家樂氏 (K) 2008 Q4 法說會逐字稿

Good morning.

Welcome to the Kellogg Company fourth quarter and full year 2008 earnings call.

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

(Operator Instructions).

Thank you.

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

You may begin your conference.

Thank you, Latonya and good morning everyone and thank you for joining us for a review of our fourth quarter and full year results and for some discussion regarding our strategy and outlook.

With me here in Battle Creek are David MacKay, President and CEO; John Bryant, Chief Operating and Financial Officer; and Gary Pilnick, General Counsel.

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

Actual results could be materially different from those projected.

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

A replay of today's conference call will be available by phone through Monday evening, by dialing 800-964-4463 for both US and international locations.

The passcode is #5355644.

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

Now, let me turn it over to David.

Thanks, Joel and good morning everyone.

We're pleased to report another year of sustainable and dependable performance at Kellogg Company despite what has become and continues to be a very difficult environment.

Some of our 2008 highlights include broad based sales growth around the world.

Reported sales grew 9% and internal sales grew a strong 5%, in line with this year's guidance and ahead of our long term target of low single-digits.

Reported operating profit rose by 5% and internal operating profit rose 4%, in line with our long term target.

EPS grew at 8% to $2.99 per share.

And this includes the estimated impact of the recent recall related to Peanut Corporation of America, which reduced EPS by about $0.06 per share.

We added to our platform for future growth through several bolt-on acquisitions in Russia, China, the US and Australia.

In addition, we invested more than $1 billion in advertising and another $0.14 in up front cost saving initiatives.

We generated $1.1 billion of cash flow before a net after-tax $300 million year-end contribution to our retirement plan.

This exceeded our guidance of $1 billion to $1.075 billion.

And despite record cost pressures, cash returned to shareholders once again topped $1.1 billion, through another $650 million of share repurchases and about $500 million of dividends.

In 2008, we remained true to our business model and strategy, while managing through fast moving commodity price increases.

To achieve our goals and provide future visibility, we drove strong price realization, significant cost savings and positive advertising efficiencies during the year.

With our continued momentum and heightened focus on cost saving initiatives, we move into 2009 confident in our ability to once again achieve our goal of sustainable and dependable growth.

We also recognize the challenges and uncertainties created by the current economic environment and the strain that this places on consumers everywhere.

These impacts are reflected in our latest guidance.

Also, this morning, we announced the 650 million share repurchase authorization for 2009.

The prior $500 million authorization was cancelled due to the $300 million net of tax retirement plan contribution and $150 million reduction in commercial paper in Q4.

These actions improved the Company's financial flexibility in this difficult economy.

And before I turn it over to John, I'd like to say a few words on the recent recall of some peanut based products.

Our top priority is consumer safety.

When we became aware that one of our suppliers, Peanut Corporation of America had breached our food quality and safety standards, we quickly issued a precautionary hold announcement, which was then followed by voluntary recall.

While we're obviously very unhappy with the situation caused by our supplier and its negative impact on our consumers and customers, we believe our proactive actions were in the best interest of consumer safety.

We're managing and continuing to monitor the situation, which is unfortunately impacting much of the food industry.

And now, I'd like to turn it over to John to review the financials.

Thanks, David and good morning, everyone.

Slide four highlights our financial performance for the full year ending January 3, 2009.

We exceeded our long term internal sales targets of low single-digit growth.

We met our long term operating profit target of mid single-digit growth and our EPS target of high single-digit growth.

Reported sales increased by 9% for 2008, surpassing last year's strong 8% growth.

Internal sales growth, which excludes the effect of foreign exchange, our recent acquisitions and the 53rd week; was 5%, building on last year's 5% growth.

Reported operating profit rose by 5%, lapping last year's 6% growth.

Internal operating profit rose 4%, driven by our sales performance and productivity initiatives, despite the highest cost inflation experienced in our history and the impact of the recall.

Full year earnings per share rose 8% to $2.99, which is well above the guidance that we gave at the beginning of 2008.

These strong results were driven by our operating performance and fewer shares outstanding, partially offset by a higher tax rate.

The 53rd week profits of about $0.05 were reinvested back into our recent acquisitions.

Now, the $2.99 EPS result included $0.14 of up front costs.

It is important to note that our 2008 results also include the impact of a subsequent event.

In January 2009, we became aware that the Peanut Corporation of America had supplied us with tainted product.

We initiated a recall, which we expect to impact the Company around $0.12 per share.

Of this $0.12, an estimated impact of $0.06 was booked in our 2008 results.

And $0.06 is expected to be incurred largely in the first quarter of 2009.

Let's turn to slide five to discuss our fourth quarter and full year net sales growth components in more detail.

For the full year, we achieved solid 5.4% internal sales growth.

Tonnage contributed about 1% to sales growth, while our price and mix initiatives continue to flow through with solid 4.5% growth.

As you know, we took broad based pricing during 2008 to partially offset rising inflation pressures.

For the full year, the price component contributed approximately 3% of net sales, which is ahead of 2007.

While we are still achieving solid mix improvement, the current economic environment has slowed the rate of this improvement.

Foreign exchange had no impact on sales for the full year but reduced fourth quarter sales by 7.3%.

During 2008, our acquisitions added almost 2% to sales growth and the 53rd week added 1.7% to reported sales.

Q4 reported sales rose by 5% versus last year's strong 8% growth.

And internal sales grew 3% versus last year's 5% growth.

Let's turn to slide six to discuss our gross profit performance.

Our gross profit for the year was a record $5.4 billion.

As expected, gross profit margin declined from 2007 by about 200 basis points to 41.9%.

With about 50% of the decline driven by our recent acquisitions, the impact of the recall and higher up front investments in cost of goods.

While the remaining decline was driven by commodity inflation, partially offset by pricing and cost savings initiatives.

For 2009, we anticipate gross margin to be approximately unchanged from 2008, despite another 5% increase in cost pressure.

Now, let's turn to slide seven to discuss operating profit growth.

Full year internal operating profit rose 4%, driven by solid internal sales growth, cost savings and lower up front costs and offset by 10% cost of goods cost pressure and the fourth quarter recall.

Fourth quarter operating profit declined 2%.

However, the recall had a 10% adverse impact on operating profits in the quarter.

Our North American business reported full year internal operating profit growth of 6% due to stronger sales and lower up front costs.

In the fourth quarter, North America internal operating profit declined by 8%.

While the recall had a 12% adverse impact on operating profit.

European internal operating profit was essentially flat for the full year versus last year's up 14% comparable.

The results were significantly impacted by higher commodities inflation, as well as higher up front costs that reduced operating profit growth by about 2%.

In Latin America, internal operating profit declined 2% versus 2007.

However, 2008 higher up front costs had an 8% adverse impact on operating profit.

And in Asia Pacific, internal operating profit increased by 11%, driven by high single-digit sales growth and a very strong performance in Australia.

Below the operating profit line, we benefited from fewer shares outstanding and our tax rate rose to about 30%.

In addition, full year interest expense declined to $308 million.

Let's turn to slide eight to review our advertising.

Our committment to investing in advertising is a pillar of our business model and central to achieving our goals.

During the fourth quarter, reported advertising spending declined versus last year's unusually strong 26% increase.

In addition, to the tough comparable, the decline was driven by our efficiency programs.

For the full year 2008, advertising spending rose slightly versus last year's 16% growth.

We began to see the benefits of our efficiency initiatives during the second half of 2008.

As you know, we are driving these initiatives across brand building to further improve the efficiency and effectiveness of our more than $1 billion investment.

For 2009, we will continue to drive efficiency initiatives and are also benefiting from modest media deflation.

We plan to increase our advertising investment in line with sales growth.

If media deflation increases, we may see less growth in advertising spending despite more impressions.

We believe that the combination of improved efficiency and media deflation will drive even more impressions.

We will provide additional details on these initiatives at CAGNY.

Let's turn to slide nine to discuss cash flow.

For the full year, cash flow before the impact of our net $300 million discretionary year-end retirement plan contribution was $1.106 billion, which was above our prior guidance.

As you may recall, we generally make contributions to maximize our financial flexibility, which is particularly important in this challenging economic environment.

Cash flow benefited from another strong improvement in our core working capital, as our cash conversion cycle declined to a new record low of 21.6 days.

An improvement of about 2.5 days versus last year.

Capital expenditures declined to 3.6% of sales.

For 2009, we expect capital expenditures of between 3% and 4% percent of sales, driven by our K-LEAN manufacturing efficiency initiative.

As a reminder, K-LEAN stands for lean, efficient, agile network.

This program will insure we are optimizing our manufacturing network, reducing waste and developing best practices across our global facilities.

Also during the quarter, we reduced our commercial paper balance by $150 million.

We continue to maintain good access to the financial markets.

For 2009, we anticipate another strong year of cash flows.

Our forecast for cash flow is between $1.050 billion and $1.150 billion, which includes the impact of about $100 million adverse foreign exchange headwind.

Let's turn to slide 10 to review our cash returned to shareholders.

During 2008, we returned cash to shareholders through share repurchases and dividends.

We repurchased $650 million worth of shares and raised the dividend 10% during the third quarter.

For 2009, we will continue returning cash to shareholders.

As David mentioned, we announced a new $650 million share repurchase authorization for the year and cancelled our previous $500 million authorization.

In addition, we target a 40% to 50% dividend pay out ratio and expect to grow our dividend in line with earnings.

Let's turn to page 11 for a summary of 2008.

We are very pleased with our 2008 performance in a difficult trading environment.

Around the world, broad based sales growth was ahead of our long term targets.

And despite record cost pressure, 2008 operating profit met our expectations.

In addition, earnings per share were at the higher end of our increased expectations.

As we discussed previously, the 53rd week added about $0.05 to earnings per share, which was reinvested into our recent acquisitions.

To drive future visibility, we invested back into the business with several bolt-on acquisitions, $0.14 of up front costs and more than $1 billion in advertising.

Now, I'll turn it over to David on slide 12.

Thanks, John.

In 2008, sales from products launched in the last three years were roughly $2 billion or 15% of sales.

And as you can see, we have more exciting innovations planned for 2009.

A [new cereal], we're launching Special K blueberry muffin and Frosted Mini Wheats Little Bites.

Outside the US, new cereal innovation includes Nature's Pleasure in the UK, Special K chocolate in Australia and Extra in Germany.

As is the case with innovations, despite many successes, we've had a few missteps as well.

Go Packs and Straws, both targeted at out of the bowl consumption, have not met our expectations.

In snacks, we'll continue to drive our success toward portion control packs with Kashi Seven Grain TLC cracker packs and Right Bites cookies and cream 100-calorie packs.

Other snacks innovation includes Cheez-It Scrabble Junior and Chips Deluxe oatmeal chocolate chip cookies.

In wholesome snacks, our new Fiber Plus bars are off to a solid start, backed by new advertising programs.

In addition, we continue to innovate around our successful Kashi brand.

We have strong based sales momentum in our frozen business, which will continue with innovations like Eggo Bake Shops Twists and new varieties of Kashi frozen meals and pizzas.

So, if we can turn to slide 13 for the business review.

You can see, our North American business internal sales growth was a very strong 6% versus last year's 5% comparable.

If we turn to slide 14 to discuss each business unit in more detail.

Ready to eat cereal continues to be a great category, responding to brand building and growing in the current difficult economy.

Kellogg continued to perform well in a competitive cereal cereal market during 2008 and we feel good about our current position, with trade inventories declining versus Q3.

We estimate full year category growth across all channels was about 5% to 6%.

As anticipated, our fourth quarter internal sales declined 3%, as we lapped last year's tough 8% comparable.

However, our estimate of consumption across all channels was actually solid, rising 2%.

As many of you have seen, we had a relatively soft IRI market share performance in US cereal in the fourth quarter.

And across all channels, we estimate our market share declined by approximately 100 basis points.

We continue to see aggressive price based activities from our largest competitor.

And as we go into 2009, we expect a tough comp in Q1 but remain committed to our long term strategy to win in US cereal.

For the full year, solid execution and price realization drove a 3% internal sales increase versus last year's 3% growth.

While we're happy with our performance, we're disappointed that we lost some share on a full year basis.

That reflects the strength of the category, aggressive trade activity and our efforts to clean up some of our power products.

Our Canadian business grew mid single-digits for the full year, despite aggressive competitive pricing.

Kellogg Canada had a strong Q4 performance and IRI market share rose to more than 45% in the fast growing cereal category.

Recent innovations, including Special K Cinnamon Pecan and Rice Krispies Cocoa was strong.

And we turn to slide 15 to discuss the North American snacks performance.

As you can see, our snacks business posted another strong year with 6% internal sales growth.

Our performance was driven by successful innovation and price realization.

Portion control cookie and cracker packs performed ahead of expectations.

We continue to look at other opportunities to optimize and leverage our DST system, such as our recent purchase of the Mother's trademarks and recipes on the West Coast.

In addition, we recently announced price increases across the rest of the snacks portfolio.

Let's turn to slide 16 to look at more detail about our snacks and business performance.

Our Pop Tarts business posted a solid year, with low single-digit sales growth, driven by higher core sales and price realization.

This year's double-digit cracker sales growth resulted in strong IRI market share gains.

Cheez-It and Townhouse sales grew at double-digits for the year, including great performance from Cheez-It Duos, as Townhouse Flip Sides, our most successful cracker innovation in years.

Right Bites and Fudge Shop were strong contributors to our cookie sales growth and helped gain share for the year.

Wholesome snack sales grew mid single-digits for the year, driven by Kashi and partially offset by several SKU reductions.

Special K Bliss innovation and Rice Krispies Treats performance were strong.

Let's turn to Slide 17 to discuss our frozen and specialty channels performance.

Frozen and specialty channels had a great year, with sales rising 9% versus 6% last year.

Fourth quarter sales grew a solid 6% despite the impact of elevated retail inventories at the end of Q3 due to our frozen foods price increase.

For the year, we achieved double-digit frozen food sales growth through price realizations, innovation and strong advertising.

Full year Eggo sales grew at double-digits, driven by price realization and base sales growth.

And innovations like Bake Shop Swirls and Bake Shop Mini Muffin Tops are performing well above expectations.

These successes resulted in more than 1 point of IRI market share gain in the frozen breakfast category for the year.

Morningstar Farms veggie foods also grew double-digits for the year.

Kashi frozen meals continued to deliver double-digit growth through 2008, driven by increased distribution in new varieties of frozen entrees and pizzas.

We're also very pleased with our food service business, which achieved mid single-digit sales growth for the year.

Our strong brands and innovation continued to drive the successful business in a difficult environment.

You can see on slide 18 that our international internal sales grew 5% for the full year.

In Europe, we posted 4% internal sales growth for the year.

And solid ready-to-eat cereal growth was driven by a mid single increase in our core UK Markets.

Our European snacks business delivered double-digit sales growth, driven by strengthen the UK and continental Europe.

Fourth quarter sales rose 2%, with contributions from the UK, Germany and Switzerland.

While sales rose slightly in France.

We saw declines in Spain and Italy due to the weak economy.

And we saw reduced trade inventories across all three markets.

For 2009, we anticipate low single-digit sales growth in Europe, with a flat first quarter, as we expect a continued decline in retailer inventories.

For operating profit, we expect a more difficult first half comparison due to the decline in trade inventories, the phasing of commodity inflation and timing of cost savings.

In Latin America, internal sales rose 6% during Q4, driven by both cereal and snack growth in Mexico, as well as strong performances in Venezuela and Brazil.

For the full year, internal sales grew 4% versus last year's strong 9% growth.

As we discussed last quarter, we anticipate 2009 internal sales growth at closer to mid single-digits.

Q1 sales are expected to be flat as we face tough comps, continued retailer inventory reductions and a tough economic environment across the region.

In Asia Pacific, full year internal sales grew 8%, driven by solid performance in both cereal and snacks.

And now, I'll turn it back over to John to discuss our financial outlook and cost pressures on slide 19.

Thanks, David.

2009 cost pressure is currently forecast at approximately 4% to 5% of cost of goods.

As we discussed last quarter, the cost pressure increases are primarily driven by rice, packaging and general factory inflation, with the commodity portions skewed to Europe and Latin America.

The commodity inflation will be weighted towards the first half, with about 60% of the full year's cost pressures occurring in the first half of the year.

As you know, we have demonstrated an ability to manage through both inflation and volatility.

During the fourth quarter of 2008, we announced or executed broad based pricing actions to partially offset these headwinds.

In addition, significant productivity initiatives in 2009 are expected to drive savings closer to 4% for the year versus our historical 3% savings.

Let's turn to slide 20 to discuss foreign exchange.

Over the past several years, we've achieved high single-digit constant currency EPS growth, with currency adding roughly 1 percentage point.

However, as we discussed last quarter, the US dollar has reversed and has appreciated at an unprecedented rate.

Slide 20 shows our key currencies with 2008 actual rates and recent spot rates.

Assuming current spot exchange rates, the full year impact on EPS from translational foreign exchange will be approximately 9%.

As we discussed on our third quarter call, our 2009 guidance, of high single-digit EPS on a local currency basis, excludes this adverse foreign exchange impact.

We will continue to update you on the impact of foreign exchange on a quarterly basis.

Let's turn to slide 21 to discuss the full outlook.

For 2009, we remain confident in our ability to deliver another year of sustainable and dependable growth.

We now forecast 3% to 4% internal net sales growth.

This reduction from our prior guidance, of mid single-digit growth, reflects a more conservative view to 2009 given the tough economic environment.

We continue to be confident in our ability to deliver mid single-digit internal operating profit growth, driven by our price realization and cost savings initiatives, partially offset by 4% to 5% cost inflation.

Gross profit margin is expected to remain unchanged, as our cost savings initiatives and price realization offset inflation.

Up front investments are projected to be consistent with 2008 at $0.14 per share.

With over 50% of that allocated to the K-LEAN manufacturing initiative.

We also want to provide you with some insight on the shape of next year.

We anticipate a difficult first half, followed by an easier back half.

Driven by the timing of commodity inflation, pricing, the impact of the recall and cost savings programs.

Below the operating profit line, interest expense is expected to decline to between $280 to $285 million, driven by lower short-term interest rates.

While the full year tax rate is forecast at between 30% and 31%.

Shares outstanding are expected to decline in the back half of the year, as we execute the $650 million share repurchase announced this morning.

To summarize, we will maintain the focus on our proven business model and strategy to deliver another year of growth, with earnings per share still projected to grow at high single-digits on a currency neutral basis.

Now, I'd like to turn it back to David on slide 22.

Thanks, John.

We entered 2009 with continued confidence that our business model and strategy will deliver another year of growth.

At the same time, we're realistic given the headwinds of a volatile economy, consumers that are under significant stress and continued cost inflation.

The current conditions are truly unique but we'll drive the business to overcome these challenges.

We'll continue to invest in exciting innovation, strong advertising and up front cost initiatives, as well as aggressive cost saving programs across the business.

The K-LEAN project, currently underway in our manufacturing area, gives us increased confidence that we'll achieve our cost savings and productivity goals.

We're reviewing all aspects of our business to simplify and standardize our processes for higher efficiency, while maintaining our drive for executional excellence.

In summary, we're well positioned to continue delivering long term sustainable and dependable growth.

Our business model and strategy are more relevant than ever and we remain committed to our operating principles of manage to cash and sustainable growth.

Finally, I'd like to thank our Kellogg employees around the world for their continued great work in 2008 and committment to our 2009 goals.

And now, let's open it up for questions.

Thank you.

(Operator Instructions).

Our first question comes from Jonathan Feeney with Janney Montgomery Scott.

Please proceed with your question.

Good morning, thank you guys.

Good morning Jonathan.

David, you mentioned specifically price driven competition in cereal, your biggest business.

And I'm wondering, does the response to that ultimately have to be price driven?

And as part of that, when you talk about a low single-digit or 3% to 4% internal net sales growth for 2009, are you assuming you grow volume in US cereal as part of that assumption?

I think our key focus is driving our brands, engaging with consumers through advertising and innovation.

But we're also pragmatic about the current environment and we'll tailor our activities to respond to our consumers needs and the current sensitivities in the market.

So we think we've got ourselves well positioned as we look at that for 2009.

I did mention that we expect tough comps in US cereal through the first quarter, until we see that competitive activity being lapped.

But we're very focused on driving the business the right way but we're also cognizant of the pressures that consumers are under.

And we'll work to respond to those in any way we can.

And are you comfortable saying whether you think cereal as a whole will grow this year?

Cereal, as a category?

Yes, I think last year the category showed great robust growth in '08.

We'd expect that to continue through '09 and would expect to grow in that environmental also.

Okay, thank you very much.

Thank you.

Our next question comes from Andrew [Vincent] with Morgan Stanley.

Please proceed with your question.

Thank you.

Good morning.

Just wondering if you could help me tie the guidance together a little better relative to what you said at the Q3 call.

You've taken down the top line by -- from mid single-digits to 3% to 4% but you've left your operating profit forecast at mid single-digits.

But now there's the $0.06 from the peanut butter.

And then also, am I correct, that previously you thought inputs would be up 5% and now you say 4% to 5%?

Is that right?

Yes, that's right.

Everything you said there is correct.

Remember, we have $0.06 from the peanut butter related recall in both 2008 and 2009.

So what is going to change then that's going to allow you to, with the lower top line, to still get the same level of operating profit even though you've got an incremental $0.06 of expense from peanut butter?

Well I think the reduction in the sales growth from mid single-digits to 3% to 4% is not that substantial a reduction.

It's a fine tuning of the guidance.

We continue to have very good confidence in our cost savings programs.

We also have seen -- as you saw from the inflation numbers, some moderating of inflation coming down from 5% to 4% to 5%.

So I think the guidance is not dramatically different from what we said on the third quarter call.

But that's all enough to cover the incremental $0.06 of the peanut butter?

Again because it's $0.06 in both years, as you look at it from year on year perspective and since the guidance is in percentage changes, it doesn't really impact our outlook in 2009.

Okay, thank you.

And then, the other question I have is just on the activity in US cereal, you highlighted one piece of it, which is the branded competitive activity.

But what are you seeing from private label, which according to the IRI data, has gained about 1 point of share in the latest four weeks?

Yes, if you look at private label in the US, it's growing.

We saw that in the back half of 2008.

I would expect that will continue to grow.

Also, seeing retailers respond to the current economic environment and push private label pretty hard.

But remember, when you've got a category that's growing as strongly as we're seeing cereal grow and with private label round about 10% as a category, all players within the category, you can still do pretty well.

Even in the context with private label growing a little faster than we normally have seen.

So our expectation in the way we've looked at '09 is that private label will likely continue at a slightly higher rate.

But the category growth and the dynamics for the category remain very positive.

Okay.

And then one last thing, was just, you didn't mention anything about a step-up in pension expense.

Are we to assume that there's nothing going on there?

Our pension expense is largely flat year on year, it's up about $0.01 of EPS.

We made the discretionary pension contribution at the end of 2008.

That largely offset any increase in the underlying expense from poor asset returns in 2008 or changes in discount rates.

Okay, that's very helpful.

Thank you very much.

Our next question comes from Judy Hong with Goldman Sachs.

Please proceed with your question.

Thanks, good morning everyone.

Good morning, Judy.

David, I'm wondering if you can just give us a little bit more perspective on this advertising efficiency, as well as the media deflation issues that you've talked about?

Clearly, media costs are down pretty substantially, so you're getting more bang for your buck.

And then, at the same time, you have these efficiencies that are helping your overall spending.

But I'm just hoping if you can give us a little bit more color in some of these activities?

And how we feel comfortable that, in light of some of the share performance weakness that you can continue to get these efficiencies and not see better volume performance?

Yes, Judy, that's a great question.

And we're going to go through in detail at CAGNY the efficiencies.

Particularly focusing on 2009, where we expect, while we've had some benefits in '08, a ramp up in 2009.

And I wouldn't draw any conclusion about our cereal share loss relative to our involvement and committment on advertising.

Because really as we looked at ceral in US and our support behind the brands there remained very strong, There were some efficiencies we saw in parts of the globe.

We did see a modest decrease in our snacks advertising.

So if anything, snacks was the one area that came down a little bit.

So, I wouldn't be reading too much into that.

And you've got to remember, when you look at it, advertising for us is foundational to our model.

We're still spending over $1 billion, which is double our peer group average at over 8%.

And really, the areas we're focusing on, the things like commercial production, we'll take you through at CAGNY, media efficiencies and media mix.

And we did see the start of some modest deflation at the back part of 2008, which we expect to increase into 2009.

And when you look at 2008, particularly Q4, you've got to remember that our comps in Q4 last year were up 26%.

So while we were down Q4 this year, if you added the two together, the down Q4 this year and the 26% would still be up nearly double-digits for both years.

So, I wouldn't be reading too much into it.

And we will give you a bit more flavor on the productivity and efficiency initiatives at CAGNY, Judy.

Okay.

And then just a little bit more color in terms of some of the trends that you're seeing in Europe and LatAm, both from a retail perspective and then from a competitive perspective.

Yes, well Europe, I think, remains a very challenged economy.

As we're seeing in most markets around the world.

We did see a fair amount of inventory reduction in the back part of the year, the second half of '08, particularly across France, Spain and Italy.

A little less so in the UK.

We think that will continue as some of the retailers in continental Europe try to manage their cash flows and pull down inventory.

But our performance has been pretty positive.

The cereal category in a market like the UK, still growing strongly and doing pretty well in a number of markets across Europe.

But still, I think all in all, our view is hopefully conservative that low single-digit is a reflection of the stress that's going on there across the consumer base and some of the challenges that we're seeing on inventory reductions.

And in LatAm, I think in the first half, you've alluded to some increased competition in that market in Mexico?

For next year?

Sorry, no, in the first half of '08, I'm wondering if the competitive activity has gotten better?

Well, it bounces around a bit.

I think we saw probably pretty aggressive competitive activity in Q3.

Then about in Q4, we had pretty strong programs and you saw our performance come back.

So but again, in Latin America, I think hopefully we're taking a pragmatic view.

Again, the economy is slowing a little bit there, particularly driven by the fact that oil is coming down and a lot of them are dependent on oil.

But still, we think Latin America will grow mid single-digit.

And we did call out Q1, and to a lesser extent the first half, being slightly tougher comps.

Again, we are seeing retailers reduce inventories a little bit.

It's a lot harder to really measure there but nothing too unusual, Judy.

Okay, thank you.

Thanks.

Our next question comes from Robert Moskow from Credit Suisse.

Please proceed with your question.

Hi, thank you.

I noticed you didn't mention any inventory reductions in the US at the end of the year.

I wanted to know if you're seeing stable inventory in breakfast cereal?

And also, can I ask on the -- I'm getting a $75 million pre-tax charge for peanut butter.

What -- how do you need to spend that money?

What are the elements of the recall that that money is going to go to?

And then lastly, maybe you could tell us a little bit about this box size test reduction that you're doing in the Michigan area?

How big of a change are we talking about in terms of box size?

Yes.

Well the first one, inventories in the US, really the only things we saw that were noticeable is, we did end Q3 with frozen foods higher because we had a price increase at the end of Q3.

So we saw those come down in Q4, which is a natural event.

On cereal, we saw our inventories come down Q3 to Q4, which we believe is a very positive thing, working with our retail partners.

We have a big chunk of our customers on vendor managed inventory.

So we work with them to manage those inventories tightly.

But we didn't really see it apart from those two smallish areas.

On peanut butter, the cost of the recall in 2008 was about $34 million.

And if you look at that, there was about 50% of that cost was due to inventory.

About 1/3 was because of sales reversal that we had to take.

And about 1/6 was the cost to actually retrieval of the products, given the complexity of the channels that some of those products were through.

If you come to 2009, really you've got 1/3 of the cost is reversible of sales and the cost to retrieve.

And then we have 2/3 of the 2009 is an estimated business disruption.

So that one is very tough.

We believe we've made an appropriate estimate.

We don't think it will be higher than the $0.06 or the 2/3 disruption is about $0.04 but it's very complex.

We moved with speed.

We used third parties.

We did everything we could to insure that as soon as we knew we had a problem, we took every step to protect our consumer base.

And to work with our customers to proactively remove of the product as quickly as possible.

And while it sounds a lot, we think the investment was absolutely important and critical.

And then the box size test?

The box size test, Rob, started on the 26 of January in Detroit.

So we're not even two weeks in.

So it's a little premature.

Our intent there is, hopefully within three months or so, by the time we get through first quarter, we may have some preliminary data.

I doubt it's going to be that conclusive.

But the intent with that is purely to try and help consumers.

And in so doing help ourselves and the environment by bringing down the amount of packaging we use, which will enable us to use more optimization in way we cube out our trucks to bring down the number of trucks on the road.

So a big initiative, if it works, we'll just have to see how consumers respond.

So not really much to report at this point.

Okay.

Would it be accretive to price per pound, this box size change?

No.

It would make no difference.

It would be critical for us to insure that the amount in each box, whether it was a tall box or a somewhat squatter box, was exactly the same, so consumers did not think there was any change in the value proposition.

Okay, thank you.

Thank you.

Our next question comes from Andrew Lazar with Barclays Capital.

Please proceed with your question.

Good morning.

Good morning Andrew.

So Dave, in listening to your comments around sort of fourth quarter and market share performance in cereal and such and somewhat competitive environment and whatnot.

That, I understand.

But in looking at perhaps some of the trends around cereal, along baseline sales growth.

I know that's something you've talked about in the past as perhaps normalizing a little bit for that promotional environment and looking at sort of the core health of the full price sales, if you will.

That hasn't looked as great for Kellogg over the last couple of quarters.

And I'm trying to get a sense if should that -- is that more troubling to you?

If it is, is that something we could expect to start seeing turning up in the right direction?

And if so, what's driving it?

Because even in this morning's data from the most recent month, and again it's only a month, but it's kind of continued that trend.

Yes, I think Andrew, clearly, we'd like to see base going the other way.

There's a couple of things going on there.

And we'll show you a couple of charts at CAGNY.

But if you look at what we call our core business, our top eight SKU's or brands, which is roughly 80% of our business.

Those top eight, that 80% core gain share for 2008, even in IRI, which as we know is a little distorted, the issue for us is really in the tile, which is normally the case.

I'd have to say, as we've looked back at some of the innovations we've done over the last 12 to 18 months, we are reviewing those.

I believe we need to modify some of them.

And then, the other final thing that is impacting base not only for us but for most branded players, is private labels' growth.

Because when you look at the base cereal, the only one really growing is private label in base.

And almost all of the branded competitors were actually down on an IRI basis.

Something we're watching, we feel very positive about, where our core business over 80% of our sales are, but clearly something that we're going to need to address and fix.

Thanks and then just lastly, on the more recent price increases that you've taken heading into 2009, that perhaps surprised some, just given it bucks the trend a little bit of what we've seen from some of the broader packaged food players, just given the cost environment of late.

Can you give us a sense of how that's worked its way through?

Do you find that those are sticking?

That they have gone through as you would have hoped they would?

Well, clearly, we had some very tough discussions with our retail partners.

Because when you look just on the face of it and just take some of the spots and some of the reductions, we clearly had to explain to them why our inflation was still running, at that point at 5%.

It has come down marginally to 4% to 5%, mainly driven by what's happened in oil and the price of diesel.

But I think you'll find that it's a much more complex equation than just looking at the spot price of corn and wheat.

And for us, some of the key drivers have been rice, packaging and costs in the plant.

But having said all that, as we looked at the hedges we've got and the physical contracts, we're still positive on a mark-to-market basis.

So, it's not like we've gone out with things that have really disadvantaged us.

And we've explained that to our retail partners.

I don't think anyone likes having to take price in this environment but we thought it was necessary to protect the fundamentals of the business.

And while it was reluctantly accepted, all of those have gone through.

Great and then just lastly, how at this stage would you -- I've got a sense of how much you're hedged at this point for '09?

At the moment, we're about 70% hedged for '09.

Great.

Thanks very much.

Thanks Andrew.

Our next question comes from Alexia Howard with Sanford Bernstein.

Hello there.

Hi, Alexia.

So, a question on the uses of cash from this point forward.

It seems to me that you've used this lull in the private equity markets to pick up a few sort of decent brands and both domestically and internationally.

With the increase in the share buybacks announced this morning, how are you thinking about that going forward?

Are you expecting to continue to do a similar amount of small scale acquisitions?

And if so, where are they likely to be targeted?

Alexia, we always remain open to bolt-on acquisitions that fit in with our core categories, cereal and snacks.

And who knows what will happen.

Certainly, it's a very difficult time out there, so it may create some opportunities for us.

But we, like most companies, are being relatively prudent.

We took the opportunity to fund up our pension at the end of the year.

We think that's important for us and for our employees.

And while we've announced an incremental new $650 million share buyback, more likely than not, that will be skewed to the second half of the year.

So we can watch the markets and insure that we feel very comfortable about what's going on in the financial markets, so that we stay very, very solid as we are.

Okay, thank you very much.

Thank you.

Our next question comes from Terry Bivens with J.P.

Morgan.

Please proceed with your question.

Good morning, everyone.

Good morning, Terry.

Just, Dave, a little bit further on cereal, if obviously Nielsen doesn't cover everything but what we can see so far in January shows that Mills' rate of price increase is kind of roughly equal to your own.

But you guys do show a down market share in the category and they do show it up a little bit.

Did they follow your price increase as of mid-January?

I have no clue.

I don't know but I did -- we mentioned in the call, that when you look at Q1, you'll find that we have tough comps.

If you look at some of the competitive activity, they don't lap that until April 1 this year.

And so our expectation is in cereal, the first quarter will be tough but we remain committed to our business and growing it as we go forward.

Do you think that it's possible you may do more promotional activity in US cereal over the course of Q1?

I think -- What I've already said in one of the responses, given we're in a recessionary environment, that we certainly will maintain our focus on advertising and innovation.

But we're also going to tailor our activities to respond to the consumer needs and the current sensitivities out in the marketplace.

And maybe this one is for John.

Just in terms of the currency, John, we look at it going forward, as you do, on the spot rates but to what extent do you think hedging could mitigate, what was that, that 9% you showed us?

I think, Terry, we haven't got any translational hedges in place for 2009.

If we did try to put some translational hedges in place, I suspect we'd be going at forward rates, which are probably even worse than the current spot rates.

So there's not really much we can do, unless those spot rates improve from where they are today, to reduce that 9% impact.

In the past we've done some translational hedging because we've given guidance and reported EPS terms.

Because we're now giving guidance in local currency terms, it's not our plan to do translational hedging.

So you should expect the foreign exchange impact just to move through our P&L as it changes in the marketplace.

Okay.

And there shouldn't be then any transactional mitigation?

We do have some transactional hedges but most of our manufacturing is local in terms of plants in Europe and plants across Latin America.

But clearly, Euro is still in, US dollar, peso, Canadian dollar, we have transactional hedges of varying levels across those currencies already.

Okay.

Thank you very much.

Thank you.

Our next question comes from David Driscoll with Citigroup.

Please proceed with your question.

Great.

Thank you.

Good morning everyone.

Good morning David.

David, can you go back over your guidance for 2009 for all of international?

So, and what -- the underlying question here is that you've got the constant currency growth of 9%, offset by foreign currency headwinds of 9%.

So 0 GAAP growth in '09.

But that is predicated on this international assumption.

And I suppose and I'm just a little worried about what's happening international.

And General Mills, I believe, made a comment two weeks ago that the international cereal markets were weakening.

So, go back over your international guidance.

And then maybe just give a little color on your thought process on the strength of those markets and what can happen in '09?

Yes, sure.

We've said for Europe, low single-digits net sales.

And for Latin America mid single-digits.

I think, when you look at market to market, we didn't give nee guidance for Asia but in the Australian category, the UK cereal category, the Canadian cereal category; are all still growing very strongly, And as are some markets in Latin America.

So while they may have slowed a little bit, they're still pretty positive.

There are a couple that may have weakened but in general terms, our biggest markets are looking fairly positive from a cereal category perspective.

And we continue to expect to do pretty well in the context of those markets.

So I don't know whether that helps you but is that what you're after?

It is.

The only question I would have then is, maybe, do you guys have any thought process as to why these economic environments in those international markets, perhaps, is negatively impacting the cereal category?

And is this something that is just hard to forecast and that would be the big risk in '09?

I think the less developed markets are probably more challenging to forecast because the cereal habit, by default, in the less developed markets is less entrenched.

They make up a smaller proportion of our international business.

The developed markets, with very strong and entrenched cereal habits, make up the majority.

So, you'll see more volatility no doubt in those less developed markets but we think we've got that factored into our current expectations for 2009.

Maybe just one final question.

John, the reduction in the revenue guidance, you called it like just a tweaking of it.

But if I may, was that tweaking of it a reduction in the expectation for volume growth?

So component-wise, you announced all of these price increases earlier in January.

I'd imagine that didn't change but what then theoretically would have changed?

The only piece left here would be the volume side.

Am I reading that right?

Well, I think in addition to volume, there's also, we're seeing some slowing down say of mix as we've gone through 2008.

So as you go into a recession, you should probably expect less mix growth than we have historically.

So there's a number of factors that can slightly slow that sales growth.

Great.

Thank you so much.

Our next question comes from Eric Katzman, Deutsche Bank.

Please proceed with your question.

Hi, good morning everybody.

Good morning, Eric.

A few follow-ups.

First, on Dave's question about the volume hit or let's say adjustment to '09.

Do you have any sense as to how much of the inventory de-loading that you're seeing from the retailers, how much do you think that crimps your '09 volume growth?

It's very hard to put a real measure on that.

I know when you look at volume in the fourth quarter, we probably saw inventory reductions most pronounced in Europe.

And that's where our volume was weakest, so there is a correlation there.

As we look at 2009, we're probably expecting volume to be flat to slightly down.

I would hope to do better but we think that's a pragmatic approach for 2009.

And I think retailers are pulling back their inventory will have an impact on that.

But once it's done, it's done.

And so it's normally a very positive thing.

You just feel a little pain for a quarter or two.

And I think in this environment, it's more likely than not we're going to see that, certainly in Europe and parts of Latin America.

Slightly less, in our view, in North America.

Okay.

And then, on the peanut butter recall, it's unclear to me why it's in the fourth quarter, given that it seems like everything has happened in the first.

Is that because the shipments were recorded in the fourth quarter?

Yes, it's a subsequent event, so we actually had closed our books internally before the recall even occurred.

And the recall occurred and we had to reopen our 2008 books and reverse some of the sales because we're now picking up those products from customers.

Write-off inventory that was on our balance sheet at the end of the year and also accrue for the cost of retrieval.

Okay.

And then last question.

Based on the slide, I think it shows that your cumulative cost inflation for the last four years through 2008 was about 26%.

And I'm wondering how much pricing you've taken cumulatively relative to that, that would, let's say, give some comfort to the idea that you haven't priced above inflation?

And to the extent that input costs come down in the second half of '09, that the retailers aren't going to be, let's say, overly aggressive knowing that you haven't fully priced to inflation?

Yes, I think, Andrew -- Eric, as we look at it and we've talked to retailers about this, if you look at the inflation in our pricing, I haven't got the absolute number in my head but maybe it's 8% to 10%.

And we can confirm that.

With a 20% plus increase in cost.

So clearly, we've had a significant offset from productivity.

And that would be our intent going forward that we're going to drive productivity and cost savings to make sure that while we're priced, we remain competitive in the marketplace.

Okay.

Thanks, see you at CAGNY.

Thanks.

Our next question comes from Chris Growe with Stifel Nicolaus.

Please proceed with your question.

Hi, good morning.

Good morning Chris Growe.

I just wanted to -- I should follow-up on that point you just made to Eric's question.

You've taken pricing in 2009 and you've also talked about a more aggressive promotional environment.

So it sounds like you're going to be more competitive, if you will.

Is there an intention there that promotional expenses should be up in '09, just to be clear on that?

Well, I think where we've stood on that, is that we're going to maintain our focus on advertising and innovation but engage with our consumers and tailor our activities to respond to their current needs.

And in a recessionary environment, are clearly looking for value.

So, we would expect that there would be more product support on promotion than would typically be the case.

But we're going to try and respond to consumers to the extent we can.

Okay.

I'm sorry, go ahead.

I have one more question for you just regarding the cost savings.

You mentioned having a little more aggressive level of cost savings in 2009.

Based on where inflation shakes out, your cost savings could overcome a lot of your cost inflation.

With the benefit coming through of pricing, should we see a pretty solid gross margin expansion in the year as a result?

We actually gave guidance, we think gross margin will be flat year on year.

And you're right, the level of inflation is coming down and our savings program is coming up.

So we have the potential to do better than that.

But at this stage, with the impact of the recall and this year and also the full year of the acquisitions, I think flat gross margin is still the right guidance.

Okay, And then just to be clear, I think you mentioned this to an extent before but just that, you actually have obviously a translation cost in there.

But is there incremental transaction costs for currencies that are part of that 9% figure or is 9% just straight translation?

9% is just straight translation.

Transactional expense is significant and it's above that but we're covering that within our normal operating model.

That makes sense.

Thank you.

LaTonya, just one last question please.

Okay our last question will be from Alton Stump with Longbow Research.

Please proceed with your question.

Good morning, this is actually Phil Terpolilli calling for Alton.

I just wanted to go back to cereal, real quick, in the US If you guys could talk a little bit about what you've been seeing maybe late 2008, early 2009, specifically in regards to the Post cereals, especially under its new owner?

And kind of how you're thinking about that going forward?

Thanks.

Yes, Phil, I really don't have any comment to make.

I think -- I'm sure they are in the process, having finalized the integration but you'd need to ask them to get more specifics.

But nothing that we're seeing that I would highlight to you on what they're doing.

Okay, thank you.

I would like to turn it back over to management for closing comments.

Great.

Thank you very much for joining us on the call.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.