家樂氏 (K) 2004 Q4 法說會逐字稿

Good morning and welcome to the Kellogg Company 2004 fourth quarter earnings call.

This call is being recorded.

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

After the speakers' remarks, there will be a Q&A period. [Operator Instructions].

Please limit yourself to one question during the question and answer session.

Thank you.

At this time, I will turn the call over to Simon Burton, Kellogg Company Director of Investor Relations.

Mr. Burton, you may begin your conference.

Thank you, Rochelle, and good morning, everyone.

Thank you for joining us for a review of our fourth quarter and full year results and for our continued discussion about our strategy and outlook.

With me here in Battle Creek are Jim Jenness, our Chairman and CEO Designate;

David Mackay, President and COO;

Jeff Boromisa, CFO; and Gary Pilnick, General Counsel.

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

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

Actual results could be materially different from those projected.

For further information concerning these that factors that could cause the results to differ, please refer to the second slide of this presentation as well as to our public SEC filings.

A replay of today's conference call will be available by phone through Friday evening by dialing (888)203-1112 in the U.S. and (719)457-2687 from international locations.

The passcode for both numbers is 7124897.

The call will be available via webcast, which will be archived for 90 days.

Now let me turn it over to Jim Jenness, Chairman and Chief Executive Officer Designate.

Thank you, Simon, and good morning, everyone.

To start, I'd just like say how happy I am to be here and what an honor it is to be the CEO designate of this wonderful company.

This appointment will become official in a week or so, as Carlos is sworn in.

My wife and I have purchased a home and just about completed our move.

I have been actively involved in the business over the last several weeks; and as many of you know, for the last 30 years, I've had a very professional relationship with the Kellogg Company.

My transition is going well.

It is also my privilege to work with the excellent management team we have in place.

If Mr. Kellogg were here, I know he would be immensely proud of Carlos Gutierrez, for all he has done for our company and for all he will do for our country.

Carlos has led Kellogg through a remarkable transition with tremendous vision and courage.

Our entire Kellogg family, worldwide, wish him all the best as Commerce Secretary of the United States.

Now let's get to our performance.

We are pleased to report excellent results.

We have posted strong sales throughout the year, and the fourth quarter was no exception.

In fact, in the fourth quarter, we managed to increase sales in each of our businesses despite some very difficult comparisons during 2003.

Mix improvement again drove much of our sales growth in 2004.

As you know, mix is a very important part of our volume to value operating principle, and we continually focus on its improvement.

This enables investment in brand building and innovation in all our businesses.

Our gross margin expanded by 50 basis points, both in 2004 and in the fourth quarter.

This is a positive result given the cost pressures faced by the entire industry over the last couple of years.

Margin improvement helped funds increased investment in brand building and innovation, and increased investment in up-front costs for cost reduction initiatives.

In fact, as Jeff will discuss in a minute, we recognize a significant amount of these costs in the fourth quarter and throughout the year, all of which we absorbed in our guidance.

We continue to show improvement in reducing working capital, driving our cash flow, and reducing our debt.

In 2004, we stayed focused on our strategy of growing our cereal business, expanding our snacks business.

We delivered a third consecutive year of results which equal or exceeded our long-term growth targets.

We concentrated on our volume to value and manage for cash operating principles, and made progress on each.

These principles are the right way to run our business.

We will continue to innovate and invest in brand building and efficiency initiatives.

The Company will continue to be run targeting realistic goals that enable us to deliver dependability and sustainability.

David will review each of our businesses in a minute; but first, I'll turn it over to Jeff Boromisa, who will walk us through the financial results.

Thank you, Jim.

Good morning to everyone.

Slide 4 details our key financial highlights for the full year and fourth quarter.

Net sales increased by 9 percent for the full year, due to both excellent growth throughout the Company, and because of the favorable effect of foreign exchange.

In addition, internal sales growth, which concludes excludes the effect of foreign exchange and the 53rd week, was a strong 5 percent, significantly above our long-term target of low single digit growth.

Sales growth in the fourth quarter was 12 percent, or 4 percent on an internal basis.

Operating profit increased by 9 percent for the full year.

Internal growth was more than 4 percent.

We increased investment in innovation and brand building for both the full year and the fourth quarter.

In fact, brand building investment increased at a double-digit rate for the full year.

We also invested in upfront costs for cost reduction projects, which added to slightly more than $0.06 in the quarter.

For the full year, these costs equaled approximately $0.17 or right in the middle of our guidance range.

Importantly, more than 2/3 of these costs were recognized in SG&A in the fourth quarter.

For the full year, approximately 60 percent were recognized in the SG&A.

We also recognized approximately $0.015 of CEO, retirement and transitional costs.

Despite this, operating profit grew a strong 9 percent in 2004.

Earnings per share grew by 11 percent for the full year, helped again by lower interest expense.

EPS decreased by 2 percent in the fourth quarter, primarily as a result of a one-time increase in taxes that led to a tax rate of 35.9 percent.

Our EPS for the quarter and full year was a very high quality delivery, with an increased tax rate due to executing our cash repatriation strategy, aggressively executing up-front costs for cost-savings initiatives, and absorbing transition expenses.

However, despite these unanticipated expenses, we were still able to overdeliver EPS in the quarter.

Cash flow for the full year was $950 million, driven by increased earnings and core working capital improvements.

We are pleased with each of these results.

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

For the full year, internal net sales growth was 5 percent.

This resulted from both price, mix improvement and tonnage growth.

This is growth on growth as it builds on strong internal sales growth of 3.8 percent in 2003.

Foreign currency translation, again, contributed to reported sales growth, adding 2.8 percent for the full year and 2.4 percent for the fourth quarter.

This year's 53rd week added approximately 1 percent to annual sales, as we expected.

In the fourth quarter, it added 5.3 percent to our sales growth over last year.

Importantly, our sales growth continues to be broad-based across our businesses.

Slide 6 shows our gross profit margin for the full year and the fourth quarter.

Our gross margin increased a strong 50 basis points for both the full year and the fourth quarter.

This increase was driven by improvement in mix, increased productivity as a result of our cost savings initiatives, and operating leverage which resulted from the sales growth.

Importantly, we achieved this growth despite continued high commodity and benefit costs.

The impact of the higher commodity costs on the full year earnings was $0.14 to $0.15 per share, which built on a similar increase in 2003.

We are very pleased with these results given that commodities have added an incremental 30 cents per share to costs of goods sold since 2002.

Remember that gross profit margin is a very important part of our volume to value principle, as it provides us the flexibility to increase investment and innovation and brand building programs and drive improved mix.

In addition, as we said, our gross margin was affected by up-front costs in the fourth quarter and the full year.

As always, we absorbed these costs in our communicated results, as we believe it is just a part of our ongoing business.

Turning now to slide 7, which shows our investment in brand building.

We aim to increase our investment in brand building at a rate greater than sales growth each year.

We exceeded this target for the full year, although we fell short in the fourth quarter, simply because of the greater-than-expected sales growth and very significant growth in investment during the fourth quarter of last year.

As you can see in the chart, brand building increased at a strong double-digit rate during 2004.

As we continued to invest in our brands and future sales growth.

Along with investment in innovation, investment in brand-building comprises the core of volume to value; and we are committed to meeting our targets for this spending in 2005 and over the long-term.

Our goal is dependable, sustainable growth, and we will not sacrifice that trend for 1 or 2 quarters of unsustainable operating profit growth.

Slide 8 shows internal operating profit growth for the full year and the fourth quarter by reporting area.

Remember that internal growth excludes the benefit of currency translation and the effect of the 53rd week.

Internal operating profit growth was 4.5 percent for the full year.

It decreased by 5.6 percent in the fourth quarter due primarily to an increase in investment in brand building, up-front costs related to our cost savings initiatives, CEO transition costs, and commodities.

Internal operating profit growth in North America increased by 6.5 percent for the full year and 10 percent in the fourth quarter.

These results included up-front costs primarily related to the consolidation of the Worthington plant, and the cost related to the relocation of our snacks business to Battle Creek.

We are very pleased that operating income increased so strongly, despite these costs, and a significant increase in commodity costs.

In Europe, operating profit decreased by 7.4 percent for the full year, and 76 percent in the fourth quarter.

While we invest heavily in brand building in this area, the decrease is largely attributable to up-front costs for cost-savings initiatives.

We essentially finished the implementation of SAP in the region, and we continued an initiative during the fourth quarter designed to improve Europe's organization effectiveness.

Which resulted in our European headquarters being relocated to Dublin.

In Latin America, internal operating profit growth was 14 percent for the full year, although it decreased 4.5 percent in the fourth quarter.

We achieved this excellent full-year result despite a double-digit increase in investment in brand building in 2004.

The fourth quarter was adversely affected by the repurchase of a few weeks of inventory from a distributor in Latin America.

This was done to improve our warehousing efficiencies from a cost-savings standpoint.

And in Asia-Pacific, internal operating profit increased 13.8 percent for the full year and almost 108 percent in the fourth quarter.

We have been active in this region, increasing our brand-building investment at a double-digit rate to address weakness in the Korean market and increasingly competitive environment in Australia.

The unusual growth in the fourth quarter was caused by strong sales growth and comparisons to the fourth quarter of 2003, which you remember, included up-front costs associated with a plant closure in Australia.

Our tax rate of 35.9 percent in the quarter was significantly higher than normal due to provisions for future repatriation of foreign earnings, as a result of the passage of the American Jobs Creation Act.

This also brought our full-year rate to 34.8 percent.

We anticipate that with the finalization of certain regulatory details, we will repatriate approximately US$1 billion.

Slide 9 shows continued improvement in working capital.

This is core working capital measured as receivables plus inventories less traditional payables, which excludes customer trade liabilities, divided by our last 12 months' sales.

This was our 14th consecutive quarter of improvement in core working capital.

We are very proud of this achievement, but believe that we have an opportunity to improve further.

Even from our industry-leading position.

Obviously we have businesses which are better than the average and we are constantly spreading their best practices throughout the organization and are remaining focused on the right metrics.

We intend to do all of this while continuing to improve the quality of our customer service as we have in the past.

Cash flow is the end result of manage for cash and slide 10 shows a significant improvement we made in cash flow generation over the last 7 years.

Cash flow increased to $950 million in 2004, so cash flow was, again, in line with our guidance.

Slide 11 shows the magnitude of our debt reduction over the last 4 years.

Debt reduction and the financial flexibility it brings remains very important to us and our bond holders.

Our long-term goal is to reduce debt by approximately $300 million a year.

We paid down $286 million of debt during 2004.

Despite our more balanced approach to uses of cash, we repurchased approximately $298 million worth of shares during 2004, essentially completing the entire amount of the $300 million authorization.

As we expect to continue this balanced use of cash flow in the future, while meeting our debt reduction targets, return on invested capital improved significantly in 2004 as shown in slide 12.

Our focus on volume to value and manage for cash drives increases in return on invested capital.

Buying the value concentrates us on return and manage for cash promotes capital discipline.

You can see, based on the slide, the effect this focus has had in recent years.

Slide 13 previews our outlook for 2005, and is one that you've consistently seen before.

We anticipate low single-digit, internal net sales growth in 2005, which excludes the effect of the extra shipping week in 2004.

Remember that the extra week added approximately 1 percentage point to net sales in 2004.

So, 2005 will be challenging, but the targets are still realistic.

Our long-term target is to improve gross margin each year, and 2005 will be no exception.

This improvement will likely be driven by mix improvement, the cost savings initiatives we completed in prior years, and last summer's price increase.

Gross margin improvement and lower overhead should provide operating margin expansion, despite further increased investment in both brand building and innovation.

We continue to anticipate that benefit costs will increase by $0.05 to $0.10, and we continue to expect that total commodity costs and effect of foreign exchange will be approximately even with last year.

As we said last quarter, we continue to evaluate cost savings projects.

We have now identified up-front costs associated with these projects that equal $0.08 to $0.10 of EPS in 2005, versus our previous guidance of $0.05.

You should remember that we expect to continue to execute additional projects as they are identified throughout the course of the year.

Despite all this activity, we expect that operating margin expansion will provide mid-single-digit operating profit growth in 2005, right in line with our long-term target.

We also expect some leverage below the operating profit line from reduced interest expense, although 2005 benefit will be much less than 2004, because of the timing of bond maturities.

In addition, we also anticipate some benefit from tax planning initiatives we are executing and a low -- and a year-over-year benefit because of the one-time effect in 2004 from the homeland investment cash repatriation.

We now expect our tax rate will be around 33 percent in 2005.

We also expect that this new tax rate may be sustainable for the foreseeable future.

So, for 2005, this should all result in a high single-digit EPS growth.

This, however, does not include the approximately $0.04, second half effect we expect when we begin expensing stock compensation in the third quarter.

If we restate back to the start of the year, the full-year impact will be approximately $0.08.

We are all doing the right things for the business, for the long-term.

We're investing in brand building and innovation.

We are investing in efficiency initiatives and we are focusing on cash generation.

All of this will provide financial flexibility and long-term sustainable growth.

With that, let me turn it over to David for a review of our operations.

Thank you, Jeff, and good morning, everyone.

Let's now turn to our operating results by business segment and geography around the world.

Slide 14 shows strong North American internal sales growth of 5 percent for the full year and fourth quarter.

And remember that this growth is truly comparable as it excludes the effect of currency translation and the 53rd week, which fell in the fourth quarter of 2004.

I'll review North American retail cereal, retail snacks and frozen and specialty channels in more detail, and if you look at slide 15, it shows the results posted by our North American retail cereal business in 2004.

We posted full-year growth of 2 percent and fourth quarter growth of 1 percent.

The full-year growth of 2 percent builds on strong 6 percent growth in 2003, and we're especially pleased with these results as we're up against comparisons of 10 percent and 9 percent growth in the third and fourth quarters of 2003, respectively.

So, although our fourth quarter innovation program was not as strong as in 2003 due to timing, the 1 percent growth in Q4 was solid given the year-ago 9 percent comparison.

Importantly, growth for the year came from both the U.S. and Canadian businesses.

In the U.S., new products and products in the first year of introduction helped drive sales growth as did strong consumer support for our advertising and consumer promotions.

Kashi had another excellent year, posting double-digit sales growth.

We increased our share in the total ready-to-eat cereal category and in the natural segment through the introduction of new products.

Remember that the natural channel is a growing channel, so we're very pleased with this result.

In Canada, Raisin Bran Crunch and Banana Crunch Corn Flakes continued to be very popular, adding to that business's low single-digit sales growth.

As you can see on slide 16, we increased our dollar share of the U.S. ready-to-eat cereal category by 40 basis points in 2004, and this was our fifth year of consecutive market share growth and builds on an increase of 20 basis points in 2003.

Sales growth in 2004 was helped by the introduction of Smart Start Soy and Protein, the One Third Less Sugar varieties of Frosted Flakes and Froot Loops.

In addition to that, the original varieties of Fruit Harvest, S'mores, Special K Vanilla Almond, and a Maple and Brown Sugar version of Mini Wheats, all of which were introduced late in 2003, continued to do well throughout 2004, as did Kashi's Heart To Heart cereal.

We also focused on brand building in 2004.

As you know, we ran a successful Mini Wheats campaign that highlighted the benefits of a diet high in fiber.

In addition, we ran very successful programs tied to the "Spider-Man" and "Incredibles" movies, and we have more of this planned for 2005.

For 2005, we have strong plans for innovation and brand building, and expect good growth for the full year, even from the high base we've set over the last few years.

Slide 17 shows continued growth in the North American snacks business.

We're very pleased with full-year growth of 8 percent, although many of the categories within snacks remain challenging.

It is notable that growth actually accelerated throughout the year as a result of new products and DSD execution.

It is also notable that we accomplished these results despite the move of snacks business to Battle Creek from Elmhurst, which obviously was a significant initiative.

As you can see detailed on slide 18, full-year growth was relatively broad-based across the snacks portfolio.

Internal sales growth of Pop Tarts toaster pastries increased at a strong double-digit rate for the full year and fourth quarter, driven by new product introductions such as the French toast variety and a successful advertising campaign.

Pop Tarts now holds a category share of 84 points, which increased by 4 points during 2004.

Sales of crackers increased at a mid-single-digit rate for both the full year and the fourth quarter, driven by Cheez-It, the new Cheez-It Twisters, Club, a new Graham cracker, and new packaging innovation.

With more introductions planned for the first quarter of 2005, including caddy packs of Twisters, a new cool ranch flavor of Twisters, new Club Sticks, and new Cheez-It Grips single serve packaging.

Sales of wholesome snacks increased at a double-digit rate during a difficult year in which numerous low-carb products led to a cluttered shelf and some space constraints.

Growth was led by the introduction of our new fruit snacks.

New Kazaam Crunch Granola Snack Bars, new All-Bran High Fiber Bars, and growth in our core Nutri-Grain bars.

While sales of cookies remained essentially unchanged in 2004, we're pleased with the performance, given that the category remains weak, down 4 percent in measured channels for the year.

Keys to our performance in this tough environment included growth in our Chips Deluxe and Fruit Sandies brands.

We have new flavors of Sandies planned for introduction, but expect that this category will remain challenging 2005.

Slide 19 details the results posted by our North American frozen and specialty channels product group in 2004.

Internal sales growth was up 4 percent for the full year and by 3 percent in the fourth quarter.

We're very pleased that we're able to post good results despite the closure of our Worthington, Ohio veggie food plant during the year.

And we're also well through the process of consolidating that facility's products into our Zanesville plant.

The Eggo business had an excellent year, posting solid double-digit sales growth.

New products such as French Toast Sticks helped drive this excellent growth.

Our food away from home business also had an exceptional year.

At a time when you've been hearing about many similar businesses generating weak results, ours actually increased sales at a strong mid-single-digit great rate.

This gain was due to the development of channel-specific packaging and the introduction of new products, in combination with the strength of our focused channel teams.

We have a good calendar of new products and brand building programs scheduled for 2005, and we have confidence that these businesses will continue to show good results.

Slide 20 highlights the sales growth from Kellogg International during 2004.

Reported sales growth for the year was 14 percent, and internal growth was 5 percent.

And these results built on very strong reported and internal growth of 15 percent and 5 percent, respectively, in 2003.

For the quarter, reported growth was 12 percent, and internal growth was 2 percent.

All three areas, Europe, Latin America, and Asia-Pacific, within our international business reported growth for both the full year and the fourth quarter.

Slide 21 shows the full year and fourth quarter internal net sales growth of each of our 3 international areas.

Starting with Europe, we posted full-year internal sales growth of 4 percent, and 2 percent growth in if the fourth quarter.

For the full year, many countries posted cereal sales growth, including the U.K., Ireland, Spain, and Italy.

We saw strong category growth in Spain and the Netherlands in the fourth quarter, and we actually increased our market share in those countries at the same time.

Our snacks business posted very strong double-digit sales growth in the fourth quarter as a result of good innovation throughout 2004.

We're running Special K challenge campaigns in Europe during the first quarter of 2005, and have a good innovation program planned for the year.

It's important to remember that we achieved 2004 results while implementing SAP across our entire European business during the second half of 2004, which included going live in 8 countries at year-end.

We also moved our European headquarters from Manchester to Dublin in the fourth quarter.

Internal net sales growth in Latin America was 11 percent in 2004 and 2 percent in the fourth quarter.

Jeff mentioned earlier that in Q4 we repurchased some inventory from a distributor in Latin America.

In addition, in Mexico, we actively reduced inventory in Q4, which further impacted Latin America's quarterly growth by 2 percent.

Also notable in Latin America was the commissioning and start-up of a new snacks and cereal plant in Toluca, Mexico, intended to service our continued growth in that market.

Sales growth in Mexico was driven by new products, such as Zucaritas Turbo MIx, and a chocolate chip variety of Choco Krispies, as well as brand-building activities such as Special K 15-day challenge and a health-oriented All-Bran challenge.

The Asia-Pacific region posted an increase in internal net sales of 2 percent for the full year and 5 percent in the fourth quarter.

Australia had a strong fourth quarter driven by both snacks and cereal, while Asia had a tough year with the cereal category in Korea being weak, and Japan up against double-digit growth in last year's fourth quarter.

We increased our brand-building investment this region at a strong double-digit rate in the fourth quarter, and we had success with new products such as Fruit Nuts [ph] All-Bran and Fruits Granola.

Cereal sales growth in Australia was driven by Nutri-Grain, Special K, Crunchy Nut, and Crispix, and snacks growth was driven by strength in various products, and the launch of a new Nutri-Grain bar.

It's early for these products, but we're very encouraged by the initial results.

With all that we undertook as a company in 2004, we're very pleased with all areas of our global business grew for the full year and the fourth quarter.

This growth is a great reflection of the quality and ability of our managers and employees around the world, and we have every confidence in our ability to continue to generate growth in 2005.

I'll now hand over to Jim for summary.

Thank you, Jeff and David.

In summary, we are pleased with our results in 2004.

We lapped a period of active innovation in our U.S. cereal business during the fourth quarter of 2004, and consciously decided that we'd launch our next program of new products in January of 2005.

We remain optimistic about our business in 2005.

We have a proven business approach with 3 components.

Volume to value will continue to focus on mix improvement, margin expansion and investment in innovation and brand building.

Through manage for cash, we continue to drive cash flow and increase our financial flexibility.

And we will maintain our realistic targets, so that we always consider what is best for our company over the long-term.

It is an approach that I'm committed to and believe in.

I have the utmost confidence in our excellent management team and the 25,000 Kellogg employees around the world.

We know that we must build on the strong foundation that we've laid over the last few years, and we thank you, our investors, for your continued confidence in us.

With that, I'd like to open it up for questions.

Thank you, the question and answer session will be conducted electronically. [Operator Instructions].

Please limit yourself to one question only.

And we'll pause for just a moment.

Terry Bivens, Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Good morning, Terry.

A lot has been said lately about the pricing environment, particularly versus commodities.

And I'd like to get an update there.

As we look at the price mix contribution, I guess in Q3 you were at around 3 percent.

It slipped modestly to 1.8 in the fourth quarter.

Could you kind of give us a bit of your feeling as to where that's going to go as we move through the year?

Yes, Terry, this is Jeff.

When you look at the quarter's results, primarily if was driven by mix.

And certainly going forward we probably see that a little more split 50/50 between mix and pricing.

But our commodity situation, just like all the companies, have experienced some big hits in '04 and the pricing that we took earlier this year will start to help that in '05.

I guess I was just a little bit surprised that more of it didn't come through in Q4.

Well, you know, there is, you know, protection of certain promoted prices that we have agreed with the trade and those were honored.

Okay.

Well, that's my one question.

Thank you.

David Nelson, CS First Boston.

Good morning.

Good morning, David.

The -- just to get some of these moving parts right here, as we look into '05, interest rates -- interest expense could be down about $0.04.

Tax rate could add about $0.07. 53rd week is a $0.05 negative, does that sound right so far?

Yeah, expect for the interest expense.

What we're seeing is not as great of an improvement in '05 as we've seen in '04 and the prior years.

We, in the past, have had large bond maturities early in the year, and so we were able to pay those down and finance that into commercial paper.

In '05, the first fixed debt maturity really comes late in the year.

Okay.

And then on streamlining costs, I -- I try to sort through a lot of numbers I heard here.

There was an $0.08 to $0.10 for what I thought was productivity.

Was that your estimate now for streamlining in '05?

That's correct.

I think our original guidance, third quarter, was $0.05 --

Right.

-- and then we've increased that to $0.08 to $0.10 for '05.

The other -- the other thing that you probably want to take into effect for '05 is that we do have a significant increase in benefits, given a range of $0.05 to $0.10 --

Right.

-- it's probably closer to the high end of that range.

Okay.

And then you've got option expense.

You talked about, let's see, $0.08 on an '04 basis.

Do you think it would be that much, or can you go to -- was that Black-Scholes and you can use another methodology, are you moving to restricted stock that could reduce that?

The way we look at it for '05, is the $0.08 for the full year, $0.04 for the second half.

That's taking into effect our best modeling and change in plans that -- that we know of.

Okay.

Then -- but I heard you might repatriate about $1 billion.

That's correct.

What would you intend to do with that?

You know, the American Job Creation Act is very clear and on the uses of bringing back foreign dividends, and it fits perfectly with Kellogg, I mean, certainly investment and innovation, increased investment in brand-building, our capital spending plans, those are all very viable alternatives to use this cash and that's what we're planning on doing.

All right.

Well, speaking of innovation and brand-building, would you compare what you think the magnitude of new product news you will have in '05 to that you had in '04?

David, this is David.

I think if we look at '05, we'll be probably as strong, maybe marginally stronger.

It very much depends, of course, how those things work in market, but we did have a softer Q4 in innovation and that's meant that some of that has actually occurred in the first quarter of '05.

So, I think we're looking fairly comfortable with innovation for 2005 versus last year.

Great, thank you very much.

Thanks.

Okay, David.

Chris Growe, A.G. Edwards.

Good morning.

Good morning, Chris.

Good morning.

I just had a quick -- sort of follow-up.

The repurchase of that inventory in Latin America, is there a cost you can apply to that?

Or was it small enough so it doesn't really matter?

Well, we wouldn't -- we wouldn't give you the detail on the cost, but yes, we did repurchase some inventory there.

It actually, in Q4, had an impact of about 4 percent on total Latin American sales, if you're looking for a dimension of it.

That's helpful, yes.

And was that included as part of your up-front costs that you quantified for the year?

No.

That's all I was curious about.

Second question, then, just relative to the cookie and cracker aisle, obviously you're doing very well in cracker.

There's obvious weakness in cookie, not only in the category, but your own position.

Is that an instance where you believe you need to be more innovative?

Or is this a function of better marketing?

Or is this just the way the category's going to be for 2005?

If you just talk about the category in general?

Yes, I think we as we look at the category for 2005, our view is it's probably going to remain weak, hopefully not as weak as '04.

And we're going to do everything we can through innovation and marketing and bringing appropriate products to the marketplace to try to stimulate it, but even with that, Chris, we're taking probably a pragmatic view on the category and expect that it will still be down.

But like all of these things, categories go through swings and round-abouts.

Cookies are great-tasting products, and I think ultimately we'll find a way to see consumers come back to this category in the medium-term.

Are you committing more marketing dollars to the category?

Is it something where you're kind of holding back on that for right now?

We have a new campaign we'll share with you, but it puts more emphasis on a number of aspects that are germane to what's unique about our cookies and we will be committing quite heavily to that.

In 2005?

Yes.

Okay, thank you.

Neal Goldner, State Street Global.

Hi, thanks.

Just a quick question.

You upped the '05 up-front costs about $0.05, I think is what I heard.

I'm just curious, with all the -- the up-front spending that you seem to be doing for -- year, after year, after year, can you give us a sense of when the benefits start to exceed the costs, if it actually hasn't started already?

You know, we do look at all of these projects, you know can looking for essentially an internal rate of return of greater than 20 percent, payback of 4 to 5 years.

We are currently getting benefits from prior years' initiatives that we -- that we performed in 2003, early part of '04.

That's why you're seeing our gross profit margin being up 50 basis points in the quarter, Neal, and for the full year.

So that is our plan.

I mean, that drives the dependability of our stock and our performance is that we're constantly looking at these initiatives to help drive our -- our returns over the long-term.

The other avenue that we haven't talked as much about on the up-front costs is certainly on innovation and brand-building standpoint.

We have plenty of opportunities to do incremental-type activities there in '05.

Okay.

Thank you.

Thanks, Neal.

Pablo Zuanic, JP Morgan.

Yes, good morning, everyone.

Good morning, Pablo.

I just wanted to verify a couple of numbers and then a couple of strategic questions.

First of all, I think for the quarter, the guidance had about been $0.05 to $0.06 in total charges.

I just want to confirm if that was the number for the fourth quarter?

And related to the guidance, on the one hand you're adding 3 to 5 pennies to up-front charges, so, I would say that the like-for-like guidance has been increased, but on the other hand, the original guidance was based on the tax rate of 35 percent, now that tax rate is 33 percent.

Dollar amount's about 7 pennies.

So I could say that officially today Kellogg has guide like-for-like guidance for 2005?

I mean, can you just comment those 2 questions?

And then I'll follow up with a more strategic question.

Thanks.

Yes, Pablo, this is Jeff.

On the fourth quarter, our guidance was $0.05 to $0.07, and we came in actually at $0.06, right in the middle of that range.

I think when you look at '04 -- '05 guidance, we are getting a benefit in '05 from taxes and our tax rate will be around 33 percent for 2005.

I think one of the things you might be missing is -- the $0.10, close to $0.10 that we see in benefit costs coming up in '05 and what's happening there, Pablo, is we're reducing our asset return rate from currently it's around 9.3 percent as a company to below -- slightly below 9 percent.

And at the same time, our discount rate is going from 6 percent to 5.75.

So, it's kind a double hit there on our healthcare, pension benefits.

Okay, thanks.

And just understand the 8 pennies in options, that's not in the guidance, right?

That's not in the guidance, Pablo.

Right.

Okay.

And just on the strategic front, when I see [inaudible] US dietary -- USDA dietary guidelines and I see that General Mills starts putting whole grains in most of their boxes.

Do you think that's going to put you at a competitive disadvantage?

I mean, obviously, the new [inaudible] says whole whole grain, but General Mills, do they have the upper hand here on the new guidelines?

Pablo, this is Jim.

No, the whole grain area, we see that as being good for the category.

Nutrition in this category, historically, has been -- has given it a boost.

It flows [ph] right out of the food.

In fact, the dietary guidelines that are really pushing whole grain and fiber, we have over 50 varieties containing whole grain and fiber, so, we're right -- we're right there.

As you may have seen, we've just introduced Tiger Power, a new cereal targeted at kids, which is whole grain.

So, no, we see this as good for the category and something that's going to be good for our business.

Okay, thanks.

And just one last question, Jim.

When I hear other companies complain about what's happening in the European retail channel and how that's affecting margins, tell us how you're dealing with that and how the new changes with your SAP implementation may help margins in Europe?

Yes, Pablo, it's David.

I think if you look at hard discounters in Europe, it is a -- it's an issue for all of us.

It had an impact on us in 2004, but we're still able to grow 4 percent for the year in Europe.

How are we dealing with it?

You know, really it's a matter of focusing on volume to value driving branding, investing behind the brands, innovating constantly to make sure that our brands are something the consumers want and ask for as they go into any of the retail partners we have throughout Europe.

I think that's probably true for all branded food companies in Europe.

I think that the whole move with converting to SAP in Europe is ultimately going to have real tangible benefits for us.

We have it -- we've quantified those internally, but it's going to give us better understanding, better data, better control.

So, we think that will play out positively for us in 2005.

Great.

Thank you very much.

John McMillin, Prudential Equity.

Jim, welcome.

Thanks, John, good morning.

I, too, wish Carlos the best of luck, and you.

I just -- to follow the rules, I'll make a comment and then I'll ask a question.

Just -- my comment is really to Jeff's statement that your guidance is challenging -- I mean people have been through the numbers, but if if you just add the $0.17 or even the net -- let's say $0.08 or $0.09 of less project costs, you're kind of building in a year, at least if we believe your guidance, of very little growth.

And certainly not anything resembling high single digits.

So I don't know if you've just kind of set this up to do what Carlos has done in terms of surprising on the upside, which is nice, but to call of the guidance challenging, Jeff, I just find -- just hard to fully accept.

So, that's my comment.

If you want to comment to my comment, you certainly can.

My question is to -- is to Jim, just -- he's obviously watched the consolidation in the industry last week with Proctor and Gillette.

Kellogg is kind of a home-grown company with very deep roots that you seem to respect and love.

Just in terms of Kellogg's desire to participate in more consolidation -- I mean, a billion dollars is a lot of money, either as a seller or a buyer.

John, I will -- Jeff, do you want to say something --

I do want to make a comment for John's comment.

But I think, John, you're right, on the up-front costs for 2004 versus 2005.

The net difference there is about $0.07 and with the benefit cost that we're seeing in '05 being up about $0.10 --

Is that versus -- up 10 versus what you knew on the third quarter?

In the third quarter, we communicated the same range of $0.05 to $0.10 -- what I'm seeing now, just recently with our budget to be at the higher end of that range.

The other thing is the one less week is about $0.05 of EPS effect for us, and then plus the taxes are helping us in '05.

If you add all of that up, it's going to be very close to the 2.13, 2.14 level that we're at, reported, and getting the high single digit EPS growth for next year, our guidance is very realistic.

And I think the other avenue is, we always are investing more in brand building initiatives, and certainly that has an impact.

And we want the growth to be dependable and sustainable.

We just don't want to have 2 or 3 quarters of outstanding results and those not to be sustainable for the future.

So, we're managing it for the long-term.

We want to make sure that we can consistently deliver the performance for the Company.

John, just back to your question on consolation.

I just -- I would get into it by saying we see tremendous strengths in the Kellogg Company of being a very focused company.

We're number one -- we're number two in our category, so, we have the scale on which to compete, and I really think that's key for us going forward.

So, we have our heads down, we're driving what we've been, and so we're very comfortable in the position we are in.

Okay, well thank you.

Eric Katzman, Deutsche Bank.

Hi, good morning, everybody.

Good morning, Eric.

Good morning, Eric.

Dave, my sympathies about Australian Layton Hewitt.

Can't win them all.

Yep.

I guess kind a follow-up to Neal's question and also a follow-up to John's question is that I -- ultimately, it kind of seems that the spending that you're doing should be reflected in, I guess, improvements in cash flow.

And when I look at the chart that you gave us, or slide number 10, you could say from '98 to 2001 there was a tremendous amount of improvement, and you might say those were the -- the early Carlos years, but in the last -- from 2001 through this past year, using your numbers, compounded growth rate in cash flow is 3.5 percent.

And I guess, again, kind of reference to -- to Neal's question, if it these projects are so high in returns, I mean when does it start to show up in cash flow in terms of accelerating once again?

And then, I guess that kind of lays into John's question in that -- specifically, do you think the billion dollars in return can be used for acquisitions, and would something like Pringles, which is -- arguably could be DSD-delivered and better executed, once that comes out of Proctor, would that be something in an adjacent category in snacks that you'd be willing to consider?

Hi, Eric, it's Jeff.

Just to address your cash flow questions, you look at the cash flow chart there.

That includes, all the benefit funding that we've done in 2002, 3 and 4, but just to kind of look at 2004's performance, we're up about 25 million in cash flow at 950 million, and that's really driven by earnings and our improvement in core working capital.

Capital spending is up in '04, about $31 million, and also benefit contributions versus 2003 are up about $11 million.

So, when you take those into effect, you can see where some of the uses of that cash flow is going.

On -- on getting the returns from the projects, we are, but they're -- as part of our volume to value principles, we're always reinvesting those upsides back into brand building, and that's giving us a longer duration of success, very sustainable growth platform.

But I don't know, David, or Jim, do you want to talk about the comment --

On your comment about -- because I know you know we don't -- can't -- we don't comment on acquisitions, but I would say that we view this repatriation as contributing to our financial flexibility, as you know, paying down debt from the Keebler acquisition's been a real key driver for us.

We're going to continue to do that.

We see that giving us some financial flexibility in the future to look at close-in acquisitions, which has been part of our strategy.

At some point, look at the dividend, and so we have that flexibility and continue to pay down our debt.

If I could just follow-up -- thank you, Jim.

If I could just follow-up, Jeff, do the changes in assumptions in terms of the pension from 9.3 to less than 9, which I understand the SEC is kind of looking at, or forcing companies to look at these days, does that mean that there will be required more cash contribution so from a cash flow perspective, again, as opposed to an earnings perspective, will that once again limit the growth in cash flow?

No, Eric.

When you change the asset return rate, that's more from a book accounting standpoint of recognizing expense.

What we have been doing is actually funding investment or money into our pension plan to help our -- help offset some of the costs that we've seen increasing there.

So, there is a difference between that -- going forward I would say from a company standpoint, you won't see as much from a funding standpoint of the benefit plans.

We are very close to being fully funded and just to give some guidance on 2005 cash flow, we're looking at cash flow to be somewhere between 950 and 1 billion 25.

Okay.

And that -- I'll pass it on.

I'm not saying that you aren't at a very high level, but you kind of wonder, does the stock react to just a high level or a growth or -- and certainly how ultimately the board and Jim, how you decide to use it.

Okay, that's it.

Thank you.

Thanks, Eric.

Christine McCracken, Midwest Securities.

Good morning.

Good morning, Christine.

Jeff, to focus a little bit on your promotional strategy, some of your -- one of your peers has -- has chosen to change its strategy, possibly, to avoid potential litigation down the road.

You participate in a number of the same categories and maybe open to the same, I guess, issues, longer term.

Have you decided how you're going to move forward?

Clearly you have a number of healthier products, as well, that you could focus on.

Has there been a change in strategy?

Christine, first of all I can't comment what our competitors are doing or where they sit.

We basically feel very positive about our products.

How we present them to the consumer.

The Company has a very long history of being responsible and talking to our consumers in a way that is positive.

We're offering products with great tastes, nutritional benefits.

We're actively in agreement with the dietary guidelines that have just been issued.

We think that is a plus for the category.

It's a plus for our brands.

We have -- the Kellogg Company for years has been on the whole idea of calories in, calories out and it's what you eat and also exercise, it's about eating a good breakfast, so, no doubt there's some challenging times here and some issues, but we feel good about where we're at.

We're going to be very aggressive and positive about coming up with solutions that can address where we stand.

I hope that gets at your question.

Yeah, sure, thanks.

Thank you.

We can take one more question, please, Rochelle.

Okay.

Evan Morris, Banc of America.

Good morning, guys.

Good morning, Evan.

Just -- I'll make it quick.

Just trying to get a sense as to how the year is going to play out.

You have some tough comps in the first half of the year, which would I guess imply that things could be back-end loaded.

But if you can kind of lay on that in terms of the expected $0.08 to $0.10 worth of costs, how that's going to flow through the P&L during the year and then what cost savings you're expected for the year in aggregate and again, how that's going to flow through and sort of the timing of that?

Yes.

Evan, you're exactly right.

This is Jeff.

On the 2004 EPS for the first half it was up plus 20 percent as I recall.

So, very difficult comp on EPS first half.

I still think you'll see some progress for us, but it is very difficult from a comparison standpoint.

On the cost initiatives, that's embedded in our 50 basis point improvement that we see every year, we're still saying that we should see at least a 50 basis point improvement in '05.

And that's where -- you're seeing that from those cost initiatives helping us.

And as to how the $0.08 to $0.10 falls over the year, I think probably $0.01 to $0.03 in the first half and probably the remainder over third and fourth quarter.

Okay.

Terrific.

Thank you.

Thanks, Evan.

Thanks, Evan.

And that will conclude today's question and answer session.

Thank you for your participation.

Mr. Burton, do you have any final comments?

You can wrap it up, Rochelle, thanks.

Thank you.

And that will conclude today's conference call.

Thank you for your participation.