家樂氏 (K) 2004 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Kellogg Company third quarter earnings call.

This call is being recorded.

All lines have been placed on mute to prevent background noise.

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

If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad.

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

Also, please limit yourself to one question during the Q&A session.

Thank you.

At this time, I would like to turn the conference over to Mr. Simon Burton, Kellogg Company Director of Investor Relations.

Thank you for joining us for a review of our third quarter result and for some discussion about our strategy and outlook.

With me here in Battle Creek are Carlos Gutierrez, Chairman and CEO;

Jeff Boromisa, CFO; and Gary Pilnick, Council.

By now you should have received a press release by email, and the slides that accompany today's presentation are available online on www.kelloggcompany.com.

We must point out that certain statements made today such as projections for Kellogg Company's future performance, including earning earnings per share, net sales, gross margin, brand building, operating profit, costs, interest expense, tax rate, cash flow, share repurchases, and debt reduction are forward-looking statements.

Actual results could be materially different from those projected.

For further information concerning these factors and the 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.

A replay of the today's conference call will be available by phone through Thursday evening by dialing 1-800-642-1687.

Pass code 6854548, and via webcast which will be archived for 90 days.

Let me turn it over to Carlos Gutierrez, Chairman and Chief Executive Officer.

Good morning to everyone.

I appreciate your interest in our company and taking the time to be with us today.

We are pleased to report another excellent quarter and some great third quarter results.

We posted very strong sales, operating profit, and earnings growth this quarter despite some very difficult comparisons that we had against last year.

These results exceeded our expectations and continued our strong momentum and were really broad-based across the whole business.

If you look at the quarter in a nutshell, we told you last -- during the last call that we would absorb some charges, some investments for future visibility.

We have done that and a little bit more.

And the upside came in because our business is so much stronger than we had planned.

So very good high quality results.

Our net sales increased by 7 percent.

Which builds on an equally strong 7 percent growth last year.

Internal sales growth, which exclude the impact of favorable foreign exchange acquisitions, divestitures, and differences in shipping days increased by 4.8 percent.

Our gross margin increased by 80 basis points in the first quarter, and that has increased by 50 basis points on a year to date basis.

Mix improvement was a key contributor to this increase, and it just demonstrates the power of volume to value once we get it going and once we get rhythm to what we are trying to do.

We are pleased with the gross margin performance given the current high commodity costs.

Operating profit grew by 6 percent, and strong sales performance drove this growth and allowed for much greater investment in brand building and cost reduction initiatives.

We, again, increased our brand building investment and this was on top of a double digit increase in the third quarter of 2003.

And we initiated new programs and we continue to execute successful ones in all of our businesses.

So we remain focused on and investing for future visibility through upfront cost and cost reduction projects.

And as always, we absorb these costs in our guidance and in our numbers, so we're not going to report with the good news and without the good news.

We only have one number.

We continue to strive for long term sustainable growth, and we are capitalizing our success to drive results in 2005 and beyond.

We are aggressively reinvesting in our business and will continue to do so in the fourth quarter.

We are also raising our full year earnings guidance range to 211 to 213 per share, reflecting the momentum in our business.

And it's this momentum and the success of our strategy that gives us confidence in our outlook for the next quarter and for 2005.

I will be back with more -- review of the business, but I'm going to turn it over to Jeff to walk us through our financial numbers.

Thank you, Carlos.

Good morning, everyone.

This was another excellent quarter for Kellogg's.

These results give us additional confidence in the full year outlook.

Slide 4 details some of the key quarterly financial highlights.

Our net sales for the quarter increased by 7 percent, due to continued momentum across our businesses and a favorable effect from foreign exchange.

Internal sales growth, which excludes the effect of foreign exchange, was 4.8 percent for the quarter.

Our operating profit increased by 6 percent.

And internal growth was at 3.7 percent for the quarter.

We again increased our spending on R&D, significantly increased our investment in brand building, and absorbed even greater upfront costs related to cost reduction initiatives than we had planned.

These costs totaled 5 to 6 cents of EPS in the quarter, which was about 1 penny more than we had expected.

We also absorbed an intangible impairment loss which equaled about 2 cents of EPS.

Year to date, operating profit has grown an impressive 10 percent.

Earnings per share grew by 5 percent, due to improvement below the line from lower interest expense.

Cash flow for the quarter was $472 million, bringing our year to date cash flow to 860 million, in line with last year's result, and we remain comfortable that we will achieve our full year target of 925 million to $1 billion.

We are very pleased with our results for the quarter, especially the net sales growth.

Slide 5 shows our net sales growth in its various components.

Internal net sales growth was an excellent 4.8 percent.

This resulted from price, mix improvements and tonnage growth.

Remember, too, that this growth builds on a strong increase of 4.5 percent in the third quarter of last year.

Our net sales growth once again benefited from the dollar's year-over-year weakness against various currencies, which added about 2.4 percent to overall growth in the quarter.

And we are pleased to see our sales growth continues to be broad based across our businesses.

Slide 6 shows our gross profit margin for the third quarter and year to date.

As you can see, our gross profit margin in the third quarter actually increased by 80 basis points from the third quarter of last year.

Year to date we have seen an improvement of 50 basis points.

It was great to see this increase, given the head winds that we faced during the quarter.

Like all companies, commodity costs remain high, yet we overcame the effect through improved operating leverage, productivity savings, and mix improvement.

We continue to expect that the full year earnings impact of high commodity prices will be approximately 15 cents per share.

In addition to increased commodity costs, our gross margin was adversely affected by additional investments in upfront costs, about half of which was recognized in costs to goods sold.

We view this as a smart investment in our business in the future.

We continue to expect some gross profit margin expansion for the full year, despite the fact we will execute additional up front costs in the fourth quarter, some of which will be recognized in cost to goods sold.

Slide 7 shows our investment in brand building.

Our long term target is to increase brand building at a rate twice that of sales growth.

We increased investment in the third quarter at a rate lower than this because of the very strong growth we posted, and because of the timing of programs and certain markets around the world.

However, we have increased brand building investment at a very strong, double digit rate year to date.

And we will meet our long term targets for the full year, and we are will also meet these targets in 2005 and beyond.

We were committed to true brand building as a company, because it is such an integral part of our buy into value model and it drives our long term sales growth.

Slide 8 shows the internal operating profit growth for the third quarter by reporting area.

As always, this internal growth excludes the benefit of foreign exchange.

We posted a total company internal operating profit growth of 3.7 percent in the quarter, and all of the regions contributed to this growth.

In North America, internal operating profit growth in the quarter was 1 percent.

Limited by cost, resulting from our Worthington plant consolidation and relocation of our snacks business to Battle Creek.

We also absorbed the effect of an intangible impairment loss during the quarter.

Likewise, we also incurred up front costs in Europe.

As we continue the rollout of a SAP in the region and began the implementation of an initiative designed to improve Europe's organization effectiveness.

Europe's operating profit was essentially flat, despite the absorption of even more upfront costs than we planned and we increased our investment on brand building.

We posted internal operating profit growth of 27 percent in Latin America.

And year to date, we have increased our investment in brand building at a strong double digit rate.

In Asia/Pacific, we posted internal operating profit growth of 9 percent.

We also increased brand building investment in this area at a very strong double digit rate.

We are very pleased with the results as we did continue to see weakness in Korea as a result of a soft category, and flat sales growth in Australia due to increased competition.

We also benefited below operating profit from decreased interest expense.

In addition, our tax rate for the quarter and so far this year was 34.5 percent.

We now expect that the full year tax rate will fall between 34 and 35 percent.

Slide 9 shows outstanding improvement in working capital.

This measure is core working capital as a percent of sales.

That's receivables plus inventories, less traditional trade payables.

This was our 13th consecutive quarter of improvement in this important metric.

Managed for cash focuses our entire organization on the efficient generation of cash flow, and the improvement in working capital has been an important part of the process.

Our balance sheet has improved since the acquisition of Keebler in 2001 and will continue to improve as we concentrate on the right metrics.

And once again, we have delivered these working capital improvements while improving the quality of our customer service.

Slide 10 shows our year to date cash flow performance.

The third quarter's cash flow of $472 million brings our year to date total to 860 million.

Both figures are approximately equal to last year's strong results.

Remember that our year to date contributions to benefit plans in 2004 have totalled $141 million.

Or about $80 million more than we had contributed by the end of the third quarter in 2003.

In addition, our capital spending, thus far this year, has been $48 million higher than last year.

And we have still been able to equal last year's cash performance.

We remain confident that our full year cash flow will meet our target of between 925 million and $1 billion.

Slide 11 shows the progress we made on our commitment to reduce debt since the acquisition of Keebler.

While we are taking a more balanced approach to the uses of our uses of cash flow, debt reduction will still remain very important to us.

We again reduced debt in the third quarter.

And our total debt outstanding is now 4.9 billion, a decrease of 1.9 billion since the first quarter of 2001.

Remember, we said at the start of the year we would repay approximately $300 million of debt during the year.

Through the third quarter, we have repaid $272 million of debt, or most of the targeted amount.

We also repurchased approximately $66 million worth of shares during the third quarter and have repurchased almost 230 million so far this year.

All of this amount was funded from proceeds of the exercise of options.

Slide 12 shows that we continue to improve our return on invested capital.

Buying for value and manage for cash increases our return and promotes capital discipline.

As a result of our focus on these metrics, we expect continued improvement in return on investment capital.

Slide 13 shows our outlook for the fourth quarter of 2004.

We saw continued strong growth in the third quarter after strong growth in the first half.

And we have considerable financial flexibility through the remainder of the year.

As we discussed before, we have identified and started allocating capital towards investment in high-return projects that we expect to complete in 2004 and 2005.

A majority of these costs have been absorbed so far, and will absorb in the fourth quarter, are associated with the implementation of SAP in Europe, the relocation of our European headquarters, and the relocation of our snacks business to Battle Creek from Elmhurst.

We are also continuing various manufacturing initiatives, and we continue to identify and evaluate additional projects all the time.

Consequently, we absorbed between 5 and 6 cents of upfront costs in the third quarter.

This was 1 penny more than we anticipated, and we now expect to absorb between 16 and 18 cents for the full year.

Or 2 cents more than our previous expectations.

We also anticipated very strong investment in brand building in the fourth quarter.

Along with innovation, brand building is a key driver of our buying to value strategy, and we're committed to increasing this investment at a rate twice that of net sales growth over time.

This will drive the long term growth of our business.

We have seen the cost of some commodities decrease recently, but they remain very high and some such as natural gas and packaging have even increased.

We continue to expect that the full year impact of these high prices will be approximately 15 cents.

In addition, many of commodities that we use are not hedgeable on an exchange.

We do have a 53rd week in the fourth quarter of this year.

Although this will add only about 1 percent to sales growth as many of our operations are essentially closed that week.

Despite the significant increased investment in brand building and the cost initiatives and the continued adverse effect of commodities, we are raising our guidance for full year earnings to a range between $2.11 and $2.13 per share.

This reflects a more sustainable, low single digit sales growth for the fourth quarter, despite difficult comparisons from the fourth quarter of last year and the head winds I highlighted.

While earnings in the fourth quarter may be down slightly, it is simply a result of the absorption of upfront costs and a significantly lower tax rate in the fourth quarter of last year.

We are very pleased that we can increase the level of investments we are making in our business and increase our earnings guidance at the same time.

So in summary, we have faced a very difficult environment this year just like the industry has.

However, we have been able to manage through the adverse circumstances.

We have increased our margins, increased our investment in future growth, and increased earnings in excess of our long term target.

With our performance being driven by our buying to value strategy, coupled with our imbedded earnings power, gives us confidence for the fourth quarter and for 2005.

Let's now turn to slide 14 and a preview of our outlook for 2005.

In 2005, we expect to realize low single digit internal net sales growth right in line with our long term target.

Remember that reported sales will be decreased by the comparison to 2004's 53rd week.

As we said that week will likely add about 1 percentage point to net sales in 2004.

We should see improved gross and operating margins in 2005, as we benefit from operating leverage, mix improvement, and the productivity initiatives we completed thus far.

We expect that benefit cost will adversely affect EPS by approximately 5 to 10 cents.

Raw and packaging costs, as well as energy and fuel costs, remain very high for us, so we are not budgeting any net benefit from these inputs for 2005.

We will also continue to reinvest in cost savings projects.

In fact, we have already identified investment opportunities that will impact EPS by approximately 5 cents in 2005.

That said, we allocate our investments toward high return projects and could execute more during the balance of 2005.

Brand building will also receive strong funding in 2005.

Despite this spending, we anticipate mid-single digit operating profit growth in 2005, right in line with our long term target.

We also expect some benefit below the operating profit line in 2005.

We continue to reduce debt outstanding in 2004, and should see a slightly reduced interest expense next year.

In addition, we may see a slightly reduced tax rate next year, as a result of some tax planning initiatives we are executing.

These two benefits should result in a high single digit EPS growth, which is also in line with our long term targets.

These estimates, however, do not include the impact of stock compensation expense.

Should we expense stock compensation for the full year, we anticipate an EPS effect of approximately 8 cents.

We are very pleased with this outlook as it includes increased spending on brand building, reinvestment in the business, the absorption of upfront costs, and the effects on earnings of one less week in 2005.

Our realistic targets allow us to pursue long term, sustainable growth, and they allow us to make the right decisions for the future of our company.

With that, let me turn it back over to Carlos.

I would like to take a moment and go through the results by business segment.

Slide 15 shows the excellent results we've had in -- across our North American business.

Internal sales growth was 5 percent for the quarter and was also 5 percent for the year to date period.

Slide 16 shows continued growth in the North American cereal business.

This growth is more impressive if you recall that we had a 10 percent growth in the third quarter of last year, so we were up against some very, very difficult comparisons.

And this year's innovation and brand building programs have allowed us to grow on top of that 10 percent growth.

Albeit, just 1 percent, but we're very pleased with that.

We saw growth in both the U.S. and Canadian businesses in the quarter.

In the U.S., products introduced this year including Mini Wheats Maple and Brown Sugar, a new variety of Fruit Harvest, and the one-third less sugar varieties of Frosted Flakes and Fruit Loops helped to drive this growth.

In Canada, products such as Banana Crunch Corn Flakes and Raisin Bran Crunch helped to drive double digit sales growth.

Sales momentum in our North American snacks business continued again in the third quarter, as is detailed in slide 17.

Total net sales growth was 9 percent and continues a strong growth of the first half.

Cookies and crackers and wholesome snacks all posted sales growth in the quarter.

Our new Fruit Snacks line continued to do very well, and now hold a 14 share of the category, which essentially places them as the number 2 player in that category.

Pop Tarts also had a very strong quarter and contributed to the overall snacks sales growth as a result of innovation into new flavors and some strong brand building.

Our Canadian snack business continues to do well.

New products introduced this year such as the new Fruit Snacks line and Frosted Flakes and Fruit Loop cereal bars drove double digit sales gains.

You will see on slide 18 that growth was broad based across the snacks portfolio.

While the cookie category continues to be somewhat weak, our cookies posted a mid single digit net sales growth.

Our new On-the-Go packaging added to this growth as did the new 12 count caddies packaging.

We focused on our core brands and saw very good growth in Chips Deluxe and Fruit Sandies in the quarter, and in fact, our new Sponge Bob Animal Cookie is also off to a very strong start.

We saw growth in our crackers business as well.

Sales of crackers were also helped by the new On-the-Go packaging and increased caddy sales.

This real packaging innovation and it directly addresses consumer's desire for convenience.

Twisters continues to do well and drove the overall growth for Cheez-its.

Townhouse posted very good sales growth, and our Scooby Doo crackers, incredibly, continue to be a huge success.

And as I mentioned, wholesome snacks also posted good sales growth in the quarter.

Our fruit snacks are doing well and Special K bars grew at a very strong double digit rate.

We've launched All-Bran bars and KaZaam Crunch granola bars during the third quarter, and early signs are encouraging.

All-Bran bars came from an idea generated in Mexico, actually, and have now made their way to many of our other regions around the world.

This just another example of how we take ideas that are working in one part of the world and move them quickly throughout the world.

So I'm very pleased at the results posted by our snacks business.

This was a strong quarter led by good growth in product innovation, in brand building and, of course, excellent DSD execution, which really is at the core of this business.

The results of our North American frozen and specialty channels product group are also shown on slide 19.

Sales increased by a strong 6 percent in the third quarter and continued the good growth we've seen so far this year.

Our Eggo business posted high single digit sales growth as a result of successful innovation.

Our Food Away From Home business increased sales at a strong single digit rate as did our Morningstar Farms business.

These businesses again relied on innovation to drive demand.

We have both new products and new programs planned for the coming quarters that will continue the growth that we have seen so far this year.

So we are very pleased with those businesses as well.

This slide 20 just gives you an idea of the kind of activity and the kind of pressure that we are putting in the marketplace.

This is the innovation that we have slated for what is left of the fourth quarter and the beginning of the first quarter.

So it's really innovation that has been announced, that's out there, that has been taken to our customers.

But it just gives you an example of the level of activity and the amount of new product activity that we are bringing to the marketplace, and our people are doing a great job in this area.

Slide 21, shows results for Kellogg International.

Reported sales growth of the quarter was 10 percent, internal sales growth was 4 percent, and that builds on a very strong 7 percent growth last year.

And the important thing is that this growth was relatively broad based.

Slide 22 details the third quarter internal sales growth of each of our major international areas.

Europe posted internal sales growth of 2 percent in the third quarter, and year to date growth has been 4 percent.

Sales of both cereal and snacks increased in the quarter, led by new product introductions, successful brand building programs, and good business momentum overall.

The U.K. cereal business posted flat sales due in part to the timing of promotional activities and the introduction of new products at the end of the quarter.

For example, we introduced Frosties Light and yogurt-coated varieties of All-Bran at the end of the fourth quarter.

Importantly, both Crunchy Nut and Special K bars continue their strong growth in the U.K. and added to very strong growth across the snack business.

The PanEuropean snacks business was also strong due to impressive growth from Special K bars and the introduction of a new three layer bar in several countries.

It's still early, but we're very encouraged by the initial success of all of these products.

Internal net sales growth in Latin America was 11 percent during the quarter.

This was driven by very strong growth in both cereal and in snacks.

In Mexico, which is of course, our largest business in the area, sales of both cereal and snacks increased as a result of strong promotional campaigns and the introduction of new products.

We introduced what we call Zucaritas Turbo Mix, Zucaritas of course is our brand name for frosted flakes in Mexico, and Kellogg's Corn Flakes Strawberries during the third quarter and ran a -- what we call a Defense K nutrition-based promotional campaign which has shown tremendous success in Mexico, and we continue to build on that and improve it.

In the snacks business, we introduced Pop Tarts in Mexico and we are encouraged by the early results.

We continue to grow our All-Bran bar business at strong double digit rate, and continue to benefit from the expansion of the DSD system and our very strong execution in that country.

The Asia/Pacific region posted a slight increase of net sales in the third quarter and internal sales have increased by 1 percent year to date.

We again increased our investment in brand building in this region at a double digit rate in the quarter.

The essentially flat net sales resulted from category weakness in the Korean market and the continue effect of a new competitive entrant in the Australian cereal market.

However, in Australia, we saw strong growth for both Special K, the introduction of a new apple cinnamon variety and Crunchy Nut Corn Flakes continues to do well.

The snacks business in Australia also grew at a strong double digit rate.

In addition, strength in Japan, India, and other businesses partly helped to offset the weakness we have seen in Korea and Australia.

So our international business continues to implement and execute volume to value and managed for cash.

And we continue to move the best ideas around the world quickly and very effectively so that we can take advantage of high probability, best practices.

And we remain convinced that the increased investment in innovation and brand building will continue to fuel growth for our company.

So in summary, we had another very good quarter and feel very good about our business.

We remain confident about our long term prospects.

And you can expect that we will continue to do and excel and improve at what we have been doing and what we said we will do.

We are going to continue to focus on revenue and not how much tonnage we can put through our system.

We have a sustainable strategy which drives dependable long-term profitable growth and we are going to continue to execute that.

We'll strive for improvement in mix anywhere we can in the development of our core brands, and we're going to continue to invest in brand building and innovation and in cost savings initiatives.

And, of course, we're going to continue to drive cash flow as an essential part of our business model, and just as importantly, as an essential part of the business culture in our company.

So I hope you agree that we are well positioned to capitalize on the foundation we've built over the past 3syears.

I would just like to recognize our 25,000 employees for delivering another great quarter.

Thank you for listening, and with, I'll open it up for questions.

[Operator Instructions].

Lenoard Teitelbaum, Merrill Lynch.

Good morning.

Everybody else crying the blues and you guys are putting the results on the board.

It's got to account for something.

I would just like to ask -- my one question relates more to your budgeting.

If I take a look at what you had budgeted, let's say at a mid year review around June for your advertising, promotion, and, et cetera.

And compare it to to what you will spend this year, was there an adjustment as we got into the fourth quarter, and if so, how much?

Well, Lenny, there is an adjustment to what we budgeted.

It's a similar approach I think when you look at the cost projects that we are executing.

When we do have stronger earnings, certainly we're going to reinvest that into our business for the long term dependability.

I don't want to really give exactly how much our spending on brand building is up versus budget, but it is significant.

Safe to say, Lenny, your right.

Our brand building is up versus our plan year to date.

And it was up versus our plan for the quarter.

All right.

So there is a sharing component and I will come back and ask a follow-on to that, or a follow-up off-line.

Thank you very much.

Eric Katzman, Deutsche Bank.

Good morning.

I guess one thing that you didn't note in your comments, but has a lot of us kind of interested is the 4.5 percent price increase.

I guess based on my contacts, every other branded competitor has followed and yet you didn't really talk about that.

Perhaps more importantly, the impact that it might have on '05 to absorb some of the higher material costs.

Did you factor that in and how would you characterize the effectiveness of the pricing?

Well, as we mentioned, Eric, last time, we are looking at the price increase as a benefit for 2005.

We didn't expect to get a lot of benefit in 2004.

However, I will say if you look at the IRI data, the reported data, our average price for the quarter is up almost 2 percent.

Year to date is up about 2 percent.

So we are beginning to see that price increase already come through.

But for us essentially we are looking at it as a benefit for 2005, and we have included that in our numbers.

So -- I understood that you were mostly saying it was going to be an '05 event, but -- so when you talk about the combination of higher input costs such as packaging and energy, versus lower raw material costs, net, net, are you basically assuming zero benefit from the pricing and then it's all absorbed by the higher input costs?

Actually, the pricing doesn't fully offset the commodity increases that we have seen.

And has private label followed this price increase at this point?

Yeah, we believe and from what we have heard and seen out there that everyone has pretty much moved their prices, yes.

I guess that's my one question with four parts.

Thanks.

Thank you.

John McMillin, Prudential.

Good morning.

Congratulations.

Maybe you should limit it to one topic rather than one question, so I'll -- my topic will be project costs, because I know you've said is one number, Carlos, but past press releases have highlighted we're keeping our earnings guidance, but we're raising our project costs, and I'm sitting here running through the third quarter press release trying to find the amount of project costs in it.

So my big question for '05 is, you are only assuming -- because you can do the lower end of your guidance if you just take -- only take 5 cent project costs.

You're almost building in no operating growth into your preliminary '05 model.

Do you see my point if project costs come down from, let's say 17, 18 cents to 5 cents, that adds 12, a little tax adds -- I mean, it gets you to 228 doing nothing.

I do see your point, but doing nothing that would be a -- let me pass it on to Jeff, John, and I'll --

I think it's a question really for you though, Carlos, because is that all we're building into the plan, is 5 cents --?

No.

No, no, no.

We put that into the plan because those are identified projects.

And we are constantly looking for more projects.

And as you say, yes, we have got -- if the only thing we did was the 5 cents and we've got 2005 in the bag, we are not managing this company for 2005.

So we are always looking for investment opportunities where we can invest today to guarantee visibility and guarantee sustainability.

That's what we've said, that's what we're gong to continue to do.

So the 5 cents that we identified is simply just where we are today.

But that's what we said at the beginning of the year and we always find a way to invest in that.

You can expect the same next year, John, and I wish I could just sit back and do nothing and let the numbers roll in.

But somehow we seen it's not that easy.

Well, and obviously you have done a great job investing in the top line which does builds a longer term story.

I was just trying to get more clarity in terms of --

And the reason I wanted Jeff to jump in is because he can give you a lot of clarity on the specific numbers and what we did last year and what we will do this year.

But essentially that's what we're trying to do, and we don't look at 2005 as -- we got it in the bag.

We don't need to do anything.

We are looking at 2006, 2007, and as we told you and promised investors, we are after sustainability and dependability and reliability over the long term and not one heroic year.

Jeff help me out on --

You know, John, on a couple of the inputs, really for next year on the sales side we are looking at -- right in line with our target at the low single digit sales growth.

I think this year certainly we have done better than that.

But for next year's plan we do want to set very realistic top line for the group.

Commodities, really aren't helping me that much for next year.

Where I am getting benefits on corn and some of the other commodities, I'm getting some pain here on fuel costs, energy costs, and particularly packaging for us.

So it's kind of a no-net benefit for next week -- next year.

We also have one less week.

I think some people probably have forgotten.

But we still are keeping with our high single digit EPS, even with the less -- less business in 2005.

Foreign exchange right now is kind of mixed.

That's a hard one for us to be right on.

We're not really forecasting any benefit or any pain from that at this moment.

And our benefit costs I think is probably an avenue that people might overlook that we should have benefit costs rising next year versus this year about 5 to 10 cents.

So that certainly impacts us.

Costs initiatives, really the allocation of our capital towards projects that are going to give us future benefits.

And right now we have on the table about 5 cents, but it doesn't mean that that's all that there will be.

And certainly, our brand building is an area that we are focusing on for next year to have very good funding.

So you put all that together, and we are at the high single digit EPS guidance.

Thanks a lot.

Thank you, John.

David Driscoll, Citigroup.

Good morning, everyone.

Good morning.

I wanted to talk a little bit about fourth quarter guidance.

Just kind of a quick statement here as Kellogg's had upfront cost hit the P&L all throughout 2004, yet, when I look at the margins they remained pretty strong.

The question is, if I have done my math correctly in the fourth quarter, and using a $2.13 guidance number, that would imply margins just slightly below 17 percent or somewhere thereabouts, which looks to me like it's markedly below what we have been seeing through the 9 month period.

Can you talk to me here and give me insight as to what's happening?

And I would also note that if -- again, if I remember my history correctly, last fourth quarter contained very substantial upfront costs in your international business.

I think it was something like 12 cents.

I think it was closer to about 10 cents.

David, do you mind if Jeff answers that one?

Not at all.

We will be very -- fairly in line, I think with last year's upfront costs.

I think what you might be missing is our brand building for the fourth quarter.

It will be up significantly.

We want to have a good start to 2005, and we just don't like things to fall to the bottom line without getting a future benefit.

We're going to be looking at the brand building side.

That's probably the plug that you are looking for, the difference that you have.

So it really does mean that we should be looking at margins that are quite a bit lower than what we have seen through the first 9 months?

I think Carlos summarized it well that we are trying to manage the Company here for the long term, for the dependability and sustainability.

So we're not going to let a lot of money drop here without trying to reinvest it into the business to give us more momentum and visibility for next year.

Super.

Thanks a lot.

Ken Zaslow, Harris Nesbitt.

Good morning.

It looks like your cash cycle benefited from lower inventory days and higher accounts payable turnover days.

Can you comment on what you are doing more aggressively on inventory and accounts payables?

It's -- there's really no magic to it.

It's just the group here at Kellogg's is really focused on our managed for cash.

And when you look at those metrics, the core working capital as we would call it here, as percent of net sales, accounts payable individuals within the Company are tied to that metric.

They know what that metric is every month.

They know what they need to get to.

The same from a collections standpoint and inventory standpoint.

It's really driving our strategy, and the metrics related to the strategy to an individual person.

And the power of that is amazing.

When people really see what they need to do, they get there.

There's a lot of sharing of ideas across Kellogg's.

You know, I have some business units that are in the low single digit of working capital.

And so what they're using from a tactic standpoint, sharing that with the rest of the business units has given us a lot of value.

The last thing, it's SAP has helped us tremendously on managing our working capital.

Okay, thank you.

David Nelson, CS First Boston.

Good morning and congratulations.

Thank you.

I guess my real question was really asked previously, so why don't I ask you about the operating environment you are seeing in Europe.

A lot of your competitors or peers are talking about problems encountered with hard -- the spread of hard discounters beyond Germany into France and so forth.

Maybe a big picture comment there, please.

There is no question and this is something that we talked about often that that is -- that's a very difficult environment.

On one hand you have hard discounters.

You have some very strong retail competition in other markets.

There is a very strong regulatory environment coming out of the EU.

The important thing for us is that we've been able to grow in spite of that.

Our business is up throughout Europe for the quarter.

It's up year to date.

Our snacks business is doing extremely well.

We are growing in cereal.

We're pleased with our business in the U.K..

But there is no questions to your point.

It is an environment where everything seems to be coming at you and it's a bit of a perfect storm.

Okay, great.

Thank you.

Terry Bivens, Bear Stearns.

Good morning.

Carlos, the last time we talked, I think you mentioned along the lines of areas where you felt you had some real strong growth prospects.

Three things, Latin America, dollar stores, Kashi.

Can you give us a quick review there on where you are in those areas?

Obviously, Latin America looked great, but just kind of an update on those three areas where you do see the potential.

Just starting with Latin America, we continue to just see the momentum in that business and a lot of it comes from having people on the ground who understand the environment who've played together for awhile.

And they just continue to impress us with their innovation, with their marketing, with their zeal to get results.

So we are just extremely pleased.

About Mexico, and about some of our other Latin American businesses, Kashi continues to grow.

Continues to be a strong growth vehicle for us.

Year to date, we're up around the low double digit, high single digits sort of thing.

And it's a great business.

We're finding that it's also a great avenue for new products.

We just launched a line of Kashi hot cereals, which you may have seen.

And we are looking at other ways of expanding the Kashi brand.

So we believe that has still a long way to go.

And on dollar stores, as you know, there are two types of dollar stores.

The very extreme dollar-only stores and some of the others that have opened themselves up a little bit more, and we're growing in both.

We have a significant amount of SKUs.

We are working with them and we see that coming through our numbers, and we also see that as something that will continue.

So we're very pleased with our performance there.

And I can just tell you year to date, our business is strong.

Okay, great.

Thank you.

Thank you.

Evan Morris, Banc of America.

Good morning, guys.

Good morning.

You have been raising guidance pretty consistently throughout the year despite higher costs.

That would suggest, and I think, Carlos, you alluded to this earlier, that there's some business trends here that are obviously coming in better than your own expectations.

Can you I guess walk us through a little bit which segments of those businesses are coming through -- coming in meaningfully above your expectations?

What's been driving that?

Why they should be sustainable going forward into '05, and I guess just with that same topic, I think you said third quarter was going to be flattish, but you came in better.

Saying fourth quarter earnings are going to be down.

I'm just wondering why we shouldn't at this point just start to view your guidance as conservative?

If the business was stronger than expected in the third quarter, why shouldn't if be stronger than expected in the fourth quarter?

If you can just kind of walk me through both of those, that would be really helpful.

Let me say on the first point, Evan, the business is strong across the board.

So it's not like we see one or two pockets of growth.

We are seeing growth in our food away from home channel.

We are seeing growth in frozen foods.

We are seeing growth in cereal.

We were seeing very strong growth in healthy snacks, and that includes Pop Tarts, that includes Fruit Snacks.

So it's less about what trends are out there impacting our business, and more about what our people are doing to shape the business.

And we just have good plans, good innovation, good execution, continuity of teams across our businesses and that's really what's driving it.

We got some momentum, and momentum breeds momentum, and frankly, the key pressure and the key challenge for us is to keep it going.

So you're saying that pretty much in every business line, every business line is coming in above your planned expectations?

Yeah.

As I said on the -- I said in the script, the only two businesses that didn't grow were Korea and Australia.

Is that right?

Actually, Australia still grew.

Australia grew slightly.

What we are saying is, yes, we have momentum across the board which tells me that it's more about what we do versus any external factors that can impact our business.

In terms of our guidance, we have said from 3, 4 years ago and we will continue to say that we believe in realistic targets.

By setting realistic targets, we don't force our people to do crazy things to make short term targets.

If we beat those targets, that's great.

But the important thing is that our model works with the realistic targets.

So I would just -- I would just lay out what we think the business is going to do, and we view it very realistically.

We're not -- we're not trying to be overly conservative, but we don't want to promise something that we know we can't deliver, and that's just the way we are and that's the way that you can expect us to be.

You know also, Evan, in the third quarter last year, where we really excelled this year is certainly on the top line.

And the reason being is last year our cereal was up 10 percent.

It would have been somewhat irresponsible for us to expect that we would top that hurdle, but we did.

We did grow cereal in the quarter in the U.S. -- or North America by 1 percent.

Our snacks business for Q3 this year was up 9, and those figures you just -- you wouldn't put those down if -- because you would certainly be wrong more times than not.

Very strong top line.

The fourth quarter, we did have last year an increase in North American cereal about 9 percent, so that's a tough hurdle for us.

Total company sales last year were 4.5 in the fourth quarter.

So I don't think we are being unrealistic.

We are just trying to be responsible.

And you know, Evan, just to add on this, I don't want to dwell on this point too much, but it seems to be important for a lot of the people on the phone.

You can imagine if we would have said that we were going to grow on top of a 10 percent quarter in cereal, and then the question would be around how can you expect us to buy the fact that you going to grow over 10 percent, and that's a very good question.

I would much rather be arguing the flip side.

But believe us, we try to be very realistic and very in tuned with our reality.

What we are up against.

What the head winds are.

What the tail winds are, and we try to give you a number that we know that we have a good shot at hitting.

We don't want to talk our way into prosperity.

And also, Evan, take a look at last year's fourth quarter tax rate and I think it was around 22, 22.7.

This year we're going to be at 43.5.

And that will make up a lot of difference I think in your mind on the quarter.

Did you say you were going to be at 43.5 for the fourth quarter?

Right.

Tax rate?

Thank you very much.

Jonathan Feeney, Wachovia Securities.

Good morning, guys, great job.

Thank you, Jonathan.

How are you doing?

Terrific.

One -- my one question is, your largest competitor is clearly spending a lot of money delivering better unit volume growth than they had across their entire portfolio, and apparently at the cost of some margin.

Can you -- given that, and cereal's still their largest business, can you talk about the competitive landscape in cereal?

I know you had a very, very difficult comparison, but up 1 percent year-over-year.

Both on a pricing and volume standpoint.

Where you see the space today, and what you saw develop in the quarter, please.

Well, I will tell you a bit about our business and the category just to give you a sense of how we were doing within that environment.

And these are, of course, IRR numbers that are not -- IRI numbers that are not inclusive of all channels.

But we do see -- you know, it's a very competitive category.

Very competitive environment.

There is still a lot of price promotion and a lot of short term volume renting.

But we continue to stay focused on our game plan.

The category as reported was sort of flattish, about down a half a percent.

If you include unmeasured channels, you probably get up to 2 percent.

Within that, our share is up -- was up for the quarter a couple of tenths.

Our share on a year to date basis is up almost 1 share point, it's about up 8 tenths.

The -- importantly, base sales, which for us is critical and it really spells how much we were getting consumers to buy our brands for the right reasons and not because it's at a giveaway price.

Our base sales for the quarter were up almost 3 percent.

Our base sales year to date are up almost 3 percent.

Our incremental sales which is sales, as you know, on deal, were down about 7 percent for the quarter and are down about 7 percent year to date.

So we continue to see that very consistent pattern throughout the year.

As I mentioned before, our average price is up -- was up for the quarter, almost 2 percent and year to date it's up almost 2 percent, and then our prices on deal which is something that we've talked to you about in the past that is also an indicator of getting better mix out there on deal and promoting better mix brands.

Our pricing on deal for the quarter was up almost 2, and our pricing on deal year to date is up almost 2.

So the quarter was very much a reflection of the year.

And for us these are very, very positive numbers in a category that's still, as you know, very competitive and can be very price competitive.

Thank you very much.

Amy, if we can have just one last question, please.

Chris Growe, A. G. Edwards.

I'm feeling lucky today with this last question here.

My only question, I think we covered a lot of ground, is regarding your pricing benefits in 2005, and to what extent you are getting pricing beyond U.S. cereal.

I believe Latin America is one area as well.

And if you could also talk about mix, which has been very positive for you the last 2 years, and what extent mix can help in '05 as well?

Mix for us is constantly a priority.

And every year we should see mix improvement because that's what we are trying to do.

I think we said this before, but just as an example, our number one global brand used to be Kellogg's Corn Flakes, which of course, is lowest priced brand.

Today that's our number 3 or 4, and our number one brand is Special K. So mix improvement for us is a constant -- constant objective and every plan, every time we sit down and talk about the business mix is there, and then we're getting some pricing in some countries where we need to be either at or below inflation.

So you can see a combination of both and that's going to continue to happen into the future.

Did you want to say something out other countries?

No.

You know, we've had selective pricing across different countries.

But since I am on the line I do want to correct.

I did -- misspoke and I said the tax rate for the fourth quarter was going to be 43.5.

I meant 34.5.

And that was a question Evan answered -- Evan asked, right? 34.5 instead of 43.5.

Okay.

Great.

Thank you.

Thank you very much.

Thank you.

That does conclude the question and answer session, and also it concludes the conference.

Thank you for your participation and have a great day.

Thank you very much.