家樂氏 (K) 2009 Q4 法說會逐字稿

Good morning, and welcome to the Kellogg Company fourth quarter and full year 2009 earnings conference call.

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

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 Kathryn Koessel, Kellogg Company Vice President of Investor Relations.

Ms.

Koessel, you may begin your conference.

Thank you, Christina.

Good morning.

Thank you for joining us today, and welcome to the review of our 2009 fourth quarter and full year results and a discussion of our ongoing strategy and outlook.

Joining me are David Mackay, our President and CEO; John Bryant, Chief Operating Officer; and Ron Dissinger, Chief Financial Officer.

The press release and slides that support our remarks today are posted on our Web site at www.kelloggcompany.com.

As you are aware, 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 the results to differ, please refer to the second slide of this presentation, as well as our public SEC filings.

As a reminder, a replay of today's conference call will be available by phone through Monday, February 8.

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

Now let me turn it over to David.

David?

Thanks, Kathryn.

Good morning, everyone.

We are pleased to report another strong year of sustainable, dependable performance at the Kellogg Company.

Our business model and focused strategy are helping us weather the tough consumer and customer environment and positioning us for growth now and well into the future despite the current economic backdrop.

Our focus has been and will continue to be to sustainably grow the top line, drive investment in our brands, build an effective and cost efficient infrastructure and consistently deliver solid results for the long term.

As I said last quarter and I think it bears repeating, 2009 has certainly presented us with challenges and yet at the same time, given us opportunities to build an even stronger Kellogg Company.

The weaker global economic environment has lessened the inflationary pressure on pricing and increased the stress level on consumers, which has translated into moderating top line growth.

However, consumers are seeking ways to maximize value, and trading into some of our core categories, such as cereal in markets like the U.S.

and the UK.

Consumers recognize that our brands represent value, great taste and good nutrition, so that positions us well for the future.

Another benefit of the weaker economy is media deflation in key markets.

As a result, our increased investment in advertising has significantly grown our underlying impressions.

On an internal basis, our advertising grew 15% in the back half of the year, and nearly 7% for the full year.

As discussed at our investor day and on previous earnings calls, we have been focusing on improving productivity and reducing costs.

We completed the first year of our three-year billion-dollar-plus cost reduction program.

In 2009, we exceeded our expectations in cost savings, now adding a plus to the billion-dollar challenge.

The result, strong earnings per share growth and record cash flow for 2009.

Benefiting from the 2009 momentum, we entered 2010 with a solid pipeline of innovation and renovation, as well as a renewed commitment to productivity and cost savings.

We continue to focus on building a Kellogg Company resilient to economic conditions and poised to forge ahead.

With excellent financial visibility into our future financial performance, we remain confident in our ability to deliver another year of sustainable and dependable growth.

With that, I would now like to introduce our newly appointed CFO, Ron Dissinger, for the review of our financials.

Ron, over to you.

Thanks, David.

Good morning, everyone.

Let me begin with a summary of our 2009 financial results on slide four.

As David said, despite the challenges of a weak economy and a competitive landscape, we had a good year.

We met or exceeded our 2009 guidance on growth rates of 3% to 4% internal net sales, 8% to 10%, internal operating profit, and 10% to 12% currency neutral earnings per share.

In 2009, our internal net sales grew 3%, with strong operating profit growth at the top end of our range.

As you are aware, our internal numbers exclude the effect of foreign exchange, acquisitions, and a 53rd week in 2008.

Our net sales growth reflects a particularly strong year in retail cereal and a solid year in retail snacks, which helped to offset the pressures we experienced in our foodservice business due to industry trends, and the supply disruption in our Eggo Waffle business.

We continue to invest in our brands and we increased our up front cost investments to $0.26 per share for the full year compared with $0.14 per share in 2008.

Our solid sales performance combined with our cost savings and productivity initiatives, as well as moderating commodity inflation, drove 10% internal operating profit growth for the year.

This resulted in our full year 2009 earnings per share of $3.16, a 6% increase on a reported basis, and a 13% increase on a currency neutral basis.

As we said on our third quarter call, we expected below the line items to negatively impact our full year and fourth quarter results.

The primary drivers include full year interest expense of $295 million, which includes the cost of the bond tender offer completed in December 2009.

This enabled us to refinance a portion of our 2011 bond maturity at an attractive interest rate.

Impacting the other income and expense line was a charitable contribution in the fourth quarter.

In addition, we took an approximate $0.02 hit to our earnings per share in the fourth quarter from the impact of Venezuela.

The situation in Venezuela is changing rapidly, however, profits from this business are only 1% to 2% of total Company results.

And we think we are appropriately positioned.

Partially offsetting these expenses, we benefited from discrete favorable tax items in 2009 lowering our tax rate to 28.2%.

On slide five, we will walk through the components of our internal sales growth for the fourth quarter and full year.

Year-over-year reported net sales for the full year 2009 declined by 1.9%.

On an internal basis, net sales grew 3%.

The following components contributed to our sales performance.

Our tonnage declined by 0.7 of a point during the year.

Much of this decline came from our continued transition away from low margin products in Russia and China and the Eggo supply disruption.

This decline masks a strong volume performance in cereal.

Price and mix contributed 3.7 points of growth to the business, currency reduced our reported growth by 3.7 points.

And acquisitions increased our reported growth by a modest 0.3 of a point.

Also note that the 53rd week in the fourth quarter of 2008 impacted our reported sales growth unfavorably by 1.5% for the full year.

Each of our operating segments contributed to net sales growth for the year.

Internal net sales for North America increased 2.8%.

Europe, rose 1.6%, and Latin America grew 6.8%, while Asia-Pacific improved by 5%.

Our fourth quarter internal net sales grew approximately 2%.

Now let's turn to slide six to discuss cost pressures.

As expected, commodity prices moderated during the year, reducing our cost pressures and costs of goods sold to approximately 3%.

This compares to much higher inflation rates over the past several years.

Our billion-dollar-plus challenge cost reduction initiatives combined with price execution early in the year more than offset these cost pressures in 2009, and improved our gross margin during the year.

For 2010, we expect cost pressures to remain at approximately 3%.

For 2009, our gross profit was $5.4 billion.

On an internal basis, our gross profit grew 6% for the year.

Gross margin increased 100 basis points to 42.9% due to price increases, as well as savings initiatives and cost of goods sold, and these more than offset inflation and higher up front costs.

Internal gross margin was up 120 basis points, and if we exclude the impact of up front costs, gross margin was up 160 basis points for the year.

For 2010, we expect gross margin improvement of approximately 100 basis points.

As you can see on slide eight, we have continued our commitment to reinvesting in our brands through advertising.

It remains a key component of our business model and we believe essential to achieving our long-term goals.

As we have said, we experienced media deflation in the year.

Lower prices combined with increased media efficiencies and increased investment resulted in a significant increase in impressions.

In 2010, we expect our advertising to grow at a higher rate than sales, even with expected media deflation in key markets.

Slide nine highlights our internal operating profit growth by area.

Despite heavy investment in advertising and up front costs, our North America business still delivered 11% internal operating profit growth.

And in the fourth quarter, North America internal operating profit increased by a healthy 25%.

While Europe delivered moderate sales growth for the year, both operating efficiencies and media deflation contributed to a strong 7% internal operating profit increase for the year.

In the fourth quarter, Europe delivered 13% internal operating profit growth.

Latin America showed strong internal sales growth for the year, however, internal operating profit declined by 2%.

Significantly higher input costs and increased advertising contributed to the full year decline.

In addition, a December reduction in trade inventory impacted both full year and fourth quarter sales and profits.

This trade inventory reduction increased advertising investment and higher up front costs contributed to a 52% decline in internal operating profit for the fourth quarter.

In Asia-Pacific, internal operating profit increased by 14% for the full year driven by sales performance.

However, increased advertising contributed to a 21% decline in fourth quarter internal operating profit.

Now let's turn to slide ten to discuss cash flow.

Managing for cash continues to be a key operating principle for Kellogg.

We are focused on growing net earnings and remain disciplined about core working capital and our balance sheet.

We delivered record cash flow of $1.27 billion in 2009.

Our strong cash flow generation has given us flexibility to support our business and continue to return cash to shareholders.

Capital spending declined to 3% of net sales in 2009 versus 3.6% in 2008.

As we said on our third quarter call, for 2010 we expect capital spending to be approximately $500 million, at the high end of our 3% to 4% range, driven by capacity increases in our Eggo Waffle network and costs to reimplement SAP across our Americas businesses.

Also in the fourth quarter, we reduced our commercial paper significantly and took our net debt to one of the lowest levels since the Keebler acquisition providing us with a strong liquidity position.

Given the potential for continued volatility in the economy, we believe this positions us very well for the future.

For 2010, we expect our cash flow to be comparable to 2009 given the increase in capital spending.

In sum, we were pleased with our 2009 performance, posting solid sales growth and effectively managing our cost structure while at the same time increasing our investment in advertising and up front costs.

We posted a double-digit increase in internal operating profit, invested in our future growth, and improved our financial visibility.

It was a very good year for Kellogg, delivering high quality earnings in a very difficult economic environment, another year of sustainable and dependable performance.

Now let's turn to slide 12 for our expectations for 2010.

We remain confident in our ability to deliver another year of sustainable and dependable growth and we are raising our 2010 currency neutral EPS forecast.

We expect to continue to drive volume and mix to grow internal net sales to 2% to 3%.

Our focus on productivity and expected moderate inflationary environment and a lower up front cost should result in approximately 100 basis points of gross margin expansion.

2010 up front investments are projected to be approximately $0.16 per share.

About half of these costs are allocated to the KLEAN manufacturing initiative.

Lower up front costs should help accelerate our internal operating profit growth to 8% to 10% which is above our long-term targets.

Below the line, we expect interest expense to be in the range of $250 million to $260 million.

Our effective tax rate is projected to be between 30% to 31%.

Shares outstanding are expected to decline as we execute the remaining $463 million of the 2009 share repurchase authorization, plus the $650 million we authorized for 2010.

We expect to lower shares outstanding by 2% to 3% for 2010.

Our guidance for earnings per share has increased and is now 11% to 13% growth on a currency neutral basis.

To understand the impact of foreign exchange on our 2009 results and in 2010, please turn to slide 13.

As we discussed on previous calls, moving from currency neutral to reported earnings per share guidance requires us to estimate the impact of foreign exchange on our earnings per share performance.

The full year 2009 adverse impact of translational foreign exchange was $0.22 on EPS, up from our November estimate of $0.21.

Slide 13 shows our key currencies with 2009 actual rates and current spot rates as of February 1, 2010.

Based on these spot rates, foreign exchange is estimated to be flat compared with our earlier estimate of a favorable $0.08.

Approximately one half of the change is related to the devaluation of the currency in Venezuela.

As you are well aware, foreign exchange is a moving target, so we are prepared to update you on the impact on a quarterly basis.

And now I would like to turn it over to John to discuss our business operations.

Thanks, Ron.

And good morning everyone.

We delivered strong results in 2009, and are well positioned to deliver another year of sustainable, dependable performance in 2010.

As you can see on slide 14, our 2009 North America internal sales grew 3% versus 6% last year.

It was a particularly strong year for both retail cereal and snacks.

However, weakness in frozen and foodservice, which I will address in a moment, dampened net sales for the year and particularly in the fourth quarter.

As we look forward to 2010, we expect that North American sales growth will be in the low-single-digits range.

Let me discuss each business in greater detail beginning with cereal on slide 15.

Ready-to-eat cereal continues to be a strong category responding well to brand building, nutrition, and innovation.

Cereal is also a great value and we are seeing growth in all of our core markets around the world.

By our estimate, the ready-to-eat cereal category in the U.S.

grew around 2% to 3% for the quarter, and approximately 3% for the full year.

Our category share increased approximately 20 to 40 basis points for the quarter, and 10 to 20 basis points for the year.

We continue to drive growth and support for our top eight brands plus Kashi, which on a combined basis grew more than 7% in the quarter and even more for the full year.

Our North American ready-to-eat cereal business delivered a healthy 4% internal net sales growth for the full year and was up 6% for the quarter driven by double-digit increase in advertising.

In addition to the growth in our [large] brands, there are two other factors which impacted our North America cereal shipments in the fourth quarter.

Firstly, as we have mentioned before, we continue to manage the tail of our portfolio, exiting On-the-Go and Straws because performance was not meeting expectations.

Secondly, we did build our trade inventories at the end of the quarter in preparation for January events.

We believe about 2% of our fourth quarter North America cereal shipments was due to trade inventory.

Our innovation and renovation pipeline is solid.

Froot Loops and Apple Jacks with Fiber hit store shelves in August.

Frosted Mini-Wheats Little Bites Original Flavor, Special K Granola and Cinnabon Cereal will be introduced in the first quarter.

Kashi is also introducing GOLEAN Crisp!

and two new Bear Naked granolas.

Kellogg Canada also continued to perform well in the cereal category with share growth for both the quarter and the year.

Kashi's performance was particularly strong in Canada.

Turning to our North America snack business, we posted a full year internal net sales increase of 3% and 5% in the fourth quarter.

On slide 17, you can see that we achieved broad-based growth across our North America snack business.

Our Pop-Tarts brand is performing well, delivering mid-single-digit internal net sales growth for the year.

Crackers grew mid-single-digits for the year driven by another strong year from Cheez-Its.

In the first quarter, we are launching two new SKUs of Wheatables Nut Crisps and two new SKUs of Cheez-Its.

Cookies posted a slight gain for the year, driven by the Fudge Shop and Mother's brand.

We saw some softness in the fourth quarter due to heavy promotional activity and ranging.

Within snacks, our best performing category was Wholesome snacks which grew double-digit for the year and achieved strong share gains.

The introduction of Fiber Plus, Special K Chocolatey Pretzel and Cinnabon Bars helped drive Wholesome snack growth for the year.

Turning to the frozen and specialty channels business, we experienced a tough 2009.

The negative trends in the foodservice industry and the Eggo supply disruption contributed to a 13% decline in the quarter to finish the year down 1%.

A combination of a flood and extensive enhancements and repairs at our Eggo facilities significantly impacted production in the second half of the year.

While all of our plants are operational we have not been able to achieve previous capacity levels so demand continues to exceed supply.

We are evaluating our inventory plans and working hard to increase capacity.

However, as a result of the supply disruption, the impact on the top line will continue through the first half of 2010 and the estimated impact is included in our 2010 guidance.

On a more positive note, Morningstar Farms Veggie food net sales grew over 3% for the year, gaining over 1 share point.

Kashi Frozen meals grew over 10% for the year, capturing almost 25% of the natural organic meal category.

Our Food-Away-From-Home business posted lower sales for the year and the quarter reflecting the weak economic environment and the impact that this has had on the foodservice industry.

We don't expect to see significant improvement in this business until the middle of 2010.

Please turn to slide 19 where we will discuss the international business.

Outside North America, our international business continues to perform well, delivering 3% internal net sales growth for the year.

In Europe, the operating environment remains difficult.

As anticipated, the first half of 2009 was flat due to customer issues but regained momentum in the back half of the year.

Europe delivered 2% internal net sales growth for the year and 2% for the quarter.

In the fourth quarter, Europe achieved share gains in the UK, France, and Italy, supported by an increase in brand impressions.

Crunchy Nut and Rice Krispies in the UK and Extra and Trsor throughout the continent contributed to this growth.

In Russia, we continued to transition away from bulk to higher margin packaged biscuits and cereal, and we also achieved significant package share gains in those categories.

However, the large reduction in the bulk business adversely impacted the overall volume picture in Europe and for the entire Company.

In 2010, Europe is expected to deliver low-single-digit sales growth despite a continuing tough economic environment.

Turning to Latin America, we delivered strong results with 7% internal net sales growth for the year, despite flat internal net sales in the fourth quarter.

During the quarter, we reduced trade inventories in Mexico and the Caribbean, and experienced supply constraints in Venezuela.

In Mexico, we gained share growth in the quarter and the full year, aided by the success of newly launched All-Bran Yogufibras and a new long targeted media campaign, [Fazukaritas.] Looking to 2010, Latin America is projected to deliver mid-single-digits growth in internal sales.

We enter the year with healthy trade inventory levels, good consumption momentum, and strong commercial plans.

For the full year, our Asia-Pacific business delivered 5% internal net sales growth building upon last year's growth of 8%.

Our businesses in South Korea, Australia and India all had strong cereal performance.

In China, we continued to move away from low margin volume, which impacted the fourth quarter and will continue to impact the first half of 2010.

For Asia-Pacific, we expect to see top line growth in the mid-single-digit range in 2010.

Now I would like to turn it over to David for closing remarks.

Thanks, John.

In summary, we are pleased with our 2009 performance.

We entered 2010 with confidence in our business model and focused strategy, yet at the same time we are realistic given the headwinds of a volatile economy and consumers struggling under significant stress.

While current conditions are unusual, we will continue to drive the business to overcome these challenges.

Our financial performance for 2010 will be strong given our cost savings and productivity momentum and investments we are making.

The top line is expected to be in line with our long-term guidance, and we have a clear focus to leverage the current tough environment to take advantage to build Kellogg into an even stronger Company for the future.

We are planning to grow our top line through exciting innovation and renovation and continued investment in advertising.

We are optimizing our global organization and striving for enhanced effectiveness in many areas of our business.

We are off to a great start with the completion of the first year of our three-year billion-dollar-plus challenge.

We've significantly increased our investment in up front costs which will help drive efficiency gains, help offset commodity and energy inflation in future periods, and provide the fuel to sustain our momentum.

And we will continue to reinvest heavily in the future of our business as we did in 2009.

All of these elements combined with excellent financial visibility support our increased confidence that we are on track to deliver our targeted rates of growth growth in 2010 and beyond.

We've demonstrated our commitment to manage the business the right way for long-term sustainable, dependable performance.

And I would like the thank our shareholders for their continued interest in Kellogg and I would like to acknowledge and thank the Kellogg employees around the world for their dedication to the Company and commitment to excellence as we begin 2010.

And now I would like to open it up for your questions.

Thank you.

Ladies and gentlemen, the floor is now open for questions.

(Operator Instructions) Please hold while we poll for questions.

Thank you.

Our first question comes from Terry Bivens of JPMorgan.

Please state your question.

Good morning, everyone.

Good morning, Terry.

One of the things we have been looking at, as you know, for several years Wal-Mart's growth has considerably outpaced that of the general grocery industry.

It appears that that maybe slowing down and I guess this question would be for you, Dave, they are also, for the time being, cleaning out Action Alley, and we think really hurting some companies that depend on that for merchandising space.

I would like the get your comment on that and whether, just what sort of effect you think that will have on your domestic volumes as we move through this year?

I know you don't like to talk about individual accounts, but if we could just get sense of how your looking at that?

Sure, Terry.

I think first of all from a macro perspective, if you look at North American in particular I think most retailers are feeling the impact of a degree of deflation particularly when you look at the dairy and general produce sections and I think that's putting a lot of pressure on them as costs rise and yet in many areas their absolute sales are actually dropping a little bit.

I think that's an area where most retailers are now looking to see how can they drive greater efficiency and effectiveness through their supply chains and through their systems.

We have been working with many of them cutting our own SKUs, looking to work with them to see where we can drive further efficiency.

As far as talking about a particular retailer, I think number of retailers have looked to clean up their stores a little bit.

I think the impact of that is typically more felt in the DSD-type area.

We have the ability and have normally been able to build incremental displays, so where customers are cutting back on that, probably in our DSD area we're feeling it a little bit more than anywhere else.

We will see little bit of impact of that through the first half and then most of the activity started mid-2009, so not material, but probably a little bit of an impact.

But in general terms I think when you look at the overall retailing environment, very challenging given what is going on with some of the big segments being somewhat deflationary.

Okay.

Thanks for that, I will pass it on.

Thank you.

And our next question comes from Robert Moskow of Credit Suisse.

Please state your question.

Hi, thanks.

I just wanted to know what your outlook is for commodity costs inflation, I don't think I quite picked it up on the call, and the fourth quarter came in a little lighter than we had expected, and yet you're raising guidance for the internal operating income.

Can you give us a sense of to what degree that is just related to commodity costs or any kind of incremental cost savings that you are getting?

Why did you raise the guidance?

Well, just, Robert, specifically on commodity costs, we are expecting that our cost of goods for the year will rise about 3%.

When you look at that it's driven by employee benefits and wages, some packaging costs, sugar is at a 30-year high, some things are down, some things are up.

So you've got a lot of offsetting components in there.

But pension and employee costs are also in that number.

That's relatively consistent with what we saw through 2009.

What was the second part of the question, Robert?

I think that was the whole question.

But to what degree is pension expense a benefit in 2010 on a comparison basis?

.

Pension expense is not a benefit as we move into 2010.

This is Ron speaking.

Actually we are seeing our employee-related costs and specifically benefit costs increasing including pensions.

So is it greater than 3% or is it around that same kind of basket level?

It's included in the 3% cost pressures.

Okay.

Just finally, I think some of us were hoping that there would be an easy comparison in first quarter compared to trade inventory deloading a year ago, but it looks like you got a benefit from loading inventory in North America cereal in fourth.

So can you just give us a sense of first quarter on the comparisons, like is it still an easy comparison or is it about neutral?

One, I think last year there were a number of companies that did see inventory reductions at the end of the year.

I think on the call when we did this call a year ago, we said we hasn't seen that.

Our inventory levels were relatively stable and where we expect them to be.

This year, however, in the cereal business, for a variety of reasons, we did notice that in Q4 our shipments were 6%, our consumption was around [4ish%].

As we looked at our inventories are slightIy higher than we believe our customers would like them to be.

On a shipment base, we will see a couple of percent of what we saw in fourth quarter come out in first quarter.

It's nothing more than that, making sure we manage our inventory levels to an appropriate level on behalf of our retail partners.

And then the other impacts that you will see probably in the first, second quarter, for us, is we mentioned the Eggo disruption, which will impact through the first half, and foodservice probably because it started to hit us in the back half of 2009, given we are pretty much non-commercial foodservice versus the restaurant type trade.

That will have an impact through the first half too.

That's all balanced into the full year guidance of 2% to 3%.

Thank you very much.

Thanks, Robert.

And our next question comes from David Driscoll of Citi Investments.

Please state your question.

Good morning.

This is actually Cornell Burnette calling in for David.

Just wanted to ask you guys, just getting back to commodities, if in your guidance, is any of that including the sell-off that we've seen in the grain markets post the January 12 USDA report or have you already been significantly hedged so that you are not really experiencing any of that benefit?

We are about 70% hedged on a global basis at this point in time, Cornell.

In the markets you are talking about have bumped around from lowish to much higher and back down a little bit, but for us, whenever our expectation, when we take hedges we'll get it perfect at the top or at the bottom, but we are 70% hedged.

Feel very comfortable where we are hedged and puts us in a good position for 2010.

Okay, and then another question, if I may, just moving on to the consumer marketing side.

I notice obviously that gross profit margins were up 350 BPS in the quarter, but operating margins weren't, were actually down.

I know you had some higher up front costs there running through the SG&A line, but it would also seem that advertising was up significantly in the quarter.

Just wondering was a lot of that concentrated in the international markets, and particularly did you witness a big bump up in advertising spending in your developing markets in line with the strategy to fund future growth there?

Our fourth quarter advertising was up very, very strongly.

And I think that was across the board, but I know in Europe it was up very strongly as it was in Asia-Pacific and Latin America.

But it was also up strongly in North America.

Our belief in advertising is we have to invest in our brands, keep the brand equity strong, continue to reinforce the value of the quality of the products we sell, particularly in an environment where consumers need to be reminded of these things on ongoing basis.

We think that puts us in good stead as we head into 2010.

Thank you.

Thank you.

Our next question comes from David Palmer of UBS, please state your question.

Hello, David, are you on the line?

Okay our next question comes from Alexia Howard of Sanford Bernstein.

Please state your question.

Hello there, and good morning, everyone.

Good morning, Alexia.

Hi.

Can I ask about the competitive dynamics in the cereal segment that you are seeing?

I mean it seems as though advertising spending is increasing fairly significantly.

I guess we are seeing some of the smaller competitors maybe taking pricing downwards, I guess, to try and secure their share positions.

Is that the main reason that we are going see another bump in advertising spending next year as a percentage of sales given that you're already at fairly lofty levels compared to other package food companies in the U.S.?

Well, I think, firstly, strong advertising and brand building is a fundamental part of our belief that underpins our ability to draw sustainable and dependable performance.

That's something you are going to see every year.

We did get significant productivity benefits in 2009, plus a lot of cost saving benefits.

While you are look at a number for a year around 7%, our impressions were significantly higher.

We see that as a very positive thing.

The cereal category remains strong.

We gained share in Q4 and for the year, just a little.

We did see Quaker, to a lesser extent Post, come back quite heavily.

But you've got to remember, this has always been a competitive category, nothing unusual.

Quaker had been out of the market for, I think, the back half of 2008 because of the flood, so for them that was just a return to being in the market.

And Post had had some disruptions through the first half.

So they were probably just getting back in to it a little too.

Nothing that unusual, we think the category remains strong.

It's a very positive category to be in in this sort of environment.

That's great.

Thank you very much.

Could I just real quick follow up, on the Russian bulk shift into more packaged product, is that likely to be finished by the end of the first half of the year or is there a timeframe by which that might be completed?

Yes, I mean, it will be ongoing.

I think the magnitude we started it at about mid last year, so while it won't finish for the second half of this year, the degree of change will probably drop off.

That's great, thank you very much, I will pass it on.

Thanks.

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

Please state your question.

Question has been answered, thank you.

Thank you.

And our next question come from Vincent Andrews of Morgan Stanley.

Please state your question.

Hello, Vincent, are you on the line?

Yes, I am.

Sorry about that.

Trying to juggle between a couple of calls here.

My question would be could you remind us when, or what you were expecting in your fourth quarter 2009 guidance as it relates to both Eggo and then also what took place in Latin America, and then also help us understand, or quantify if you can what the impact will be in 2010 relative to what your guidance is?

Yes, I think you've got two or three questions there.

On the Eggo supply situation in Q4, it had about a 1% to 2% NSV impact on the total Company for the quarter.

We absorbed the Op impact into the year.

For 2010, it's built into our guidance.

We have said that you will see more of an impact on top line in the first half, but the Op impact is included in our guidance.

On Latin America, Q4 was a difficult quarter but very understandable, there was some inventory reductions in Mexico and the Caribbean.

We had some issues in Venezuela, we had massive advertising, so it was more a issue driven by those three things.

And for 2010, our expectation is that Latin America will continue to grow at mid-single-digits.

So while the quarter might look a little odd we don't have any worries about Latin America for 2010.

See it growing strongly again.

I guess what I'm trying to understand for Latin America, if that Q4 is sort of a one-off and the rate it should grow off would be off of a little more normalized fourth quarter or if we should consider that the base?

Yes, on the top line, that's a one-off.

And the bottom line is distorted from the factors I think Ron gave you during the call.

Okay.

And then just lastly on the Eggo piece, I just couldn't remember what was in your guidance for the fourth quarter about that and was trying to understand whether it was better or worse than what you expected or told us to expect?

We really didn't get into a great deal of detail in the Q3, and as we went through Q4, we did see that we didn't make the improvements on restoring the capacity that we are hoping to make, and that's why for the quarter we saw net sales for the total Company impacted about 1% to 2%.

That's why we are being a little bit more specific on it now having done a lot of work and actually having arrived at a perspective for what is likely for 2010.

Terrific, that's very helpful.

Thanks a lot.

Thanks.

Our next question comes from Alec Patterson of RCM.

Please state your question.

Yes.

Just following up on Vincent's question about the frozen business, is it your expectation that once you have the capacity back where you wanted it that your business, given your very large share in the category, should sort of go back to where it was in prior periods?

We have been working very hard to actually try and get back to our prior capacity levels after we had the flood and we did some enhancements and repairs and that created a bit of the disruption.

It's frustrating, but we haven't been able to get back there yet.

Demand currently exceeds supply.

So we are taking a pragmatic approach, we're evaluating our inventory plans, we are going to work hard to increase capacity.

And we are looking to add capacity in Eggo, but that will probably take us a while.

We think 2010, baked into our guidance, first half there will be an impact until we lap what was a relatively soft second half.

And once we are back to our capacity, then our expectation would be the brand is very strong and we will see a gradual return to the prior levels, but forecasting exactly when that will be, Alec, I think, is a bit premature.

Okay.

So just so I understand, your forecasting that your capacity will be back on line to normal levels by the middle of the year, roughly speaking?

More towards the end of the year, if we are being pragmatic.

We would like to think mid-year but we are taking the view that it may be later than that.

Okay.

I understand now.

So then on your gross margin outlook overall, you've got a cost of goods 3% outlook, and then you've got a productivity that should probably exceed that, implying a good chunk of your gross margin increased source, does that sort of paint a picture of a pricing environment where you expect to be able to be a little bit more promotional as need be or more volume oriented than necessarily price mix oriented?

Yes, I think the environment for 2010 probably, we will see minimal pricing.

It depends, region-to-region of the world we are seeing inflation at high levels in some parts of the world than others, like Latin America.

But in general terms, on a global basis, I think there will be minimal pricing, so volume and mix is going to be more important, but that's why in essence we are giving guidance at our long-term top line range of 2% to 3%, low-single-digit.

Okay, and then just, Venezuela, you guys didn't really spell out the impact for 2010 in terms of hyper-inflationary accounting?

We are actually happy with our underlying business performance in Venezuela.

It's only 1% to 2% of our sales and profits, as I mentioned before.

We took a $0.02 hit in the fourth quarter.

We did convert over to the parallel rate for the translation of our sales and profits in 2010.

That has impacted our earnings per share performance.

And I commented on that in terms of the currency impact to earnings per share.

It's roughly half of the $0.08 that we declined.

So approximately $0.04.

Our underlying business performance, the internal growth, will be just fine.

We do expect growth in Venezuela over the course of 2010.

Yes, I think the only other comment on Venezuela is, it's a volatile situation, we are watching it carefully.

We did have some display, disruptions to supply in the fourth quarter because there wasn't electricity and all of the raw materials we needed we couldn't necessarily access.

So we've got a very strong watching brief on Venezuela and really to Ron's point it did take our FX upside for 2010, which we thought would be $0.08 and wiped out $0.04 of it in moving to the parallel rate.

But that's all built into the guidance we have given today.

Great.

Thanks very much.

Thank you.

Our next question comes from Ed Aaron of RBC Capital Markets.

Please state your question.

Thank you for taking my question.

In the North America cereal business, do you think it's prudent to expect that the sales there in the first quarter will be up year-over-year, just when you consider the inventory build in Q4, the full lapping of the price increases, and then I think you also have a tougher market share comparison there.

Just trying to get a little bit more clarity on how you manage expectations around the next quarter?

We would expect growth in the first quarter, it will be modest given the fact that we are pulling down our inventories from year end through the quarter.

So I'm not going to give you a number, but modest growth.

That's helpful.

And then on the Eggo Waffles issue you mentioned 1% to 2% sales impact in the fourth quarter.

Would you be able to give us maybe just a flow through assumption on that so we can get a better sense of what the EPS impact might have been on the quarter there?

No, we absorbed it into our results for 2009 and we've got it covered in 2010.

Okay.

Thanks.

And then one more quick one, if I could.

At your analyst day in November, you talked about a lot of fee rationalization that took place in North America in 2009, just trying to understand how to think about what that does from a sales comparison perspective, how much volume growth we might pick up in 2010 just given the fact that we are lapping against that pruning from 2009?

Yes, the pruning is basically from about mid-2009 through, it will be completed by mid-2010.

You are going to have some impact in the first half.

I don't think major.

Really as we look at that, we think that was a very proactive move to try and simplify our portfolio, as our retail partners are looking to simplify theirs and manage what is a complex and tough environment from their perspective.

Nothing major, but a bit of an impact in the first half but nothing worth really calling out.

Thank you.

Thanks.

Our next question comes from Judy Hong of Goldman Sachs.

Please state your question.

Thanks, good morning, everyone.

Good morning, Judy.

Dave, I just wanted to go back to the question about the ad spending and the competitive dynamics because in 2009, clearly, you've talked about the efficiencies and the productivity that you gained on the ad side and there is a media deflation that helped you as well.

But at the same time, you've also seen some of your competitors really take spending up in a pretty significant way.

So I'm just wondering as you think about 2010 you talked about ad spending growing faster than sales growth, but how meaningful does ad spending maybe have to step up again, especially now that you are lapping the media deflation that you probably got in 2009 as well?

Yes.

Judy, firstly, our view is in a couple of our major markets we are going to see deflation, mid- to high-single-digits.

So that's built into our expectation.

While advertising will be above sales, our impressions will be significantly enhanced by that assumption that we are very comfortable with.

So, again, when you look at the base dollar spends, if you take 2009, I mean you could add 5%, 6%, 7%, 8% from our dollar spend to our true impressions and, therefore, end market impact.

And likewise for 2010, that deflation is really going to help us get a lot more impressions for a much lower cost.

Our view is that the, I think, strategic approach of investing behind your brands in this sort of market is clearly one that most other major branded companies are recognized support and trying to catch up on.

I guess it's more just on the relative spending side because clearly it seems like even with media deflation you've seen your competitors raise spending much more in 2009, and at the same time, your sales growth sort of slowing down, albeit within your long-term target, you were doing internal sales growth mid- to high-single-digits and it seems like that's slowed down.

And I'm wondering where whether you think there is any correlation to your ad spending not being up as much as maybe some of your competitors?

No, I don't think so.

You look at our performance on, say, the cereal category we grew share for the year, we grew share in the quarter.

The category was strong, so to the extent that other branded competitors are increasing their spend that's positive for the category.

It's not like you can just segment, you take your advertising up more than the other guy you are going get share.

It's a healthy thing for the category, it's a positive dynamic for all of us in my view.

Okay, thank you.

Thanks, Judy.

Our next question comes from Eric Katzman of Deutsche Bank.

Please state your question.

Hi.

Good morning, everybody.

Hi, Eric.

Two just detail ones and then a broader picture one.

The interest expense hit from the refinancing, how much was that?

Approximately $0.07.

$0.07, okay.

Then the charitable contribution in the other income line, how much was that?

That was approximately $0.04.

$0.04, okay.

Then the broader question, can you help me understand why, maybe this is kind of follows up on Judy's question, but why SG&A as percentage of sales in the quarter was so high?

You have been running roughly 26%, 27% of sales and yet this quarter it jumped to close to 30%, 31%, what is happening there and do you think that's kind of what, just why don't we go there?

There are really two key item there, Eric.

First is, and recollect we had indicated in previous calls that we were going to increase our advertising investment double-digit in the back half of the year.

You've been doing that forever.

So I'm not buying that one.

But those are the results.

We increased our advertising significantly in the fourth quarter, and in addition to that our up front costs were up significantly as well.

It was the highest investment we had in up front costs within SG&A.

I try to look at it excluding the up front costs, so I'm getting a clearer picture and not getting the swings from that.

Even excluding that, it's still up significantly.

So is that the Venezuela absorption, is that the hit from Russia, which is surprisingly large?

I'm not exactly clear why that keeps coming back for such a small acquisition.

I just -- I don't understand.

It doesn't have anything to do with Venezuela or Russia.

It's really the advertising and up the front costs that are driving the performance.

Eric, it's John.

I think what is happening a little bit is the up front costs this year were, in the fourth quarter, one, it was the highest quarter of the year for up front costs, and, secondly, it was largely in the SG&A line.

Which is a little bit different to prior quarters and prior year.

And also the advertising increase year-on-year is significant, it's about half the increase in the SG&A margin, the SG&A percent of sales for this quarter.

However, advertising we spent in the fourth quarter wasn't that much different to any other quarter in the year, but our sales base is lower in the fourth quarter because of seasonality and that distorts the SG&A margin line.

All right, maybe I'll follow up, I'll pass it on, thanks.

Okay, one more question.

Our last question comes from Chris Growe of Stifel Nicolaus.

Please state your question.

Hi.

Good morning.

Good morning, Chris.

Hi.

I just wanted to ask you, I'm looking at a little softer volume picture for the Company.

I'm just curious as you look at 2010, to the extent you have this big increase in advertising that occurred this year and it looks like it will occur again next year.

What else is it your doing to drive volume growth?

The categories look like they are doing okay.

But at the same time, your new productivity is a little soft this year in 2009.

Is that picking up in 2010, or perhaps what are the levers that we should look at to judge your volume growth in 2010?

Chris, let me just clarify a little bit on volume in 2009 and then I'll hand it back over to David to talk about 2010.

I think Eric just raised this as well in terms of impact of Russia.

If you look at volume in the fourth quarter, we were down slightly, and the three big drivers of that were actually China, Russia, and frozen.

In both China and Russia, we are trying to move our business to a higher margin, more premium packaged [food] business from low margin or bulk business in some of those markets.

What that is doing is actually means we are moving away from some pretty big chunks of volume.

Then, of course, the frozen issue of Eggo disruption impacted our volume.

If you strip those out, our volumes are actually very healthy in the quarter, if fact, our cereal volume was up 3% or 4% in the quarter.

So we are seeing good volume in the core of our business.

There's some [illness] around the edges which is distorting volume.

So we actually feel good about our volume performance.

Yes, I think if you look at 2010, we will see volume grow, a little bit bit of mix, much lower levels of pricing just as a result of what is going on with commodity and cost increases.

So that's why when you look at our guidance of 2% to 3% being more in line with our long-term top line, it does reflect the fact that the pricing impact is going to be significantly lower than it's been probably for the last three to four years.

Okay.

That's helpful.

I guess it's good to get a little perspective on how big those drags, if you will, in the quarter could have been.

That seems like it's a bigger driver than what many of us expect?

Yes, I think so.

Okay.

We will probably come back and give you a bit more color at CAGNY just to give you a sense of what is happening there.

That would be great.

Thank you.

And then just one last one would be relative to your share repurchase activity.

You've got a lot to do in the year, your debt levels are down to much lower levels, should we just expect a pretty ratable amount of share repurchase throughout the year?

Is that what you're trying to do?

Any kind of one big, big one-time share repurchase for the year?

You should expect it to be ratably over the course of the year.

In fact, we've already started some repurchases at the beginning of this year.

Okay.

Great, thank you.

Great.

Well, thank you, everybody, for joining us today.

Please feel free to call me with follow-up questions, and we'll see you all in a couple of weeks at CAGNY.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

We thank you for your participation.

You may disconnect your lines at this time, and have a great day.