家樂氏 (K) 2007 Q4 法說會逐字稿

Good morning and welcome to the Kellogg Company 2007 fourth quarter and full year earnings call.

Today's conference is being recorded.

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

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

(OPERATOR INSTRUCTIONS) Thank you.

At this time, I would like to turn the call over to Joel Wittenberg, Kellogg Company Vice President of Investor Relations.

Mr Wittenberg, you may begin your conference.

Thank you, Lisa, and good morning, everyone.

And thank you for joining us for a review of our fourth quarter results and for some discussion regarding our strategy and outlook.

With me here here Battle Creek are David Mackay, President and CEO, John Bryant, CFO, and Gary Pilnick, General Counsel.

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

Actual results could be materially different from those projected.

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

A replay of today's conference call will be available by phone through Monday evening by dialing 888-203-1112 in the U.S.

and 719-457-0820 from international locations.

The pass code for both numbers is pound 6083848.

The call will also be available via Webcast which will be archived for 90 days.

Now, let me turn it over to David.

Thank you, Joel and good morning, everyone.

We're pleased to report another year of strong performance by Kellogg Company.

Highlights include reported sales grew 8% and internal sales rose more than 5% in-line with our 2007 guidance and above our long-term guidance, driven by both price mix and volume growth.

Reported operating profit rose 6% and internal operating profit rose 3%.

For the first time, cash flow rose above $1 billion and earnings per share rose 10%, above our long-term growth target of high single-digits.

We achieved these results by sticking to our business model and focusing on sustainable performance, despite absorbing very high levels of commodity, fuel, energy and benefit inflation.

We continue to invest in the long-term health of the business.

In fact, our advertising rose at double-digits to more than $1 billion.

We also benefited from a lower tax rate, due to some discrete items and we reinvested that benefit back into the business.

Our up-front cost investments totaled $0.18.

Given our investments and excellent execution and despite a volatile commodity environment, we entered 2008 with confidence in our ability to continue to deliver strong results.

Therefore, we are affirming our 2008 guidance.

Now I'd like to turn it over to John to take you through the financials.

Thanks, David, and good morning, everyone.

For the full year reported sales grew 8% and 5% on an internal basis, consistent with our most recent guidance.

Reported operating profit rose by 6% and internal operating profit rose by 3%, as full year up-front costs were $0.18 per share versus $0.14 in 2006.

In addition, full year incremental commodity, fuel, energy and benefits inflation was $0.32 per share, in line with our prior estimate.

As we anticipated, fourth quarter earnings were slightly lower at $0.44, as our tax rate rose to about 34%.

For the full year, earnings per share grew by 10%, to $2.76, ahead of our initial and most recent guidance.

This was driven by our strong operating performance, a full year 29% effective tax rate, and share repurchases.

And cash flow was $1.031 billion.

Let's look at these results in more detail.

Slide five shows our net sales growth.

For the full year, net sales growth was a strong 8%.

Price mix was 3.3% higher, due to pricing actions, continued trade spend efficiency and improved mix.

Tonnage added about 2.1% and currency contributed 2.6%.

For the fourth quarter, net sales growth was 8.1% and 4.7% on an internal basis.

Now let's turn to our advertising spending on slide six.

As you can see, we significantly increased our advertising this year.

In fact, our advertising rose above $1 billion for the first time to end the year at $1.063 billion.

Not only are we spending more, we're doing it more efficiently.

We have increased our presence with more targeted communications at a lower cost, allowing us to invest more into our best ideas.

Going forward, we will continue to review our spending for further efficiencies.

Advertising is an essential part of our business model and we have even more investment planned for 2008.

Let's turn to slide seven to review our gross profit performance.

2007 gross profit was $5.2 billion, a $350 million or 7% increase over last year.

This increased gross profit in dollars helps fund our advertising and innovation growth.

As expected, our full year gross margin percent declined to 44%.

This was driven by significantly higher commodity inflation, which was mostly offset by cost savings initiatives, pricing, mix, lower up-front costs and operating leverage.

Now let's turn to slide eight and a discussion of operating profit by region.

Total operating profit rose 3.1% as a result of strong sales offset by a double-digit increase in advertising and higher up-front investments.

In North America, operating profit was flat due to higher input, advertising and up-front investments.

These additional up-front charges reduced our operating profit growth by 2.3%.

2007 was another great year for our European business unit.

Full year operating profit rose 14.2%, as the results were positively impacted by this year's lower up-front investments.

The lower up-front costs in 2007 increased our operating profit growth by about 3%.

In Latin America, full year internal operating profit fell 4.7%, reflecting increased investment in advertising as well as high commodity inflation.

Sales in Latin America continued to be strong, up 9% for the year.

Finally, in Asia-Pacific, full year internal operating profit decreased by 9.5%, or $9 million, due primarily to the continued challenges in the Australian market.

The rest of our Asian business units performed very well in both cereal and snacks, with net sales and operating profit growing at double-digits.

We indicated last quarter that about 40% of the year's inflation would be concentrated in the fourth quarter and that was certainly the case.

Below the operating profit line, net interest was approximately unchanged and our full year tax rate was about 29%.

A maze for cash operating principal continue to drive cash flow.

Kellogg employees around the world know the importance of focusing on cash flow and for 2007 they delivered more than $1 billion.

Core working capital was relatively flat as a percent of sales, as favorable payables offset by an increase in inventories due to higher input prices.

As you can see on slide 10, we also put this cash to good use.

We continue to utilize our cash flow for dividends and share repurchases.

Over the last three years, we have returned more than $3.3 billion of cash to shareholders.

We have increased our dividend per share by more than 20% since 2005, repurchased almost $2 billion of our stock and invested significantly in future growth initiatives.

As you know, our Board of Directors has authorized a share repurchase program of another $650 million for 2008.

Slide 11 summarizes our strong 2007 performance.

In 2007 we absorbed another year of even greater cost inflation.

We made higher up-front investments in cost savings initiatives and increased our advertising at double-digit rate.

We were able to make these investments while achieving earnings per share growth of 10%.

Now let's turn to our 2008 outlook on slide 12.

We remain confident in our business model and despite even higher cost pressures, we have not changed our sales, operating profit or earnings per share guidance.

This is a result of operating the business for long-term sustainable growth.

We forecast mid single-digit revenue and operating profit growth, given our business momentum and the recently announced price increases, as well as our efficiency in upfront investment initiatives.

Our guidance now includes significantly higher incremental commodity, energy, fuel and benefits inflation of more than $0.65 per share versus our earlier estimate of more than $0.40 per share.

While gross profit dollars will rise, gross profit margin is expected to decline by about 100 basis points as a result of the incremental input costs, a higher amount of upfront charges recorded in cost of goods, and the investments in our recent acquisitions.

As we discussed last quarter, total upfront investments will decline from $0.18 per share in 2007 to about $0.14 in 2008, which is more consistent with historical levels.

In 2007 our tax rate fell due to some discrete items allowing us to offset the higher upfront costs.

However, for 2008 we expect the tax rate to be approximately 31%.

Our 53rd week would have added about $0.05 to the EPS, but these earnings will be reinvested back into the business.

Below the operating profit line, we expect net interest expense to be flat at just below $300 million.

We expect to deliver another year of sustainable, dependable performance with high single-digit earnings per share growth of between $2.92 and $2.97 per share.

While we do not give quarterly guidance, we want to provide some insight into the shape of the year.

We expect a difficult comparison for the first half of 2008, given last year's timing of various tax events, commodity price increases, and our strong first half performance, as well as this year's 53rd week.

This should, however, result in a stronger back half.

So to summarize, despite the difficult and volatile commodity markets, we will continue to invest back into the business for long-term sustainable growth.

And now I'd like to turn it back over to David.

Thanks, John.

It's important to view 2008 against the complex backdrop of unprecedented commodity volatility and an uncertain U.S.

economic outlook.

The magnitude of the commodity volatility we were experiencing is significant.

In the last few months alone, since our Q3 update, our estimate of 2008 commodity and energy inflation increased to more than $0.40 to an excess of $0.65.

We still anticipate that second half commodities will retrench from their current level.

But we believe that commodities will generally remain on an upward trend.

Despite the volatility, we remain confident in our ability to deliver another year of sustainable, dependable growth.

Accordingly, we've worked aggressively to proactively manage our risk, including pricing actions taken across our global portfolio, stepping up our focus on cost saving initiatives, productivity gains, and SG&A optimization across our business.

With these actions already in full swing, we feel confident about the year ahead.

History suggests that even if the economy should weaken, our business should continue to do well as it tends to be less cyclical.

Let's turn to slide 14 to discuss our recent acquisitions.

We've been very active but selective in our acquisitions over the last year.

Although our three recent transactions are relatively small, each one provides us with an opportunity for expansion within our current portfolio or expansion into high growth geographic areas.

We've added another growth engine to our natural and organic business with the acquisition of Bear Naked, makers of premium, all natural granolas, hot cereals and trail mixes, a solid strategic fit with Kashi.

We also acquired Gardenburger, maker of a variety of vegetarian and vegan products and meat substitutes.

Adding Gardenburger will position our frozen foods business to further grow our presence in the frozen meals category.

The Gardenburger business also provides another manufacturing facility, enabling us to continue to expand our frozen veggie business.

Our emerging markets growth strategy has also moved forward significantly.

In Russia, we recently announced the purchase of the United Bakers Group, one of Russia's largest cracker, biscuit and breakfast cereal producers.

The company has manufacturing facilities, as well as a strong sales and distribution system.

Combined with Kellogg's innovation, brand building and R&D infrastructure, UB provides us with a tremendous platform in the fast growing Russian market.

We'd also like to extend a warm welcome to our new employees from these exciting acquisitions.

If you can turn to s,ide 15 we'll discuss our 2008 innovation.

In 2008, we'll have sales of about $2 billion from products launched in the last three years.

We strive for our new products to improve the economics of our portfolio.

Some of the key drivers of our innovation include portion control, healthier options and natural alternatives.

Now let's turn to slide 16 and the internal sales growth posted by our North American businesses in the quarter.

For the full year, North American sales were 5% higher versus last year's tough 8% comp.

Starting on slide 17, we'll review each business in more detail.

We had a great quarter in North American ready-to-eat cereal.

Importantly, most of our 8% growth in this quarter came from growth in base sales.

Our full year sales growth was 3% and our measured channel share grew a gain ending above 34%.

This year's innovation was strong with good Q4 performance from Rice Krispies with Strawberries and Mini-Wheats Cinnamon Streusel.

We saw a strong performance from Rice Krispies, Raisin Bran Crunch and Special K in the quarter due to effective advertising campaigns.

2008 innovations are even stronger than in 2007, including Special K Cinnamon Pecan and Frosted Flakes Gold.

Also, a new All-Bran Strawberry Medley was introduced with a new 10 day challenge advertising campaign.

Once again, Kashi posted another great quarter, with double-digit sales growth.

This year's innovation continued to perform well, with particularly good performance from two varieties of Kashi granolas.

We have now raised prices across much of the portfolio of Kellogg and Kashi cereal products effective January.

And our Canadian business also grew full year sales at mid single-digits with this year's innovation of Special K Fruit and Yogurt and Rice Krispies Vanilla doing well.

Slide 18 shows our full year snacks sales rose 7%, well above our guidance and a tough year-ago comparison of 11%.

Fourth quarter sales growth was 2% and, as anticipated, was adversely impacted by the DSD equity route repurchases and the transition of Kashi Snack Bars and Kellogg Fruit Snacks into the DSD system at year-end.

Also, this quarter's growth was against last year's tough comp of 12%.

Moving Kashi Snacks and Kellogg Fruit Snacks into DSD will provide further growth opportunities in 2008, however, we expect some modest disruption in Q1.

Across the snacks business, we see continued opportunities coming from portion control and on-the-go packaging innovations.

In addition, we've raised prices across much of the Pop-Tarts, crackers, cookies and wholesome snacks portfolios over the past month.

Let's look at more detail on slide 19.

Our Pop-Tarts business posted another year of sales growth with share gains for the fourth quarter.

For 2008, we've introduced whole grain varieties, as well as new printed Pop-Tarts.

Our cracker business had another solid year with mid single-digit sales growth and share gains during Q4.

We posted strong sales from recent innovations like All-Bran Crackers and double-digit growth from Wheatables, Club and Cheez-It.

Our new 2008 innovation includes Flipsides pretzel crackers and Cheez-It Duos.

Our cookie business was strong in 2007 and full year sales rose at mid single-digits as we gained share.

For 2008, our new innovation includes introduction of Chips Deluxe and Sandies Pecan Take-Along-Packs.

These innovative break-apart packs stay fresh and make the product portable.

Our wholesome snack business continued to do well this year, with double-digit sales growth for the fourth quarter and full year.

Our 2008 wholesome snacks innovation includes a new Special K Bliss Bars.

Now let's turn to our frozen and specialty channels business on slide 20.

Frozen and specialty sales were up 6% for the full year versus a strong 8% comp last year.

We achieved solid growth across our frozen and specialty business.

Our frozen business continued to perform very well, with full year sales rising at high single-digits and consumption growing ahead of sales.

We grew frozen breakfast share in the fourth quarter with solid growth from waffles and double-digit growth in pancakes and French toast.

We had strong results in veggie foods for the quarter and full year.

Like frozen breakfast, our consumption has been running ahead of sales.

And again in Q4 our Kashi all natural and frozen entrees and frozen pizzas performed ahead of our expectations.

Specialty channels contributed solid growth again, with mid single-digit performance for the fourth quarter and full year.

Slide 21 shows that Kellogg International posted another solid year with 5% growth.

Our international growth has been broad-based, with solid results in Europe, Asia, and Latin America as you can see on slide 22.

In Europe we posted a 5% internal sales increase.

We achieved solid mid single-digit growth in cereal and double-digit sales increases in snacks.

In addition, we had market share gains in both cereal and snacks categories in our important U.K.

market.

In cereal, Special K, [Optivader] and Rice Krispies all performed well.

Sales were also solid in Ireland, France, Benelux, Spain and Italy.

In Latin America, we posted 9% full year sales growth versus last year's strong 9% growth.

For the full year, we achieved high single-digit growth in both cereal and snacks.

And for Q4 Venezuela, Columbia, Brazil, and the Caribbean all posted double-digit sales growth.

Asia-Pacific internal sales were about flat for the full year, reflecting the difficult conditions in Australia.

Excluding Australia, we achieved double-digit growth in the fourth quarter and full year across our Asia business unit.

In Australia, difficult conditions continue in the snacks category and cereal remains highly competitive.

For 2008 we have strong advertising and innovation plans to ensure continued international growth.

In summary, we entered 2008 with momentum and exciting commercial plans.

Innovation is strong globally and our focus on driving our brands remains steadfast.

We remain confident and positive, given the stable nature of our food portfolio and the fact that we've taken proactive steps to manage commodity inflation and mitigate risk.

Initiatives include the pricing actions taken across our global portfolio, stepping up our focus on cost saving initiatives and productivity gains, and tighter SG&A management across our global business.

Our focus remains on delivering sustainable and dependable growth, clearly, an approach that should resonate more today than ever.

Our recent acquisitions and positive progress toward geographic expansion are also a clear signal of our focus on building a stronger business for the future.

We feel well positioned to continue our goal of sustainable, dependable growth.

Our business model remains on track and we remain firmly committed to our Company operating principal of manage for cash and sustainable growth.

Finally, I would like to again welcome the new Kellogg employees and thank all Kellogg employees for their great work throughout 2007.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) We will start with our first person, Alexia Howard with Sanford Bernstein, please go ahead.

Hello, there.

Hi, Alexia.

Quick question on marketing spending.

It seems as though we're now up with advertising, particularly, as a percent of sales up at about 9% and that's obviously been increasing, I guess, over the last few years.

Philosophically, what is your plan for over the next couple of years?

Is the intention that it will continue to increase as a percent of sales?

Are you pretty comfortable with the level you're at, given that you are now well ahead of the rest of the packaged food group?

Alexia, if we look at our consumer support by advertising and consumer promotion, we are around the 12% mark, which is very strong for our business.

But as we think about it, we will continue to increase certainly at a rate consistent with sales growth.

And if we find more opportunities and have the flexibility and great ideas to invest behind to strengthen our brand equities, then we'll look do that as well.

Great.

Thank you very much.

Our next question comes from Chris Growe with Stifel Nicolaus.

Please go ahead.

Good morning.

Good morning, Chris.

Hi.

I have a question for you regarding sort of the upfront costs and the cost savings.

Clearly you're in sort of a new paradigm here for input costs.

Could you talk about -- I'm not sure you really ever given us sort of in some general numbers what level of cost savings you're going to have coming through this year in 2008 to help kind of blunt the effect of these input cost increases.

Chris, if you look at the upfront cost, our long-term guidance is to get a payback within five years of those upfront costs and we've been executing them now for some years.

So clearly there is a flow on benefit coming through the P&L.

The issue of course is the size of those savings is relatively modest compared to the size of the inflation that we're facing.

So it's not having a cumulative impact, it's just helping us each year as part of our broader productivity initiatives, as part of the mix to help offset that inflation.

So it is not necessarily stepping up this year, given this environment?

No, I think what we said is we'd have about $0.14 of upfront costs in this year, $0.18 last year, obviously will help us in the 2008 year.

And just want to ask one other question that's just relative to the cereal category.

In measuring it through IRI, it looks like the merchandising activity has been down a little bit and there has been little surges here and there.

Do you anticipate that for 2008 as a means of getting the price increases through, we'll see overall merchandising activity down?

No.

Chris, if you look at the merchandising in the latest quarter or year-to-date, it's actually up slightly.

And it's a category that I think is a bit of a destination category for our trading partners.

I think merchandising will play an ongoing and positive component of how we and others drive consumers to the category.

And innovation clearly plays a very big role in that, so I would expect it to stay positive.

Whether it will increase dramatically is very hard to say.

Okay.

Thank you.

Our next question comes from Terry Bivens with Bear Stearns.

Good morning, everyone.

Good morning, Terry.

Couple of quick things on cereal.

Dave, could you give us kind of the number for what the price increase was on U.S.

cereal across the line?

Low single-digit, Terry.

Really, we took broad-based global pricing across the portfolio and it was anywhere from low to mid single-digits globally.

The newer cereal it was low single-digit.

That's being announced and I think is in play in January.

Okay.

Did you ship any of your '08 cereal innovation in the fourth quarter or have you been able to more or less keep all of that in the first quarter?

We -- I think we started shipping Special K Cinnamon Pecan the last week of the year.

The interesting thing though is as we've tracked inventories Q4 to Q1, we're actually coming into 2008 than a lower inventory level than we've had for last two or three years.

We feel very positive about that.

Just lastly, I guess General Mills, according to them, they're pretty much through with the right size, right price.

What's your valuation of that?

It seems to have been pretty much of a positive for the category but from my perspective.

Is that the way you're looking at it?

You'd have to ask them specifically how they feel.

As we look at our performance in cereal in the fourth quarter, we grew in IRI 4%.

The category was actually up 1.2.

But the category numbers probably in our view about 4% if you take in all channels.

The cereal category had the strongest growth for the year in the fourth quarter, comparable to 2006.

And we grew significantly above the category and actually gained nine-tenths of a share.

So certainly we're very happy with our performance.

I think the category is doing very well.

I wouldn't like to comment on anything else.

Understood.

Thanks a lot.

Okay.

We'll take our next question from David Driscoll with Citi.

Please go ahead.

Great.

Thanks a lot.

Good morning, everyone.

Hi, David.

Hi, David.

David, I wanted to ask your opinion on the big macro environment here.

There's all these concerns about economic slowdown.

Do you expect to see a volume pickup from people changing their behavior from food away from home to food at home, have you seen anything in the fourth quarter, would you expect to see anything in 2008?

And then just on the whole volume picture, of the mid single-digits, I would assume that volume embedded in that particular guidance is relatively small and that most of it's pricing, is that correct?

David, firstly, on the last, I think the mix of price mix to volume will skew more to price mix than it did in '07 because of the levels of pricing.

We'll still have some volume growth but it will be predominantly price mix.

On the economy, speaking specifically to our business, because there's a lot of other things going on that are in the press that probably won't have an impact on us, we look at the Company and the categories we're in, we're less cyclical.

We've looked back in history at when we've have slowdowns or recessions in the U.S.

and really our business has performed pretty well through those periods.

The business is currently very strong.

We have strong momentum and we have great confidence as we look at the future.

Very hard to really read what will happen, but -- so all we've done is look at history and we feel pretty good about where we are.

Great, thanks a lot.

Thanks.

Our next question comes from Jonathan Feeney with Wachovia Securities.

Good morning and thank you.

Hi, Jonathan.

Here once again you've maintained guidance while absorbing another $0.25 upward revision to commodity cost pressure.

Clearly you think productivity and savings are helping you do that.

Does that mean without all this commodity pressure if we ever get a break on that you'd be in a position to raise numbers.

And as part of that do we ever get to a point where cost inflation is so pervasive with your competitors and private label that you just ask retailers and consumer to absorb all these cost increases as opposed to maybe you are dipping into your own productivity to do it?

Jonathan, I'd love to be in a situation where we had that problem.

We can not (Laughter).

There's always hope for the future.

Yes.

There's hope for the future.

I mean we have taken broad-based pricing actions.

We're driving efficiency.

We're driving mix.

We're driving productivity.

And that's really helped us with the $0.65 plus commodity impact for 2008.

When you look at our pricing, it is broadly offsetting the bulk of the inflation for 2008.

And we feel pretty good about that, given the strength of our brand equities, the level of our innovation, and the support we intend to continue putting behind our brands as we go forward.

And is there any -- I mean, let me simplify it then.

Has the pricing environment among your competitors and just from what you're hearing from the trade, but not just your category but others, improved, maintained itself or gotten tougher over the past quarter?

I think everyone is feeling these inflationary pressures.

It may not be exactly equal across businesses, depending on the segments you're in, but I think everyone is feeling a lot of inflationary pressures as we go forward.

Most -- a lot of categories have taken price.

I can't really speak for exactly what's happened outside of our own categories, where we have broadly taken price across every category in which we compete globally.

Okay.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take our next question from David Palmer with UBS.

Thanks.

I'd follow-up on this issue of pricing and the difference, perhaps, between retailer pushback and how you monitor consumer decisions.

The duration and the magnitude of inflation, I guess, has reached new extremes and seems like the retailers are accepting the pricing from what we've heard and the competitors and even retailer brands are going up with you guys in certain key categories.

But how are you going to think about and how concerned are you about the consumer trade down.

For instance, I think retailer brands maybe gained a little share in '07, something like 30 basis point in the measure that I saw for '07.

Maybe you have a different number.

Is there risk that that becomes more pronounced and even within your portfolio that people might trade down from your better margin products to perhaps something of a lesser margin?

Thanks.

David, I think we do look at all of our competitors.

As you look at 2007 and private label performance, as we saw in 2005 in the fourth quarter and for the full year, in fourth quarter 72% and for the full year 68% of the growth that was achieved in private label came from two retailers.

And typically, what we have seen is that if retailers want to push that particular part of their business, then we could see disproportionate growth.

In the current environment, we don't think that that's going to be excessive.

And we feel pretty good about where we are, given the strength of our brand equities and the level of investment we continue to put behind them.

Okay.

Thanks very much.

Thanks.

Our next question comes from Tim Ramey with DA Davidson.

Just wanted to get a little more color on the $0.65 and also the view that that moderates some in the second half of the year.

Can you give us any breakdown in terms of which commodities are driving that and also why you would view the second half relief as possible?

I think we're not going to get into specifics, but we do believe that we'll see some commodity cost retrench in the second half.

Two reasons for that.

One is comp, comparisons to the second half of '06.

And the second is while we can't control the weather or the crops, most experts expect some reductions in some crops versus their current highs.

Now, we've taken, I think, a very pragmatic view on commodities and tried to reflect what we think they'll do and we have baked high numbers, much higher numbers as you can see into that expectation, but the markets remain very volatile.

I think most importantly on this is we've demonstrated our ability to manage this volatility should it occur and that's why we feel very comfortable in affirming our guidance for 2008.

David, can you break it between at least energy and food or is there any more detail you can offer there?

Not at this point, no.

(OPERATOR INSTRUCTIONS) Our next question comes from Pablo Zuanic with JPMorgan.

Good morning, everyone.

David there, I want to go back to resizing.

Based on our store surveys and which are obviously limited in size, but I calculated General Mills has about 47%, 50% of their cereal skews or boxes below $2.50.

And then I look at your portfolio and I only found about 5% of your boxes that are $2.50.

Do those numbers ring a bell, do they seem correct and is that an issue?

They don't ring a bell.

The numbers we've got would indicate on averages that we're around mid-threes and now slightly above us.

I'm not sure what stores you went to.

All I'd do is again reiterate that I think that we're through that big initiative through the fourth quarter and in IRI we grew 4%.

We gained nine-tenths of a share.

Our base business was actually up very strongly and the category actually had the strongest quarter it's had for 2007.

So it's very, very good situation for the category for us and hopefully for our competitors.

Just to follow-up, when I look at crackers and cookies and again here again perhaps oversimplifying, but I see from the Kraft side an apparent ramp-up in terms of advertising on their brands, Oreo's cookies and on the cracker side.

On your side I don't necessarily see the ramp-up on advertising on biscuits but definitely a lot of innovation around packaging formats.

Obviously you think that's the right way to go, but can you explain why.

It seems that they are a lot more agressive in advertising and you are just more focused on product innovation and formats around Clubs and Townhouse.

I think again, if you look at the results we delivered in cookies and crackers, we did very, very well in the fourth quarter and for the year.

Innovation seems to be working.

On-the-go not only for ourselves but for the whole category has been a huge positive and is driving a big chunk of the growth.

We think that will continue as we go forward and we are trying to capitalize on that.

Our levels of brand building support remain relatively consistent, year on year, so I don't know how else to react but that we're very comfortable with where we are.

We continue to grow share and we continue to perform pretty well across both cookies and crackers.

One last one, if I may.

In Russia, can you give us some color in terms of how the category there has been growing for cereal and biscuits in the past few years and what type of market share does the Company you bought have there.

The Company we bought, United Bakers, is about $100 million in sales.

I think it's a market leader in two of the three.

The categories there, in general terms, have been growing high single, low double-digit.

We think while there's a lot of opportunity for us to improve that business, there's huge upside and as a platform for growth in an exciting market, we're just delighted with that acquisition and you'll hear more about it as we go forward.

Before there you were exporting your products through a distributor or how was your business there?

Pablo, we were tiny.

Okay.

Thank you.

Our next question comes from Eric Katzman with Deutsche Bank.

Good morning, everybody.

Hi, Eric.

I'm going to switch focus here a little bit to kind of capital structure and cash flow.

You guys have done just a fabulous job in terms of generating cash flow.

I think you have one of the highest free cash flow yields.

The debt markets are right now, given what the Fed's been doing, very cheap, especially for a credit like yours.

The Board authorizes $650 million in share repo, which is equal to the last few years, yet earnings are much higher, the stock's been under pressure.

Why wouldn't you give a little bit more -- assuming that our DCF work suggests that the stock is undervalued and I'm sure yours does.

Why wouldn't you be pushing the Board to put more money into share repo?

Eric, great question.

I think the -- certainly the cash flow for the Company was very strong in 2007 and we continue to see improvement in things like conversion cycles and so on from a core -- capital perspective and as we go forward the $650 million authorization is still in place.

If you look back over the last three years, Eric, almost all the cash the Company has generated has gone back to shareholders, whether it be in the form of a dividend or a share buyback.

Our net debt position has been flat.

In fact absolute debt has been growing a little bit over the last couple years.

I feel pretty good about the capital structure.

I think it's a balanced use of cash.

-- we think the share price is attractive.

But I think that where we are from a capital structure it's a good place to be.

If I could just ask one quick follow-up.

Just -- I don't want to pin you down too much, but how much on the top-line this coming year should come from acquisitions, roughly, with all the three that you've named so far?

I mean, is that -- is it just 1%?

Is it more like 2 plus, just to kind of get a sense.

That's a good question, Eric.

What we said what we're giving guidance on here is internal sales growth of mid single-digits.

You'd probably add just under two points to that to get to the impact of acquisitions.

Thank you.

Our next question comes from Andrew Lazar with Lehman Brothers.

Good morning.

Good morning, Andrew.

I guess in looking at the contribution over the last couple of quarters or more to your top-line from price mix, it sort of seems like it's been decelerating as we've gone sort of through the year, including the quarter you just reported.

I know you just obviously took pricing effective January.

I'm trying to get a sense why wouldn't I be seeing more of that come through even in the last couple quarters?

I think a part of that, Andrew, has to do with the phasing of 2006.

If you go back, look at 2006, our price mix ramped up through the back half of the year.

Q4 2006 was actually our highest priced mix of 5.4% for the quarter.

Part of it is just the comparative across '07 versus '06.

Is it fair to say that you, and obviously a lot of others, have been kind of behind the curve, more dramatically, the cost curve, that is, with respect to pricing.

Are some of the initiatives that you've taken around pricing in January across the portfolio designed to get you a lot closer to covering and or maybe completely covering sort of the cost increases that you see going through the year and you're obviously being pretty conservative in your assumptions on cost.

Andrew, I think it would be fair to say that we were probably lagging if you look at '06 and '07.

A lot of that is because of the volatility and uncertainty as were commodities actually going to stay high and stay on that potential high or upward trajectory.

I think our view is, and has been probably for the last year, that that's the case.

When you look at 2008, with that higher level of commodity inflation, we have been able to offset the bulk of it with broad-based global pricing across the portfolio of about low to mid single-digits.

So we didn't offset it all but we offset the bulk of it.

So I think your point is yes, we have replaced price more to reflect where commodities are because we don't believe that they're going to suddenly drop when we get into the out-years.

Thank you.

Thanks.

Our next question comes from Ken Zaslow with BMO Capital Markets.

Good morning, everyone.

In terms of just following on on that question, when you think about your recovery rates from the pricing increase relative to the commodity costs, are there certain regions or products where you feel like you are getting greater recovery rate and what products would you think that you are not getting as high a recovery rate?

Can you just kind of span the world as well as the products?

All I would say, Ken, is we don't price just to recover in a particular business unit and some of the commodities may impact on a particular area or business unit to a greater extent than the globe.

But we did take broad-based pricing and I think what we've done is probably the right approach to try and recoup a lot of those costs.

But like last year in Latin America when corn went through the roof and that portfolio is more corn-based, our pricing was relatively consistent, maybe a tad higher, and we got through that.

You saw the impact on profit in Latin America, but we're going into a new year now where that's more stable, at a higher level but it's more stable.

Maybe just rephrasing a little bit, are you finding that your ability to pass on costs in Europe versus the U.S.

is any different or similar?

Just are there regions, besides Latin America, that consumers are either accepting it or not accepting it as well or is it just globally the exact same reaction across consumers?

I think certainly we're seeing inflation globally and I think Europe has seen theirs ramp up as we look at 2008.

But that's been true globally.

I think pricing is being taken by many, many companies across the board and in all sorts of markets and we're seeing in Europe even in hard discounter markets like Germany where private label has gone up 10% for the first time in a number of years, the consumer reaction, no one likes higher prices but I think the only way to manage your business effectively, given these high commodity prices, is to regain some of it to go forward.

Great.

I appreciate it.

Thank you.

Our next question comes from Robert Moskow with Credit Suisse.

Hi, thank you.

I wanted to know -- you mentioned cost savings from your upfront charges.

But aren't there other layers of cost savings in other projects that you have internally that go beyond those upfront charges and is there any way to help us quantify what those savings could be?

And then secondly, I wanted to ask you about pension expense because in our modeling we saw a pretty big pickup in pension expense starting in 2009.

Are you making a contribution to your pension fund and is that helping you offset 2009 increases?

Thank you.

Okay.

Great.

On both of those questions, first on productivity, you're absolutely right.

There's much more to our productivity program than the upfront costs and I would say that we target around a 3% productivity improvement.

So that helps to offset the commodity inflation that we're seeing out there.

And then on benefits expense, to your point, benefits expense will actually be down 2008 versus 2007.

So when we give guidance that commodity, benefits, energy, et cetera, are up in excess of $0.65, that's actually netting off within there the good news on benefits expense.

The benefits will be down $0.06 or $0.07 because of the higher discount rate that's out there.

That $0.65 is net of that good news.

On pension contributions, we did make a small pension contribution at the end of 2007.

But as a Company, we're pretty well funded across our various plans.

John, have you modeled out 2009?

Maybe this is just the intricacies of pension forecasting and my models don't match yours.

Have you taken a look at it whether those benefits continue in '09.

It's hard to get there because you have got to see where the 2008 market returns are versus your actual return assumption and so on.

There's quite a bit of volatility in there.

If I could have a forecast of 2009 discount rates, maybe I could get there, but that's a very hard thing to forecast from where we are today.

Okay.

Thank you.

Our next question comes from [Linda Donnelly] with Franklin Management.

Thank you.

Could you give us some guidance on what you anticipate for capital expenditures in '08 and depreciation and amortization?

I would expect capital expenditure to be around 4% of sales, which is ballpark around $500 million.

And then on depreciation amortization, similar to this year, around $380 million.

Okay.

And if I could, do you have a number yet you can give us for your R&D expense for '07?

No, I think we'll have that in the 10-K.

I think it will be in the same sort of ballpark, maybe up slightly from 2006.

Thank you very much.

Our next question comes from Vincent Andrews with Morgan Stanley.

Mr.

Andrews, your line is open.

Sorry.

Good morning, everyone.

I know it's a small part of your business but it's a part of your business that isn't performing well.

Has there been any change in the margin of the issues in Australia?

Good or bad or indifferent?

Australia didn't have a good year.

The snacks category, while it continues to be down, we did see the last month or two of 2007 a slight improvement.

And we would hope that through the course of 2008 that the category itself and our performance will start to come back to more normal levels and then the only other thing impacting us there was CPW acquired Uncle Toby's.

They have ratcheted up their level of competitive intensity there and that has had an impact on our cereal business as well.

Okay.

Thank you very much.

Thanks.

Our next question comes from Todd Duvick with Banc of America.

Yes.

Good morning.

Good morning.

Just wanted to ask a quick capital structure question.

You've got quite a bit of short term debt and you do have a note that is coming due, I believe, in this June.

I was wondering if you could tell us if you plan to refinance any or all of that in the capital market?

We'll certainly be looking at that.

As you say we have about $1.5 billion of commercial paper.

We have a credit facility around $2.2 billion and we have a maturity of around $500 million coming in.

Depending upon the conditions in the market and how the curve looks we'll look at whether we refinance that or how we take that going forward.

Okay.

And I guess just back on the share repurchase program, you just plan to, I guess, buyback shares opportunistically, not considering anything like an accelerated share repurchase program?

At this stage our plan is to buyback the $650 million which has been authorized by the Board.

Very good.

Thank you.

(OPERATOR INSTRUCTIONS) We'll take a follow-up question from David Driscoll with Citi.

My questions have been answered.

Thank you.

Gentlemen, there are no further questions at this time.

I would like to turn the conference back over to you for any additional or closing remarks.

Lisa, thank you very much.

Thank you very much, everybody, for tuning in.

And if there's any questions, please call in.

That concludes today's teleconference.

Thank you for your participation and have a good day.