat quarter as we expect a continued decline in retailer inventories. Our operating profits, we expect a more difficult first half comparison due to the decline in trade inventories, the rising of commodity inflation and timing of cost savings. In Latin America, internal sales rose 6% during Q4, driven by both Cereal and Snacks growth in Mexico as well as strong performances in Venezuela and Brazil. For the full year, internal sales grew 4% versus last year's strong 9% growth. As we discussed last quarter, we anticipate 2009 internal sales growth at closer to the mid-single digits. Q1 sales are expected to be flat, as we place tough comps, continued retailer inventory reductions and a tough economic environment across the region. In Asia-Pacific, full year internal sales grew 8% driven by solid performance in both Cereals and Snacks. And now I'll turn it back over to John to discuss our financial outlook and cost pressures on slide 19. John A. Bryant, Executive Vice President and Chief Financial Officer, Kellogg Company President, Kellogg North America Thanks David. 2009 cost pressure is currently forecasted approximately 4 to 5% of cost of goods. As we discussed last quarter, the cost pressure increases are primarily driven by rice, packaging and general factory inflations, with the commodity portions due to Europe and Latin America. The commodity inflation will be weighted towards the first half, with about 60% of the full year's cost pressures occurring in the first half of the year. As you know, we have demonstrated an ability to manage through both inflation and volatility. During the fourth quarter of 2008, we announced or executed broad-based pricing actions to partially offset these headwinds. In addition, significant productivity initiatives in 2009 are expected to drive savings closer to Page 6 of 17
  • 7. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 4% for the year versus our historical 3% savings. Let's turn to slide 20 to discuss foreign exchange. Over the past several years, we have achieved high-single digit constant currency EPS growth with currency adding roughly one percentage point. However, as we discussed the last quarter, the U.S. dollar has reversed and has appreciated at an unprecedented rate. Slide 20 shows our key currencies with 2008 actual rates and recent spot rates. Assuming current spot exchange rates, the full year impact on EPS from translational foreign exchange will be approximately 9%. As we discussed on the third quarter call, our 2009 guidance of high-single digit EPS on a local currency basis excludes this adverse foreign exchange impact. We will continue to update you on the impact of foreign exchange on a quarterly basis. Let's turn to slide 21, to discuss the full outlook. For 2009, we remain confident in our ability to deliver another year of sustainable and dependable growth. We now forecast 3% to 4% internal net sales growth. This reduction from our prior guidance of mid-single digit growth reflects a more conservative view to 2009, given the tough economic environment. We continue to be confident in our ability to deliver mid-single digit internal operating profit growth driven by our price realization and cost-savings initiatives, partially offset by 4 to 5% in cost inflation. Gross profit margin is expected to remain unchanged as our cost-savings initiatives and price realization offset inflation. Upfront investments are projected to be consistent with 2008 at $0.14 per share with over half of that allocated to K LEAN manufacturing initiative. We also want to provide you with some insight on the shape of next year. We anticipate a difficult first half followed by an easier back half, driven by the timing of commodity inflation, pricing, the impact of the recall and cost-savings programs. For a lot of the operating profit line, interest expense is expected to decline between 280 to $285 million, driven by lower short-term interest rate, while the full year tax rate is forecasted between 30 and 31%. Shares outstanding are expected to decline in the back half of the year, as we execute the $650 million share repurchase announced this morning. To summarize, we will maintain the focus on our proven business model and strategy to deliver another year of growth, with earnings per share still projected to grow at high-single digits on a currency mutual basis. Now I'd like to turn it back to David on slide 22. A.D. David Mackay, President and Chief Executive Officer Thanks John. We entered 2009 with continued confidence that our business model and strategy will deliver another year of growth. At the same time, we are realistic given the headwinds of our volatile economy continues to reel under significant stress and continued cost inflation. The current conditions are truly unique, but we will drive the business to overcome these challenges. We'll continue to invest in exciting innovations, strong advertising and upfront cost initiatives as well as aggressive cost-saving programs across the business. The K LEAN project currently underway in our manufacturing area gives us increased confidence that we'll achieve our cost savings and productivity goals. We'll review all aspects of our business to simplify and standardize our processes for higher efficiency while maintaining our drive for executional excellence. In summary, we're well positioned to continue delivering long-term, sustainable and dependable growth. Our business model and strategy are more relevant than ever and we remain committed to our operating principles of managing the cash and sustainable growth. Finally, I'd like to thank our Kellogg employees around the world for their continued great work in 2008 and commitment to our 2009 goals. And now, let's open it up for questions. Q&A Page 7 of 17
  • 8. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 Operator Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Jonathan Feeney with Janney Montgomery Scott. Please proceed with your question. <Q - Jonathan Feeney>: Good morning. Thank you, guys. <A - A.D. David Mackay>: Good morning Jonathan. <Q - Jonathan Feeney>: David you mentioned specifically price-driven competition in Cereal, your biggest business. And I guess I am wondering is as a response to that ultimately have to be price driven and as part of that when you talked about a low-single digit I guess 3% to 4% internal sales growth for 2009, what are you assuming you grow volume in U.S Cereal as part of that assumption? <A - A.D. David Mackay>: No. I think our key focus is driving our brands, engaging with consumers through advertising and innovation. But we are also pragmatic about the current environment and we'll tailor our activities to respond to that consumers' need and the constant subsidies [ph] in the market. So, we think we've got ourselves well positioned as we look at that for 2009. I did mention that we expect tough comps in U.S. Cereal through the first quarter, until we see that competitive activity being less. But we are very focused on driving the business the right way, but we're also cognizant of the pressures of consumers around there and we'll work to respond to those in any way we can. <Q - Jonathan Feeney>: And are you comfortable saying whether you think Cereal as a whole will grow this year? <A - A.D. David Mackay>: Cereal as a category, yes. I think definitely the category has shown a great robust growth in '08. We'd expect that to continue through '09 and would expect to grow in that environment also. <Q - Jonathan Feeney>: Okay. Thank you very much. <A - A.D. David Mackay>: Thank you. Operator Our next question comes from Andrews Vincent with Morgan Stanley. Please proceed with your question. <Q - Vincent Andrews>: Thank you. good morning. Just wondering if you could help me try to guide just a little better relative to what you said at the 3Q call. You've taken down the top line by from mid-single digits of 3 to 4%, but you've left your operating profit forecasted mid-single digits. But now there is the $0.06 from the peanut butter and then also, am I correct that previously you've got inputs to be a 5% and now you are saying 4 to 5%. Is that right? <A - A.D. David Mackay>: Hey yeah that's right. Everything you said that is correct. Remember we have $0.06 from the peanut-butter related recall in both 2008 and 2009. <Q - Vincent Andrews>: So what is going to change then that's going to allow you to lower top line, to still get the same level of operating profit even though you've got incremental $0.06 as expense from peanut butter? <A - A.D. David Mackay>: Well I think the reduction in the sales growth of mid-single digit to 3 to 4% is not that substantial a reduction as the fine tuning of the guidance. We continue to have very good confidence in our cost-saving programs. We have seen, as you saw from the inflation number, some moderating of inflation coming down from 5% to 4 to 5%. So I think the guidance is not dramatically different from what we said on the third quarter call. <Q - Vincent Andrews>: And that's all -- but that's all enough to cover the incremental $0.06 of peanut butter. <A - A.D. David Mackay>: Again because the $0.06 in both years, as you look at it from a year-on-year perspective and since the guidance is in percentage changes, it doesn't really impact our outlook in 2009. Page 8 of 17
  • 9. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 <Q - Vincent Andrews>: Okay thank you. And the other question I have is just on activity in U.S. Cereal you highlighted one piece of it which is brand to competitive activity. But what do you think from private label that according to the IRI data is gaining about -- gained about a point of share in the latest four week? <A - A.D. David Mackay>: Yeah I think if you look at private label in the US, its growing. We saw that in the back half of 2008. I would expect that will continue to grow. Also seeing retailers respond to the current economic environment and push the private-label pretty hard. But remember when you've got a category that's growing as strongly as we think cereal growth and with private label around about 10% of the category, all players within the category improved pretty well even in the context with private label growing a little faster than we'd normally have seen. So our expectation and the way we've looked at '09 is that private label would likely continue at slightly higher rates but the category growths and the dynamics for the category will remain very positive. <Q - Vincent Andrews>: Okay. And then one last thing was just, you didn't mention anything about a step-up in pension expense or we just assume that there is nothing going on there? <A - John Bryant>: No. Our pension expense is largely flat year-on-year. It's up to about one penny of EPS. We made the discretionary pension contribution at the end of 2008 that largely offsets any increase in the underlying expense from proactive returns in 2008 or changes in discount rates. <Q - Vincent Andrews>: Okay. That's very helpful thank you very much. Operator Our next question comes from Judy Hong with Goldman Sachs. Please proceed with your question. <Q - Judy Hong>: Thanks. Good morning everyone. <A - A.D. David Mackay>: Good morning Judy. <Q - Judy Hong>: David, I am wondering if you can just give us little bit more perspective on this advertising efficiencies as well as the media deflation issues that you have talked about. I mean clearly media costs were down pretty substantially. So you are getting more time for your process, and then at the same time you have the deficiencies that are helping your overall spending. But I am just hoping if you can give us a little bit more color in some of these activities and how you feel comfortable that in light of some of the share performance weakness that you can continue to get these efficiencies and not see better volume performance? <A - A.D. David Mackay>: Yeah Judy, that's a great question. We're going to go through in detail at CAGNY. The efficiency is particularly focusing on 2009 where we expect while we have had some benefits in '08, ramp up in 2009 and I wouldn't draw any conclusion about our Cereal share loss relative to our involvement and commitment on advertising, because really as we've looked at Cereal in the US and as a pull [ph] behind the brands have remained very strong. There were some efficiencies we saw in parts of the globe. We did see a modest decrease in our snacks advertising. So, with anything, Snacks was the one area that came down a little bit. So, I wouldn't be reading too much into that. And you've got to remember when you look at it advertising for us is foundational to our model. We're still spending over a billion dollars which is double our peer group average at over 8%. And really the areas we're focusing, on the things like commercial production, we will take you through that at CAGNY, media efficiencies and media mix. And we did see the start of some modest deflation at the back part of 2008 which we expect not to increase into 2009. And when you look at 2008, particularly Q4, you've got to remember that our comps in Q4 last year were up 26%. So while we were down Q4 this year, if you added the two together the down Q4 this year and the 26% would still be up nearly double-digit for both years. So I wouldn't be reading too much into it, and we will give you a bit more flavor on the productivity and efficiency initiatives at CAGNY, Judy. <Q - Judy Hong>: Okay and then, just a little bit more color in terms of some of the trends that you are seeing in Europe and Latin, both from a retail perspective and then from a competitive perspective? Page 9 of 17
  • 10. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 <A - A.D. David Mackay>: Yeah well Europe I think remains a very challenged economy, as we're seeing in most markets around the world. We did see a fair amount of inventory reduction in the back part of the year, in our second half of '08, particularly across France, Spain and Italy, little less so in the UK. We think that will continue as some of the retailers in Continental Europe try to manage their cash flows and pull down inventory. But our performance has been you know pretty positive. The Cereal category in Americas, like the UK still going strongly, doing pretty well in a number of the markets across Europe. But still I think, all in all and our view is totally conservative that the low-single digit is a reflection of the stress that's going on there across the consumer base and some of the challenges that we're seeing on inventory reductions. <Q - Judy Hong>: And in Latin, I think in the first half, you've alluded to some increased competition in that market in Mexico? <A - A.D. David Mackay>: For next year? <Q - Judy Hong>: No. In the first half of '08; I am wondering if its competitive activity has gotten better? <A - A.D. David Mackay>: Well, it dances around a bit. I think we saw probably pretty aggressive competitive activity in Q3 that abides [ph] in Q4. We had pretty strong programs and we saw our performance comeback so. But again in Latin America, I think hopefully we're taking a pragmatic view. Again economy is slowing a little bit there, particularly driven by the fact that oil is coming down and a lot of them are dependant on oil. But still, we think Latin America will grow mid-single digit. We did call out Q1 and to so you extend the first half being slightly tougher comps. Again, we are seeing retailers reduce inventories a little bit. It's real hard to measure there but nothing too unusual, Judy. <Q - Judy Hong>: Okay. Thank you. <A - A.D. David Mackay>: Thanks. Operator Our next question comes from Robert Moskow from Credit Suisse. Please proceed with your question. <Q - Robert Moskow>: Hi, thank you. You guys didn't mention any inventory reductions in the U.S. at the end of the year. I want to know if you're seeing stable inventory in breakfast cereal. And also, can I ask on the 70, I think it's $75 million pre-tax charge for peanut-butter. What -- how do you need to spend that money? What are the elements of the recall that that money is going to go to? And than lastly, maybe if you could tell us a little bit about this market size [ph] tax reduction that you are doing in the Michigan area? How big of a change are we talking about in terms of market size. <A - A.D. David Mackay>: Yeah. Well the first one, inventories in the US really the only things we thought that were noticeable is we did in Q3 with frozen food part because we had a price increase at the end of Q3. So we saw those comes down in Q4 which is a natural event. On Cereal, we saw our inventories come down Q3 to Q4, which we believe is a very positive thing working with our retail partners. We have a big chunk of our customers on window-managed inventory. So, we work with them to manage those inventories partly. But we didn't really see it at apart from those two smallish areas. On peanut-butter, the cost of the recall in 2009 was about $34 million and if you look at that, there was about half of that cost due to inventory, about a third was because of sales reversal that we had to take and about a sixth was the cost to actually retrieval of the products given the complexity of the channels that some of those products were through. If you come to 2009, really you have got a third of the cost to reversal of sales and the cost to retrieve. And then we have two-thirds of the 2009, is an estimated business disruption. So that one is very tough. We believe we have made an appropriate estimate and we don't think it will be higher then the $0.06 or the two-thirds disruptions, about $0.04. Page 10 of 17
  • 11. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 That's very complex. We moved with speed, we used third parties. We did everything we could to ensure that as soon as we knew we had a problem, we took every step to protect our consumer base and to work with our customers to proactively remove all of the product as quickly as possible. And while it sounds a lot, we think the investment was absolutely important and critical. <Q - Robert Moskow>: And in the box size test. <A - A.D. David Mackay>: The box size test Rob, started on 26th of January in Detroit. So, we're not even two weeks since, it's a little pre mature. Our intent there is hopefully within three months or so, by the time we get to first quarter, we may have some preliminary data. I doubt it's going to be that conclusive. But the intent with that is purely to try and help consumers and in so doing help ourselves and the environment by bringing down the amount of packaging we use which will enable us to use more optimization in the way we cube our trucks to bring down the number of trucks on the road. So a big initiative if it works. We will just have to see how consumers respond. So, not really much to report at this point. <Q - Robert Moskow>: Okay. Would it be accretive to price per pound this box size change? <A - A.D. David Mackay>: No, it would make no difference. It would be critical for us to ensure that the amount in each box, whether it was a cool box or somewhat squatter box was exactly the same. So consumers did not think there was any change in the value proposition. <Q - Robert Moskow>: Thank you. <A - A.D. David Mackay>: Thank you. Operator Our next question comes from Andrew Lazar with Barclays Capital. Please proceed with your question. <Q - Andrew Lazar>: Good morning. <A - A.D. David Mackay>: Good morning Andrew. <Q - Andrew Lazar>: So David, listening to your comments around sort of fourth quarter and then market share performance in cereal and such, somewhat competitive environment and what not, that I understand. But in looking at, perhaps some of the trends around cereal along baseline sales growth. I know there's something that you've talked about in the past. Perhaps I guess normalizing a little bit for that promotional environment and looking at the sort of a core health of the full price sales, if you will. That hasn't looked as great for Kellogg over the last couple of quarters. And I'm trying to get a sense if should that -- is that more troubling to you, if it is, is that something we can expect to start seeing turning up in the right direction. And if so, what's driving it. Because even this morning you have data from the most recent month and I get it, it's only a month, but you've kind of continued that trend? <A - A.D. David Mackay>: Yeah, I think Andrew, clearly we'd like to see base going the other way. There is a couple of things going on there. And we'll show you a couple of charts, if we can. But if you look at our, what we'd call our core business, our Top Eight [ph] if they use or brands which is roughly 80% of our business. Those Top Eight, that 80% core gain share for 2008 even on IRI. Which as we know is a little distorted. The issue for us is really in the tail which is normally the case. I'd have to say as we've looked back at some of the innovations we've done over the last 12, 18 months. We are reviewing those, I believe we need to modify some of them. And then the other final thing that is impacting base, not only for us, but for most branded players is private labels' growth. Because when you look at the base cereal the only one really growing is, private label in base, almost all of the branded, our competitors are actually down on an IRI basis. Page 11 of 17
  • 12. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 Something that we are watching; we feel very positive about where our core business, over 80% of our sales are. But clearly something that we are going to need to address and fix. <Q - Andrew Lazar>: Okay, thanks. And just lastly on the more recent price increases that you have taken heading into 2009; that perhaps surprised some, just given it rocks the trend a little bit of what we've seen from some of the broader packaged food players have given the cost environment of late. How -- can you give us a sense of how that's or just wade through -- do you find that those are sticking, that they have gone through as you would have hoped they would? <A - A.D. David Mackay>: Well, clearly we made some very tough discussions with our retail partners, because when you look just on the price of it, I mean just take some of the spots and some of the reductions. We clearly had to explain to them why our inflation was still running at that point at 5%. That has come down marginally to 4 to 5, mainly driven by what's happened in oil and the price of diesel. But I think you will find that the -- it's a much more complex equation then just looking at the spot prices of corn and wheat. And for us, some of the key drivers have been rice, packaging and cost in the plant. But, they haven't filled the letters. We've looked at the hedges we have got and the physical contracts. We're still positive on a mark-to-market basis. So, its not like we've gone out with things that have really disadvantaged us and we've explained that to our retail partners. I don't think anyone likes having to pay cost in this environment. But we thought it was necessary to protect the fundamentals of the business and while it was reluctantly accepted, all of those have gone through. <Q - Andrew Lazar>: Great. And then just lastly, just how long at this stage, would you have got a sense of how much you're hedged at this point for '09? <A - A.D. David Mackay>: Well, at the moment we're about 70% hedged for '09. <Q - Andrew Lazar>: Great. Thanks very much. <A - A.D. David Mackay>: Thanks Andrew. Operator Our next question comes from Alexia Howard with Sanford Bernstein. Please proceed with the question. <Q - Alexia Howard>: Hello Dave. <A - A.D. David Mackay>: Hello Alexia. <Q - Alexia Howard>: So a question on the uses of cash, from this point forward. It seems to me that you've used it longer in the private equity market to pick on a few sort of decent brands, both domestically and internationally. With the increase in the share buyback announced this morning, how are you thinking about that going forward. Are you continuing to are you expecting to continue to do a similar amount of small sale acquisitions and if so, where are they likely to be targeted? <A - A.D. David Mackay>: No Alexia, we always remain open to bolt-on acquisitions that fit in with our core categories, Cereal and Snacks. And who knows what will happen. Certainly it's a very difficult time for many out there. So it may create some opportunities for us. But we like, most companies are being relatively prudent, we took the opportunity to fund up our pension at the end of the year. We think that's important for us and for our employees. And while we have announced an incremental new $650 million share buyback, more likely than not, that will be skewed to the second half of the year. So we can watch the markets and ensure that we feel very comfortable about what's going on in the financial market, so that we stay very, very solid as we are. <Q - Alexia Howard>: Okay. Thank you very much. Page 12 of 17
  • 13. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 <A - A.D. David Mackay>: Thank you. Operator Our next question comes from Terry Bivens with J.P. Morgan. Please proceed with your question. <Q - Terry Bivens>: Good morning everyone. <A - A.D. David Mackay>: Good morning Terry. <Q - Terry Bivens>: Just Dave, a little bit further on Cereal. Obviously Neilson doesn't cover everything. But what we can see so far in January shows that Neil's rate of price increase is kind of roughly equal to your own. But you guys do show a down market-share and the category dates do show it up a little bit. Did they follow your price increase as of mid-January? <A - A.D. David Mackay>: I've no clue. <Q - Terry Bivens>: All right. <A - A.D. David Mackay>: I don't know. But I mean I did -- we mentioned in the call that when you look at Q1. <Q - Terry Bivens>: Right. <A - A.D. David Mackay>: You'll find that we have top comps. If you look at some of the competitive activity, they don't last that until April 1 this year. <Q - Terry Bivens>: Right. <A - A.D. David Mackay>: And so, I mean our expectation is in Cereal, the third quarter will be tough, but we remain committed to our thorough business and growing it as we go forward. <Q - Terry Bivens>: Do you think that it's possible you may do more promotional activity in the U.S. Cereal over the course of Q1? <A - A.D. David Mackay>: I think what I've already said in one of the responses. Given we're in a recessionary environment that we certainly will maintain our focus on advertising and innovation, but we are also going to tailor our activities to respond to consumer needs in the current 10 facilities out in the marketplace. <Q - Terry Bivens>: Okay. And maybe this one's for John. Just in terms of the currency, John. I mean we at look at it, I guess going forward as you do, on the spot rates. But to what extent do you think hedging could mitigate, what was that -- that 9% you showed us? <A - John Bryant>: I think Terry, we haven't got any translational hedges in place for 2009. If we do try to put some translational hedges in place, I'd suspect we'll be going at forward rates which are probably even worse than the current spot rates. So, there is not really much we can do unless those spot rates improve from where there are today to reduce that 9% impact. In the past, we have done some translation hedging, because we've given guidance and we call it [ph] EPS terms, because we are now giving guidance in local currency terms, it's not our plan to do translation hedging. So, you should expect the foreign exchange impact just to move through our P&L as it changes in the marketplace. <Q - Terry Bivens>: Okay. And there shouldn't be then any transactional mitigation? <A - John Bryant>: We do have some transactional hedges, but most of our manufacturing is local, in terms of France and Europe and France across Latin America. But clearly euro, sterling, U.S dollar, peso, Canadian dollar, we have transactional hedges of varying levels across those currencies already. Page 13 of 17
  • 14. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 <Q - Terry Bivens>: Okay. Thank you very much. <A - A.D. David Mackay>: Thank you. Operator Our next question comes from David Driscoll with Citigroup. Please proceed with your question. <Q - David Driscoll>: Great, thank you. Good morning everyone. <A - A.D. David Mackay>: Good morning David. <Q - David Driscoll>: David, can you go back over the -- your guidance for 2009 for all of international. So in what -- the underlying question here is that, is that the constant currency growth of 9% offset by foreign currency headwinds of 9% to zero GAAP growth in '09. But that is predicated on this international assumption. And I suppose and I am just a little worried about what's happening in international. And General Mills I believe, made a comment a few weeks ago that the international cereal markets were weakening. So, go back over your international guidance and then maybe just give a little color on your thought process on the strength of those markets and what can happen in '09? <A - A.D. David Mackay>: Yeah sure. We've said for Europe, low single-digits net sales and for Latin American mid-single digits. I think when we look at market-to-market, we didn't give any guidance for Asia, but in the Australian category, the U.K. cereal category, the Canadian cereal category are all still growing very strongly and as are some markets in Latin America. So, while they may have slowed a little bit, they are still pretty positive. There are a couple that may have weakened. But, in general terms, our biggest markets are looking fairly positive from a cereal category perspective and we continue to expect it to do pretty well in the context of those markets. So, I don't know whether that helps you, but is that what you were after? <Q - David Driscoll>: It is. The only question I would have then is, maybe do you guys have any thought process as to why this -- the economic environment in those international markets, perhaps isn't negatively impacting the Cereal category. And is this something that is just part of the forecast and that would be the big risk in '09. <A - A.D. David Mackay>: I think the less developed markets are probably more challenging to forecast, because the cereal habit by the fault in the less developed markets is less infringed. They make up a smaller proportion of our other international business. The developed markets were very strong and infringed cereal habits make up the majority. So, you will see more volatility no doubt in those less developed markets. But we think we've got that factored into our current expectations for 2009. <Q - David Driscoll>: And just one final question, John, the reduction in the revenue guidance, you called it like a just a tweaking of it. But if I may, was that tweaking of reduction in the expectation for volume growth, so component-wise you announced all these price increases earlier in January. I'd imagine that didn't change. But what then theoretically would have changed, the only key thrust here would be the volume side. Am I reading that right? <A - John Bryant>: Well, I think in addition to volume. There is also, we've seen some slowing down say of mix as we've gone through 2008. So, as you go in a recession, you should probably expect less mix growth and we have it. So, there is a number of factors that can grow that can slightly slower that sales growth. <Q - David Driscoll>: Great. Thank you so much. Operator Our next question comes from Eric Katzman, Deutsche Bank. Please proceed with your question. <Q - Eric Katzman>: Hi. Good morning everybody. Page 14 of 17
  • 15. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 <A - A.D. David Mackay>: Good morning Eric. <Q - Eric Katzman>: I guess a few follow-ups. First on Dave's question about the volume hit or let's say adjustment to '09. Do you have any sense as to how much of the inventory deloading that you're seeing from the retailers. How much do you think that crimps your '09 volume growth? <A - A.D. David Mackay>: it's very hard to put a real measure on that. I know when you look at volume in the fourth quarter, we probably saw inventory reductions most pronounced in Europe and that's where our volume was weakest. So, there is correlation there. As we look at 2009, we're probably expecting volume to be flat to slightly down. We hope to do better, but we think that's a pragmatic approach for 2009. And I think retailers pulling back their inventories, will have an impact on that. But I mean once it's done, it's done. And so it's normally a very positive thing. You just feel a little pain for a quarter or two and I think in this environment, it's more likely than what we're going to see that certainly in Europe and parts of Latin America, slightly less in our view in North America. <Q - Eric Katzman>: Okay. And then on the peanut-butter recall, it's unclear to me why it's in the fourth quarter given that it seems like everything's happened in the first. Is that because the shipments were recorded in the fourth quarter? <A - A.D. David Mackay>: Yes. It's a subsequent event. So we actually had closed our books internally before the recall even occurred. Then the recall occurred and had to reopen our 2008 books and reverse some of the sales because we're now picking up those products from customers, write-off inventories that was in our balance sheet at the end of the year and also accrue for the cost of retrieval. <Q - Eric Katzman>: Okay. And then last question, based on the slide I think it shows that your cumulative cost inflation for the last four years through 2008 was about 26% and I'm wondering how much pricing you've taken cumulatively relative to that, that would let's say give some comfort, the idea that you haven't priced above inflation and to the extent that input cost comes down in the second half of '09 that the retailers aren't going to be let's say overly aggressive knowing that you haven't fully priced to inflation. <A - A.D. David Mackay>: Yeah, I think Eric, as we look at it and we'd talked to retailers about this, if you look at the inflation and our pricing, I haven't got the absolute number in my head. But may be it's 8 to 10% let's -- I am looking to confirm that, but it will be a 20-plus percent increase in cost. So clearly we've had a significant offset from productivity and that would be our intent going forward that we're going to drive productivity and cost savings to make sure that while we are priced, we remain competitive in the market place. <Q - Eric Katzman>: Okay thanks. See you at CAGNY. <A - A.D. David Mackay>: Thanks. Operator Our next question comes from Chris Growe with Stifel Nicolaus. Please proceed with your question. <Q - Chris Growe>: Hi good morning. <A - A.D. David Mackay>: Good morning Chris. <Q - Chris Growe>: Hi, I just wanted to -- I guess I should follow-up on that that point you just made to Eric's question. You've taken pricing in 2009 and you've also got a more aggressive promotional environment. So it sounds like you're going be more competitive if you will. Is there any intention therefore that promotional expenses should up in '09, just to be clear on that. <A - A.D. David Mackay>: Well I think, what we just feel on that is that we're going to maintain our focus on advertising and innovation, but engage with our consumers and tailor our activities to respond to their current needs in the recessionary environment by clearly looking for value. And so we would expect that there would be more products on promotion than would typically be the case. But we are going to try and respond to consumers to the extent we can. Page 15 of 17
  • 16. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 <Q - Chris Growe>: Okay. And then I <A - A.D. David Mackay>: I'm sorry. <Q - Chris Growe>: I have one more question for you just regarding the cost savings. You mentioned having a little more aggressive level of cost savings in 2009, based on where inflation shakes out. Your cost savings could overcome a lot of your cost inflation is -- with the benefit coming through your pricing, should we see a pretty solid gross margin expansion in the year as a result? <A - A.D. David Mackay>: Well actually gave guidance. We think gross margin will be flat year-on-year and you're right, the level of inflation is coming down and our savings program is coming up. So we've the potential to do better than that. But at this stage with the impact of the recall in this year and also full year of the acquisitions, I think flat gross margin close to the right guidance. <Q - Chris Growe>: Okay. And then just to be clear, I think you mentioned this to the extent before but just that you actually have obviously a translation cost. But is there incremental transaction cost for currencies that are the part of that 9% figure or is 9% just a straight translation? <A - A.D. David Mackay>: 9% is just straight translation. Transactional expense is significant and is the bulk. But we're recovering within our normal operating model. <Q - Chris Growe>: Okay. That makes sense. Thank you. <A - A.D. David Mackay>: Thank you. And Letaina, let's take just one last question please. Operator Okay. Our last question will be from Alton Stump with Longbow Research. Please proceed with your question. <Q>: Good morning. This is actually Phil Dripley [ph] calling for Alton. I just wanted to go back to Cereal real quick in the U.S. If you guys can talk a little bit about where you've been seeing, maybe late 2008, early 2009 specifically in regards to the post cereals, especially in the long run, kind of how you are thinking about that going forward thanks. <A - A.D. David Mackay>: Yeah Phil [ph] I really don't have any comments to make. I think I'm sure they are in the prices having finalized the integration that you would need to ask trying to get more specifics, but nothing that we're seeing that I would highlight to you, on what they are doing. <Q>: Okay. Thank you. <A - A.D. David Mackay>: Thanks. Operator I would like to turn it back over to management for closing comments. A.D. David Mackay, President and Chief Executive Officer Great. Thank you very much for joining us on the call. Operator This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Page 16 of 17
  • 17. Company Name: Kellogg Market Cap: 16,600.13 Bloomberg Estimates - EPS Company Ticker: K US Current PX: 43.49 Current Quarter: 0.870 Date: 2009-02-05 YTD Change($): -.36 Current Year: 3.185 Event Description: Q4 2008 Earnings Call YTD Change(%): -.821 Bloomberg Estimates - Sales Current Quarter: 3360.000 Current Year: 13182.733 This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided quot;as isquot;, without express or implied warranties of any kind. Bloomberg retains all rights to this transcript and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have no liability for errors in this transcript or for lost profits, losses, or direct, indirect, incidental, consequential, special or punitive damages in connection with the furnishing, performance or use of such transcript. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP. © COPYRIGHT 2009, BLOOMBERG LP. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited. Page 17 of 17