家樂氏 (K) 2003 Q1 法說會逐字稿

Good morning.

My name is Jeff and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Kellogg company first quarter conference earnings call.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during that time, press star and the number one on your telephone key pad.

If you would like to withdraw your question, press the pound key.

Thank you.

I would like to turn the conference over to John Renrick, Vice President of Investor Relations.

Thank you and welcome to Kellogg Company's first quarter earnings conference call.

With me on the call are Carlos Gutierrez.

John Bryant and Jan Kelly.

The slides that accompany the presentation are available on-line at www .Kellogg company.com on the investor's page.

As always, we must point out that certain statements made today are forward looking statements.

These include but are not limited to projections for Kellogg company's future performance including aroundings per share, interest expense, investment, sales, tax rate, cash flow, innovation, currency, share or purchases, capital expenditures, returns and Cinergis.

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.

In addition the SEC's new regulation g limits our ability to discuss or respond to questions about non GAAP financial measures.

For this reason we will post or responses to such questions on our website.

A replay of this call will be available by phone through Monday evening.

You can access by dialing 1-800-642- --.

It will also be archived on our website for 90 days.

With that let me turn it over to Carlos Gutierrez, Chairman of Kellogg and Chief Executive Officer.

Good morning to everyone and thank you for being on the call and thanks for your interest.

We obviously very pleased with our first quarter performance.

Our EPS was 40 cents.

You recall last year we excluded to our results to sense favorable impact from legal impact of settlements.

If you exclude those 2 cents from a year ago EPS our first quarter EPS grew 14% versus last year.

And that was against a similarly strong underlying EPS in the year ago quarter.

So we are extremely pleased about that.

As you know, we face very difficult sales comparisons in the quarter as well as gross margin pressure from high commodity energy and benefits cost.

So to be able to turn in this type of sales and earnings performance is a credit to our whole organization.

We had improved innovation, brand building and sales execution and they continue to pay off in the form of strong internal sales growth.

We are also able to mitigate the impact of cost pressures.

And we are able to continue to invest behind our brands which it also fueled growth in the future.

We had solid performance in each of our major businesses.

Our U.S. cereal grew against a spectacular growth last year.

Our U.S. snacks responded immediately on a renewed focus of brand building and innovation and Kellogg international delivered strong local currency growth as it continued to implement volume to value.

We continue to execute well throughout the whole company.

We mentioned previously that we are planning for a higher EPS growth rate in the first half than in the second half, so we have a front loaded plan as it refers to EPS.

So it's very important for us to get off to a very good start.

We continue to expect earnings for the year to be $1.86 to $1.90.

Please remember that what we are after is not one as spectacular quarter or one exceptional year of earnings growth.

We are striving for long term dependability.

In assessing our forecast you have to consider the timing of our marketing program and our desire to invest in the business.

However, I should say that our first quarter performance gives us even more confidence in our forecast for 2003.

A year in which we plan to grow over solid growth last year.

So I will stop here and come back in a moment to discuss the health of each of our businesses.

Now I will turn over to John Bryant and will take you through the financial results and sales.

Good morning, everyone, thank you Carlos.

Here is a summary of our financial results for the first quarter of 2003.

Net sales grew 4.2% year on year aided by solid internal growth and favorable currency translation.

But offset by two divestages made over the last 12 months.

Excluding this currency translation and divestages our sales growth was over 3%.

Operating profit increased by 6.2%.

If we strip out favorable currency translation and the impact of divestages our internal profit growth exceeded 7%.

This is a solid performance.

Particularly given the cost pressures that Carlos mentioned.

Our EPS was up 8% on a reported basis.

Again, last year when we discussed our results we excluded a notably large 2 cent favorable legal settlement from EPS.

If we exclude that from last year's results, our growth in this year's first quarter was 14%.

A solid gain on top of a similarly solid year ago growth.

Most important, at 40 cents per share our earnings came not at the highest end of guided range giving us confidence in our four year guidance.

Cash flow which we define as cash from operating activities minus capital expenditure was $158 million in the quarter.

This was done against a notably sizable year ago figure it was in line with our forecast.

Let me walk through our financial performance in greater detail.

Slide five shows the components of our year on year net sales growth in Q1.

Foreign currency translation added 2.3 percentage points to our sales growth as a strengthening in the pound Sterling; the Euro and the Canadian and Australian dollars more than offset the impact of a devalued Mexican peso.

Obviously these currencies especially the Latin American currencies are susceptible to volatility.

We could see modest favorability for the year.

Divestages took 1.5 percentage points out of our growth.

Recall in May 2002 we divested our bank line private label biscuits business and in January of this year we sold another private label business.

We should experience another quarter of this kind of net sales impact before it drops off to less than a percentage point in the back half of the year.

Most importantly, our internet sales growth was 3.4% in the quarter which is on top of a strong 4.4% gain in the year ago period.

As you can see from the slide, we can continue to realize most of this growth from price mix.

Even against a notably large contribution in the year ago quarter.

The price mix contribution was driven by modest price increases and improved mix around the world.

Volume was up slightly in the quarter.

Again, remember our financial systems set up to measure volume in tonage or weight as we shift away from heavier products with less value added our volume in weight goes down even as our volume in units rise.

It is instructive to note in the U.S., where we are furthest along on implements volume to value we experience more of a balance from price to mix growth.

The first quarter was a very good start to the year for our net sales growth and we continue to look for digit growth for the year.

Carlos will walk you through our top performance of our business groups in a moment.

As I mentioned, operating profit increased by 6% in the quarter and this was on top of a similar underlying gain last year.

Slide six shows our profit growth components for this year's first quarter.

As you can see, currency translation had a very small impact on our profit growth in the quarter and we believe this will continue to be the case going forward.

Meanwhile, profit growth in the quarter had to overcome the negative impact of divestages as well as growth margin pressures.

Our gross margin slipped only 20 basis points year over year despite the cost prices.

This performance was attributable to operating leverage, favorable mix, modest pricing action and various productivity initiatives.

While commodity costs have drifted down from their highs, there remains significantly higher year over year in Q1 and we also saw a spike in natural gas and fuel costs.

So we felt good about holding gross margin relatively flat in the quarter.

We continue to look for slight gross margin expansion in 2003 as commodity costs moderate and execute various cost savings initiatives and as we benefit from recent price increases.

Our brand ordering investment was up nearly 5% year over year.

This investment includes advertising and promotion in our SG&A expense as well as consumer promotions such as inserts that are in our cost of goods sold.

This year over year growth in brand building will likely accelerate as we enter the back half of the year.

For the full year, our plan still call for brand building investment to grow a rate that is faster than our projected low-digit sales growth.

Slide 7 shows operating profit growth by area.

Adjusted to exclude the impact of currency and the two private labels snacks divestages I mentioned earlier.

Our profit in the U.S. increased by little more than 2% as mix in operating leverage more than offset the impact of higher costs.

In Europe, profit growth was a strong 10% in local currencies.

Owing to mix and operating leverage which more than funded a strong increase in brand building.

Our Latin American business posted a 28% local currency gain and operating profit demonstrating again our ability to manage through economic and currency volatility.

All other international businesses which include Canada, Australia and Asia collectively recorded a 61% profit gain allbeit off a low year ago level.

In short, the first quarter demonstrated strong profit performance.

For the full year we continue to forecast mid single digit operating profit growth.

Moving below the operating profit line, our interest expense was down 6% year on year due to debt reduction.

We expect interest expense for the full year to be around $360 million.

Our affective tax rate was 36% in the quarter.

In line with our four year guidance.

Average shares outstanding were even with the year ago period held down by share buybacks.

Recall that we have for 2003 a $250 million authorization to repurchase shares to be funded by options exercises.

During the quarter, we took advantage of a low share price and accelerated the share repurchases ahead of the receipt of this year's option proceeds.

Turning to slide 8 and our EPS outlook, our Q1 performance put us squarely on track for our four year guidance.

From a top line and bottom line per spk tfk.

We expect to expect double digit growth helped by favorable comparison below the operating profit line.

For the full year, we remain confident in our 186 to 190 EPS guidance particularly after a good start in Q1.

We believe we have a realistic plan that will enable us to reinvest in our business.

Let's turn to our cash flow.

Slide 9 indicates that we continue to reduce core working capital as a result of rolling 12 month sales.

This was the 7th consecutive quarter we registered sequential leta loan year over year improvement in this key measure.

We believe that we can make further progress in 2003 more allbeit modest than the reductions we recorded in 2001 and 2002.

We also continue to retain tight control over capital expenditure.

Cap-X, should be about 3% of net sales for the full year.

Cash flow was $158 million in the quarter.

The left side of slide ten highlights just how difficult a cash flow comparison we faced in Q1.

This cash flow performance was very good.

It met our forecast and was essentially equal to our net earnings despite growing sales in the quarter.

I would tribute the year over year decline to the year ago period being unusually strong and not to any negative trends.

The right side of slide ten shows our outstanding debt which we have reduced significantly over the past two years.

While down year over year in Q1, debt remained even with the preceding quarter.

This was attributable to our share repurchases.

Nevertheless, debt reduction remains our priority for cash flow this year.

As we continue to improve our financial flexibility.

More over, as we improve our earnings and contain investment and business capital by reducing co-working capital and Cap Ex on return sales, our return will rise.

In summary, our financial health is strong coming out of the first quarter.

Our top line growth was solid.

We mitigated the cost pressure on gross margin.

We were active in brand building and innovation and our profit growth was in line with our on going target.

Strong cash flow will allow us to reduce our debt further and we remain very much on track toward our earnings and cash flow goals for the year.

That's our financial picture and let me turn it back over to Carlos.

Thanks John.

The first quarter presented the most difficult compare somebody of the year for Kellogg USA since its kernel growth in last year's first quarter was over 7%.

Yet slide 11 shows that Kellogg USA really rose to the occasion getting off to an outstanding start in 2003 with internal net sales growth of about 3%.

Which again is quite a feat over the numbers we were up against in the first quarter.

Cereal sustained its momentum and snacks returned to growth despite the fact that our brand building and innovation efforts are getting started.

Before we examine those very two large U.S. businesses in more detail, let me cover the group we call U.S. other.

The U.S. other group sales were flat in the first quarter.

This is below recent growth rates for this group, we think it is somewhat timing related.

Last year the group grew about 6%.

Pop tarts got off to a slow start because of timing and brand building activities and difficult comparisons against last year's Spider-Man promotion.

The strong branch should benefit from increased marketing support going forward as well as the late maferng launch of our March launch of our new Pop-Tart line In food away from home, our internal sales from flat amidst a sluggish food service environment.

And relatively difficult net sales comparisons versus last year.

However, we continue to gain share in that channel reflecting a business that has been strengthened by the combination of Kellogg and Keebler and by heavy emphasis on our sales force and very effective innovation activity.

On the other hand, good growth was recorded by Eggo and Kashi noncereal products which benefitted from brand building.

Eggo executed well.

And it launched new Fruit Loops waffles in February.

Worthington continued to post growth in the quarter aided by strong category demand as well as note wly effective radio advertising campaigns and last year's price increase and sales of Kashi snack bars continue to surge as we expand distribution and launch in product.

Our U.S. cereal business continued in its momentum in the first quarter.

A slide 12 indicates this comes against a strong 9% gain in the year earlier period.

So to record a 4% growth is an outstanding achievement and that required very strong execution in all facets of the business.

While this growth out paced our reported in-market consumption, please keep in mind that the retailers and channels not covered by the data as well as the fact that we shipped our new Cinnamon Crunchers at the end of March.

Slide 13 offers some examples of the kinds of brand building and innovation that propelled our growth in the first quarter.

We continued to grow our Kashi brand aided by new products like organic products.

We have a line of two organic cereals from Kashi.

We successfully launched an adult product called Fruit Harvest in a kid offering called S'mores in late January.

This year's version of our weight loss challenge was a hit boosting our Special K's franchise.

Our Disney bobble heads insert gave us a list on key brands like Rice Chris ease and snacks and we had effective new campaigns for Raisin Bran crunch, Corn Puffs and Apple Jacks.

And this is volume product at work and execution in all aspects of our business and we believe we can growcap will grow our U.S. cereal business again if 2003.

Turning to U.S. snacks, recall that 2003 is the year in which we will return our snack business to brand building and innovation under a new internal growth model that replaces a somewhat played out acquire and integrate strategy.

We have made structural changes we have made.

People changes and started up the crucial reinvestment.

Slide 14 shows in the first quarter sales from products launched in the last 12 months jumped in 19% of our DSD sales or nearly doubled the level we had in 2002.

Innovation as you know is critical for driving these categories and while it's still very early; we have clearly ramped up the activity and expect to continue.

Similarly we boosted our brand building investment by more than 20% in the quarter.

For snacks focusing on advertising between key brands and on very good consumer promotions like the Disney bobble heads promotions which was done jointly with our cereal business.

You can expect to see more of these types of advertising campaigns and consumer promotions in coming months.

We have already seen an improvement in that sales growth.

Slide 15 shows in the first quarter our U.S. snacks business posted internal sales growth of 4%.

It's very early but innovation and brand reinvestment and better execution are already showing signs of paying off.

Consumption growth for wholesome snacks actually accelerated in the first quarter thanks to continued expansion of our product line.

Special K bars launched late last summer continued to exseat -- exceed our expectation.

Nutri-Grain yogurt bars are growing in year two.

We restaged Nutri-Grain minies line and added Nutri-Grain muffin bars.

We launched two S KU's of cereal and milk bars.

It's still early but are doing well.

And cookies our consumption was flat in the quarter.

Once again where we have invested we have seen good growth.

E L Fudge is not only receiving its first advertising support in years but nod products like Blasted are generating strong growth.

Sandy's continues to growth on the strength of innovation like swirls.

And Murray sugar-free helped the success -- helped buy the success of the new enrolled chocolate products continues to outpace the category.

Working against our consumption growth in the quarter would discontinued SKUs like sesame streets and butter cookies but the rationalization will be important especially as we continue to add new products to enhance the efficiency of our DSE system.

In crackers our consumption was up modestly.

The growth was led by the brands behind which we have invested in brand building and innovation.

Cheez It turned in a quarter of double digit growth aided by increased media advertising and the success of last year's new products.

But club and toasted brands also posted gains on the strength of effective advertising.

It's early in the transition of U.S. snacks to brand building and innovation, but we were showing signs of improved performance in biscuits and we are sustaining a very strong rate of growth in wholesome snacks.

So we have more brand building activity planned for the second quarter and for the rest of the year and we feel that we are getting started in really driving this business.

Slide 16 shows our first quarter internal net sales growth for Kellogg International compared to the growth that that division posted during the first and second halves of last year.

Kellogg International posted a solid 5% internal sales gain in the quarter.

In the U.S. dollars, that growth was actually 12%.

So this performance is very encouraging.

We began to roll out volume to value in 2002, and the pick up in sales growth that we experienced in last year's second half has carried over into the first half of the year.

So we are also off to a very strong start in Kellogg International.

Slide 17 shows that in the quarter this growth was led by Latin America.

An area many of you have expressed concern about in the past.

Our sales there grew by more than 13% in local currencies representing continued strong momentum in Mexico, Central America and the Caribbean.

Despite some very volatile economies and very specifically in Mexico, our business again delivered a record setting sales and volume performance in the quarter.

We also continued to expand our leading share of the Mexican cereal category.

This was again driven by effective brand building activities especially behind our Special K's Red Berries and All Bran.

Our continued outstanding growth in snacks in Mexico was led by the new Special K's bars and a new product called all brand bars was launched in Mexico and is doing well.

This demonstrates our ability to leverage our cereal brands into snacks and we are beginning to see how much more we can do there and getting started in leveraging our cereal brands into this growing category.

In Europe, our currency adjusted growth was about 3% aided by the implementation of volume to value and its focus on new products and favorable mix.

Sales for our U K's cereal business declined in part because of a soft category.

However brand building activities like our symptoms watch weremation allowed us to gain share and we were pleased about our share growth in the U K's.

Growing this business will be a priority for us this year.

We have plenty of brand building activities planned for the coming quarters.

Importantly we did generate strong growth in snacks in the UK during the quarter.

Elsewhere in Europe we posted local currency growth in most markets notably France, Spain and Benolux, and there are many exampled of volume to value to highlight and I will talk about a few in Europe.

A very successful Bebling promotion in France.

A CD rom soccer game, and a better breakfast ad, and health campaign.

In all other international segments.

Sales edged up about 1%, a little over 1% of local currencies.

In Canada, flat cereal sales may have been related to the timing of marketing programs and snacks growth lifted net sales overall.

In Asia, we posted strong sales growth on the strength of new products like Disney cereals.

Our sales in Australia were down due to the discontinuation of a wheat biscuit line and the timing of -- but our growth remains solid and that was led by our key Nutri-Grain brand and we have a great line up for the rest of the year.

In addition our snacks business, our wholesome snacks business continues to grow very strongly in Australia.

Slide 18 is one we have shown you many times.

First we had to change our company changed the fundamentals of how we did business.

Changed our financial model and then accelerate the growth.

In 2003, our goal was to sustain our momentum as we continued to improve our execution.

Therefore it's important for us to get off to a strong start this year.

In the first quarter, we generated good growth on top of good year ago growth.

This is important.

The growth in the first quarter came on top of strong growth in the first quarter of 2002.

So we are seeing growth over growth.

We are seeing strength over strength.

This is not only true for earnings for which we had to mitigate the impact of high commodity fuel and benefits cost but eally across the board.

The strong sales in earnings in the first quarter gives us confidence in the business underlying momentum.

In fact our business is performing in a way that gives a way to have flexibility to reinvest for sustainable dependable growth in 2004 and beyond.

We aren't just focused on driving 2003.

We were focused on creating visibility for the future as well.

We appreciate your interest and your confidence in us and we would like to open it up for questions.

I would like to remind everyone in order to ask a question, please press star then the number one on your telephone key pad.

We'll pause for just a moment to compile the Q and A roster.

Your first question comes from David Adelman from Morgan Stanley.

Carlos could you comment on the competitive involvement in the U.S. cereal business and in particular the extent to which the recent price increase has flowed through to retail pricing.

We have seen set price increase flow through pretty much the way we expected and we haven't seen any major problems in that regard.

My sense in the first quarter is that you are seeing a lot of activity related to driving value related to building brands which we believe is a positive sign for the category.

Aside from that, you should probably ask competitors how they are doing.

We like what we see in the category because we are -- there is brand building going on.

New products going on.

Promotions going on and that's a healthy sign for cereal.

And you mentioned share purchases, what was the dollar spent on share repurchases in Q1?

We spent about $62 million on share repurchases in the first quarter buying back just over 2 million shares.

Thank you very much.

Your next questions comes from Terry Bivens of Bear Stearns.

Good morning.

Just to look at cereal for a second.

If you look at the IRI numbers and Carlos I'm aware of the disconnect there, but those were off roughly 2%.

Can you characterize where the major lift came from elsewhere in the non- measured channels?

I have one idea but I want to hear yours.

And your idea is probably right.

I don't want to mention specific customers, but that is one of the reasons for the discrepancy between the consumption growth and our shipments.

The other thing I will say even though we launched three new cereal products in the quarter, our new product sales versus last year were almost cut in half because of the incredible Disney launch that we had at the beginning of the year.

A lot of that was sales were very strong.

So we are also comparing against a period where we had the benefit of Disney sales from day one to a new product plan that was staggered throughout the quarter.

The good thing about that is we had lower new product sales so many of our existing brands picked up some of the slack and we saw growth in brands such as Apple Jacks and Corn Pops and Raisin Bran Crunch that I mentioned before where we got some advertising going on.

But we are not concerned about a trade stock problem.

We identified the differences being primarily new products and what we have seen fortunately in the first couple of weeks of April is most of that volume flowing through.

Okay.

Terrific.

If I may ask John one, John Bryant that is, in the U.S. operating income was a bit soft there.

I would suppose that is because we absorbed the bulk of the ingredients, the fuel costs as well as the pension and benefits.

Is that a correct assumption and would you expect that to improve as we go forward?

You are right.

You are exactly right.

The benefits increased and the commodities increase primarily affect the U.S. business.

Benefits will be even across the four quarters.

That was about 5 cents of EPS for the year.

Commodities of around 10 to 12 cents a year. 4 cents of that was in the first quarter and I expect that to moderate across the year.

Thanks very much.

Thank you.

Your next question comes from William Leach of Banc of America Securitis.

I was wondering if you could give us guidance for the year.

The first quarter had a wide range of performance of the U.S. up 61% for the other.

Can you give us a rough geographic guidance or operating profits for the year?

Well, we will leave it as we said many times before our guidance for the year across the board is low single digit sales and mid digit operating growth.

If you take Kellogg International and Kellogg U.S., we expect fairly similar performances across the board.

What I would like to stay away from at this point is providing guidance of area or by geographic area because that will fluctuate.

But Kellogg International and Kellogg USA should have a similar type of year.

Despite the disparity parts in the first quarter?

That's correct.

The other category seems to be coming way back.

Is there anything particular?

Which category?

Your other category that was up 61%?

No.

This is included Asia, Australia and Canada.

So you got very different businesses and as we mentioned, we saw very strong consumption growth in Australia, even though the shipments did not follow the consumption growth and that we are not concerned about.

We had very strong growth in Asia primarily because we had a soft period in the first quarter of 2002.

You recall we restructured smaller markets and are working off of a low base.

We knew the benefits would come and they are coming now in the form of very high earnings growth, but there is nothing different.

There is no change.

There is nothing fundamental that's different there.

Okay.

Thanks a lot.

Your next question comes from John McMillin of Prudential Securities.

Congratulations.

The cereal up four in the U.S. was the number that was to the extent you came in the high end of your numbers.

That's the number that was the most surprising to me on the upside.

Was that true in your business plan?

In terms of what came in higher than expected or toward the top end?

This plus four number is bigger than what you were modeling.

We came in slightly higher.

Cereal business was stronger throughout the quarter than we had planned for, budgeted for and expected.

And to the extent retailers bought more inventories before the price increase, would that have any factor here?

We actually paid a check in lieu instead of loading.

And it's something that we don't believe has any impact on the inventory levels.

We actually traced it so that the way we measure it, our inventory may be 4 or 5 approximately pounds higher than the first quarter of last year.

And literally all that is new products and primarily Cinnamon Crunchers where we shipped last week. -- But we don't do buy-ins before price increases and we got a mind set and even a board resolution that prohibits us from trade loading.

You were going to say something John?

No, I'm just pleased.

I know you have been very conservative with your guidance in recent years about the cereal category and what you are modeling longer term and it does appear that I think we have seen enough quarters in a row where the category appears to be kind of lifting.

I'm just trying to wonder if it's sustainable and what is lifting it demographics that's not Atkins.

Whether you are starting to get more positive in your long term cereal domestic cereal growth guidance.

We are keeping our guidance and we are keeping a very conservative outlook.

This is growth over growth.

We are seeing the category rerespond better.

I think the first thing that we have done to improve the prospectus of the categories is reinvest back in brands and we have done that and we have seen other people do that, other player do that.

That's good for the overall category.

And then there is some speculation John, that whether people are eating more at home, whether people are having cereal at other times of the day other than breakfast, that is something that we are exploring and looking into.

I can't put my finger on a number and say that's driving it.

The big thing that's changed is that we have gone from a category where the big story was a bogo to a category was new products and inserts and health news and kinds of things that drive this business.

And just a quick question on Pop Tarts, you cites weakness in the quarter and I don't think you mentioned competitive activity as a reason for the weakness.

Might that have contributed?

John, I will tell you, we take our competition very seriously.

I don't want to underplay what anyone is doing.

The big thing with Pop Tarts is last year is that we very had strong promotions with a strong customer.

This year we didn't have that.

The launch of yogurt -- the yogurt line was literally last couple of weeks of the quarter.

And as we look at our marketing programs and the timing of the marketing programs we will see better business in the future.

I can tell you that April has listed growth rate to about -- actually a growth on a year to day basis.

There could be something there but a lot of it is self-inflicted.

We will see better numbers going forward.

Thank you very much.

Your next question comes from Philip [INAUDIBLE] of Credit Suisse First Boston.

[INAUDIBLE] after the quarter you are 700 million notes coming due.

I assume you refinanced those commercial papers for the time being.

Is it fair to assume your currency balance is about $1.1 billion?

I didn't catch the last bit.

You are correct that we do have commercial paper at 700 million.

Over about $1.1 billion right now and we are refinancing around $300 million for five year debt maturing 2008 here over the next three or four months.

And that answers my second question, great.

Can you also share with us a little bit what your current hedging strategies are both in regards to interest rates as well as currency and a little bit about commodity hedging?

The interest rate hedging to begin with, we have largely fixed on our interest rates.

We have very little exposure to verbal rates obviously with the bars of commercial papers today we have some floating rate exposure but even there we have some hedging.

On foreign exchange, we have transactional hedging.

We ship products from our manufacturing facility to various sales destinations.

We do very little translational hedging.

On commodities, as we said earlier in the year, we were largely unhedged for this year as we stand here today, we are about 50% hedged for the balance of year on commodities and that varies considerably from one commodity to the next.

With regard to currency, if we were to see a rebound in the Mexican peso during the remainder of the year that should be a net positive?

Would that be right?

Correct.

And the final question, if you could elaborate more on the increase we seen in both receivables and inventories.

They were quite a bit higher than your sales growth.

Is that as a result of new product product roll outs?

Or anything else in that increase?

That's a seasonality issue.

Our total working capital is lower at the end of the first quarter this year than the first quarter last year.

If you are looking from December to March, in December we have relatively low production.

We have low sales, pharmaceuticals are down.

In March we obviously heavy production with high levels of payables and heavy sales month so high level of receivables.

It's more of a seasonality issue between December and March.

If I could throw in a final question.

Given that you spend about a good $62 million on share repurchase, we should not read into that that you might actually accelerate your share purchase program above and beyond what you have done in the first quarter given your strong cash flow?

Right.

To look at the share repurchase program put it in the context of our option proceeds, last year we had over $100 million of option proceeds.

This year what we wanted to do was take advantage of a low share price in the first quarter and buy in ahead of those option proceeds coming in this year.

While we have bought back $60 million which is roughly $50 million ahead of this year's option proceeds, I would expect the share buybacks to slow in the back three quarters compared to the first quarter.

Thanks so much gentleman.

Your next question comes from Chris Gaulin from J.P.

Morgan

In the past I think you have talked about the potential for incremental cost savings at Keebler within the supply chain over and above what you articulated in the synergy estimates.

Can you say where you might stand with that and what it might entail?

I would say the synergies that we identified -- we did the acquisition have come in as we had planned.

And as we mentioned in the past, we have had a lot of years of experience in our sfli chain in cereal where we then implemented what we call operating asset effectiveness.

And we run many of our cereal plants extremely hard, very efficiently.

It's what has enabled us to keep our capital expenditures low while continuing to drive margins.

And we see the opportunity of applying those principles to our non- cereal plants where we haven't introduced operating asset effectiveness.

There is opportunity there.

I would think about it as a second wave of cost reductions for Keebler -- for Keebler and other noncereal business -- cereal business but we are not in a position to talk about it specific plan.

We are still in the stage of planning, reviewing, explore hat we can do.

So maybe it would be more of a 2004 type event?

At this point we don't have specific timing for it.

So I would hate to give you a time or date on anything that we haven't really sort of sealed.

Okay.

And then briefly, you mentioned skew rationalization is that something that you see continuing across aspects of the business.

When you are rationalizing skews, what is the retailer doing with the shelf space?

Are you retaining that?

We obviously try to do that and often we combine the SKU rationalization with the launch of new products.

We believe that SKU rationalization is a cost of doing business.

We are always doing SKU rationalization and any time we see an opportunity, we will take out SKUs that are cluttering up our warehouses and taking up working capital and not delivering margins.

I would say, yes, you should expect on going SKU rationalizations as part of our cost of doing business.

Okay.

Great, thank you.

Your next question comes from Eric Katzman of Deutsche Banc.

Good morning.

Few questions.

I guess in terms of where your capturing this.

I'm not sure if you are shipping it yet.

Big "G" has been putting the cereal bars, their milk and cereal bars, in with their traditional searqual boxes.

Your equivalent product, where is that going through when you talk about cereal volumes being up 4?

It's first of all not in cereal.

We put it in snacks as part of our wholesome snacks line and IRI captures it under convenient morning food.

It's not in our cereal numbers.

Not our internal numbers for cereal or our external.

Okay.

We are straight on that?

We are straight.

Second question is, John, if I look at the cash flow statement, there are two what seems to be major swings year over year, March to March.

One is an "other" line, which was a positive by about $50 million.

And then there is another big negative swing in changes in operating assets and liabilities.

Can you just kind of detail what's going on with those two items.

Sure.

There are a couple of items in our cash flow statement.

One is timing on tax payments which is what's going through that other line that you have there.

And in the first quarter this year we had an additional tax payment from what we had last year.

That's purely timing within the year that's not a full year impact and the changes in operating assets and liabilities which is the big swing from year over year is co-working capital.

In December of 2001, we had a high level of co-working capital which we pulled down across, by March of 2002.

We didn't have the same opportunity from December 2002 to March 2003.

So again our co-working capital is low year on year and as for those and didn't provide the same source of cash.

Okay.

Let me just clarify to make sure we've got the exact classification.

We have got cereal and milk bars in IRI classified under cereal bars.

Okay.

I wasn't caring too much about how IRI classifies.

I care about how you classify in terms of shipments.

It's in separate division.

It's in snacks and not morning foods and totally separate.

Next question is, corporate expense was up a bit year over year.

Is that tied to the kind of give back on foreign currency hedges?

What goes through corporate expense is several items.

We have severance, employee incentive programs and even a small international pension write up.

As you look at corporate expense for the full year I would expect it to be up slightly versus last year.

A lot of what you are seeing in the first quarter is timing.

And then I guess last question.

If my calculations are correct if we look at price increases that were initiated in international markets and cereal, same thing in the U.S. and same thing in biscuits in the U.S. and same thing in whole grain snacks, is it fair to say that the price increases that you have seen across your business are about 70% of the total?

Is that a fair number on average?

Are those about 2 to 3%?

You are probably pretty close. 70% of the total on average, maybe 2 to 3%.

Thank you.

Thanks Eric.

Your next question comes from David Nelson of Credit Suisse First Boston.

Congratulations.

You mentioned that you now are getting -- you lapped volume to value in the U.S. and are getting more balance in volume versus price.

Could you be more specific about that?

Well, what we are saying there is as you get the mix shift toward the lighter more value added products, you are going to have a leaning toward price mix as opposed to volume weight.

In the quarter in the United States our volume is up 1.2% and our pricing mix was up 1.7%.

So currently much more balance than the overall company where volume was up 0.1 and righting to mix was up 3.3.

That's what I was looking for.

Now David, I wanted you to keep in mind that the very successful bobbleheads promotion was done on the larger sizes of the brands and that would tend to contribute to volume as well.

Then as you were talking about consumption being below shipments in cereal, U.S. cereal could be more specific how much it was below and was it for food drug and mass only.

It's food, drug and mass.

Our large customer and as I mentioned before, the difference in shipments to consumption and inventories was about 5 million pounds.

And those 5 million pounds can be attributed to almost 100% to the new products that we ship and very specifically Cinnamon Crunchers.

And as I mentioned also previously in the first reading we had of IRI in April, a lot of that merchandise, maybe 2 1/2 million pounds of it flowed through.

The 5 million pounds order of magnitude, what percentage would that be?

I will give you a percent versus what it was last year.

Let me put on my glasses David.

That's about a 9% in weeks of inventory versus last.

It's about 2% of the shipments.

Thank you.

Lastly, as one of those that expressed concern about Latin America, was all of this Mexico?

Were you able to skate by problems in Venezuela that offset it?

We put together a very realistic plan for Venezuela knowing that we have been there before.

We know what these things are like.

It takes time for the economy to come out of its problems.

And we are on plan in those countries.

But what is driving the very strong business in Latin America's Mexico and Central America, Caribbean, our business in Venezuela was up double digit, but again that's comparing against a relatively soft year ago and that's in local currency.

But Mexico is the big driver.

Great.

Thank you very much.

Thank you

Your next question comes from Eric Larson of U.S. Bancorps.

Good morning everyone.

A quick question of U.S. cereal.

What was your net price per box per quarter after quality merchandise trade?

You are asking the net -- not on deals?

When we are on deals.

When you are on deal after quality merchandise.

When we are on deal we are up 3.6% as you can see in the IRI John.

Our prices on cereal was up 3.6 in the quarter.

Gotcha, and then talk about your -- when you fully implement your volume to value strategy in the U.S. and in Europe or around the globe as well, how high is up on your net pricing potential for your product lines?

Well, today we tend to average around the category average price in some instances we may be slightly below or slightly above.

And we see continued opportunities.

We have had 7 quarters consecutively of price mix improvement in the U.S.

And we continue to believe that there is room to move in the future.

And as you know, if you compare against some of our competitors, we are still very low.

We still have a lot of very heavy low price per pound products in our portfolio.

So we think there is a lot of room to move.

Frankly, we are just getting started.

And the other part about mix is also adding the convenience foods and snacks on to our total company that will improve mix as well.

But we had 7 consecutive quarters of price mix improvement and we see plenty of opportunity to continue that.

Thank you.

One quick follow-up question on your commodity costs, I know that you have taken pricing and a lot of your Keebler businesses as well as cereal and yet you are getting penalized by the higher commodity costs.

Let's not forget about the benefits issue for the time being.

What happened after those price -- is it higher fuel that probably hit you that you didn't anticipate in the pricing and can you get some more pricing to offset those costs?

I think if you look at the commodity costs, they came in largely how we anticipated.

A little higher in the first quarter.

And it was a bit more energy costs.

Remember what we have been saying on gross margin for this year is that we expect slight gross margin improvement.

We can take those higher commodity and energy costs and benefit costs offset them with pricing actions.

A variety of producttivity initiatives in the final year of Keebler synergies and across the whole year we expect slight margin expansion.

There will be phasing across quarters for the first half of the year will be likely down a little bit and the back half of the year up.

And the final question is, Latin America.

I suspect what you are doing is you are pricing to maintain dollar profit margins.

Is that 13% increase in Latin America price?

Or were your volumes maybe down in the quarter in your key Latin American areas?

Actually, we had strong volumes and a contribution from price mixing.

Our volume was up 4% and price mix contributed 9.3.

Regarding the question as to whether we priced based on collars or local currency, p depends on the local market and the magnitude of the rate of inflation, the magnitude of Deville -- devaluation.

It depends on the market.

Thank you very much.

Operator, we have time for only one more question.

Your last question comes from Romitha Mally of Goldman Sachs.

Good morning.

A question for you on cereal.

If I remember correctly at Kagny in, the month of January was very were memorable and I think you may have said irrational in the category.

Based on your earlier comments are you saying that type of behavior has changed in the recent months?

if you look at the quarter numbers, and they are all on IRI so they are all public.

Prices on deal for the categories as a whole were up 3%.

And as I mentioned before, we were up 3.6%.

So that means that others were also having and showing higher prices on deal.

I would say looking back at the quarter and taking it as a whole that January was a bit of an exception to what we are seeing now.

We didn't continue to see that level of price promotion.

Okay.

And then just in terms of the Disney cereals, how are they doing right now?

They are about a .7, a .8 share, which is a very good share level for kid brands.

They started out as extremely high.

They sort of leveled off.

Interestingly they are doing exceptionally well international where I think the equity has great magic.

We are pleased and we just launched another new product as you know.

Mud and Bugs at the end of last year.

We have access to so many of their characters so we can continue launching products and maintaining that niche.

And then we are just barely getting started on other categories.

It's something we are pleased with.

It's a solid share.

Solid products, and most importantly it's a platform for growth in the future.

I noticed one retailer on the east coast promoting the Disney line at 99 cents.

These are boxes with CDs in them as well.

I understand they are using their trade dollars to do it.

Doesn't that undermine volume to value a bit and is there a way to encourage the retailers not to use that price point.

We can't control prices on the shelf and very often you will have a retailer that will put their own money to getting a product done.

But frankly we don't like to see a value added brand like Disney being sold at 99 cents.

We don't think it's necessary.

If it's something we don't have control over.

Okay.

Thank you.

-- Okay, operator, I think that's all the time we got.

Thank you everyone for joining us.

If you have any questions, give me a call.

This concludes the conference call.