家樂氏 (K) 2010 Q4 法說會逐字稿

Good morning.

Welcome to the Kellogg Company's fourth-quarter and full-year 2010 earnings call.

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

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

(Operator Instructions).

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, James.

Good morning and thank you for joining us today.

And welcome to the review of our 2010 fourth-quarter results.

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

The press release and slides that support our remarks this morning are posted on our website at www.kelloggcompany.com.

As you are aware, certain statements 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, upfront costs and inflation, are forward-looking statements.

Actual results could be materially different from those projected.

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

As a reminder, a replay of today's conference call will be available by phone through Friday, February 11.

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

Now let me turn it over to John, who assumed the role of President and CEO at the beginning of the year.

Thanks, Kathryn, and good morning, everyone.

Thank you for joining us today to discuss our results for the fourth quarter and full year 2010.

As this is my first earnings call since my appointment as CEO in January, I wanted to begin by saying that I am honored to step into this role.

Kellogg has over a 100-year heritage and some of the most beloved brands in the industry.

I am excited about the opportunities we have here at Kellogg as we focus on strategic priorities to deliver long-term growth with the support of our employees around the world.

I'd also like to express my appreciation to David Mackay for his nearly 20 years of dedicated service to Kellogg.

We've worked closely together since I joined the Company 13 years ago, and I appreciate the support he has provided me along the way.

I hope you will all join me in wishing David all the best in his retirement.

Before I discuss our results, I would like to address at a high level what we saw in 2010 and the actions we are taking today to position Kellogg for the future.

Then Ron will discuss our financial results in greater detail.

As you know, 2010 had its challenges.

On our third-quarter conference call in November, we discussed four major issues that affected our results -- decreased innovation, supply chain disruptions, tough comparisons in our core cereal business and nonmeasured channels; and deflationary pressures.

We are well aware of our opportunities and challenges and have already begun to take the necessary steps to position the Company for improved and long-term success.

First, our categories respond to innovation and brand-building.

For 2011, we have a stronger innovation pipeline and commercial plans to drive topline growth.

We expect an approximate 25% increase in innovation compared to 2009-2010.

We are already receiving positive feedback from our retail partners, who are excited by our innovation pipeline.

We look forward to discussing our plans with you in greater detail at CAGNY on February 23.

Second, we have increased investment in our supply chain to mitigate potential risks.

For example, we have significantly increased our resources to audit our suppliers and further increased independent testing of raw materials.

We have also invested in additional capacity for Eggo Waffles to provide further capacity for ongoing growth.

And finally, we expect to move out of a deflationary cycle.

In late 2010, we announced price increases on many products across our categories around the world to help offset the impact of rising input costs.

We expect net price realization and positive mix to drive topline growth in 2011.

As we look forward, we remain confident about the long-term growth prospects for our business.

We believe cereal and snacks are great categories to be in and the Frozen Foods business provides further opportunities for long-term growth.

With that, I would like to turn to our results, which were in line with our revised full-year guidance as provided on our third-quarter call.

2010 internal net sales growth was down 1%, and internal operating profit was flat.

Currency-neutral 2010 earnings per share increased by 6% year over year.

Our fourth-quarter results also include impairment charges on our China acquisition.

We have struggled with our business in China since making a small acquisition of a biscuit business in the country in 2008.

Our current business model in China has not proven to be the right entry vehicle.

However, we still believe the country is attractive and recognize its importance for future growth.

Turning to our net sales by region, in North America, internal net sales declined by 2% for the year.

In the fourth quarter, we posted flat performance as we began to see improvement in our cereal and frozen businesses.

North America Retail Cereal posted a 3% decline in the quarter against a tough year-over-year comparison of 6% growth.

For the full year, internal net sales declined 5%, reflecting the deflationary environment throughout 2010 and the impact of the recall on our second- and third-quarter performance.

While it is early, and we are starting to see improved trends in US cereal.

In the fourth quarter, we gained 0.1 share points in measured channels, driven by a 0.6 share point gain in base share.

Strong performance from Frosted Flakes and support from our second-half 2010 innovation, with FiberPlus at 0.4 share points and Cinnabon with 0.3 share points, helped drive this improvement.

We also saw Kashi gain 0.3 share points for both the year and quarter, and returned to mid-single-digit growth in the fourth quarter.

As we enter 2011, we have already increased list prices across much of our North America cereal portfolio and have launched a strong pipeline of first-half 2011 innovation.

We believe our lineup of innovation will bring additional excitement to the consumer and our retail partners to help drive category growth.

While it's early, there is evidence that our customers and consumers are enthusiastically receiving the new innovation, including Crunchy Nut and Special K Oats and Honey.

We expect category growth and share gains in 2011, driven by the stronger innovation, brand-building and pricing.

Turning to Retail Snacks, our North America Retail Snacks internal net sales grew 1% for the year and declined 1% in the fourth quarter against a tough comparative of 5% growth in the fourth quarter of 2009.

We gained share in Pop-Tarts, crackers and wholesome snacks in 2010.

Specifically, Pop-Tarts gained 2 share points in the fourth quarter, including the strong performance of Ice Cream Shoppe innovation, a line featuring improved nutrition and great taste.

2010 makes this Pop-Tarts' 29th year of consecutive growth.

The excitement around our Pop-Tarts business will continue with our 2011 innovation, including additional flavors of our successful Ice Cream Shoppe range.

While store door cracker sales were lower in the quarter, our base sales were up 4%.

We were able to maintain essentially flat share in measured channels even as we pulled back on [tray spend].

We started off 2011 with a strong introduction of Special K Cracker Chips.

During the fourth quarter, cookie sales declined low single digits and our share declined slightly in the quarter.

However, our base share grew as we pulled back from discounting and our incremental sales declined.

In January 2011, we launched Fudge Shoppe Oatmeal, leveraging the strength of the Fudge Shoppe brand.

With double-digit growth for both the quarter and the year, wholesome snacks continues to be a bright spot in our snacks business.

The category grew 5% in the quarter and we gained 2 share points.

With additional capacity in 2011 and a solid pipeline of innovation, including FiberPlus Caramel Coconut Bars, we expect ongoing growth in this important business.

Our Frozen & Specialty business posted 8% internal net sales growth for the fourth quarter and a 3% sales decline for the year.

Driving this increase for the quarter was strong double-digit sales growth from North America Frozen Foods, driven by the continued successful rebuilding of the Eggo business.

Eggo continues to be one of the strongest brand equities in the Kellogg portfolio.

And in mid-December, we were excited to introduce new innovation -- Eggo Thick and Fluffy Original, and Kashi Waffles, as well as FiberPlus Waffles.

Our veggie business continues to be on trend, and we continue to see strong growth in key veggie segments, particularly Morningstar Farms burgers and entrees.

Our Food Away From Home business grew low single digits for the year and was essentially flat in the fourth quarter.

Our food service business continues to outperform the industry for both the quarter and the year.

Turning to our international business, we posted approximately flat internal net sales results for both the fourth quarter and the year, with Latin America and Asia-Pacific's internal net sales growth offsetting Europe's decline.

The majority of the decline in Europe in the fourth quarter was driven by difficult trading conditions in the UK.

Our share in the UK for the year remained approximately flat.

Recent price increases to offset inflation, and the launch of new innovations such as Special K Clusters and Milk Chocolate Krave, should help drive improved sales performance in the UK.

Trading conditions in Continental Europe continue to be difficult, reflecting the weak macroeconomic environment.

While relatively small as a percentage of our European business, our Russian business posted double-digit growth in the quarter, driven by an almost 30% increase in cereal.

While the transition from bulk to packaged snacks is not complete, the Russian snacks business also delivered sales growth in the quarter.

Our Latin America business posted internal net sales growth of 9% in the quarter and 5% growth for the year.

During the quarter, the cereal category had solid growth across much of the region, and our cereal business achieved low-double-digit sales growth.

This increase was partially offset by softness in snacks in Venezuela, where we can no longer cost-effectively import.

As we enter into 2011, we have already taken pricing across the region.

We continue to see a positive response to the relaunch of Special K, where we have significantly improved the food.

Our first-half 2011 innovations include the launch of Special K Fruit and Yogurt Cereal.

For both the quarter and the year, Asia-Pacific delivered 2% internal net sales growth.

Strong performance from India and South Africa drove the quarter's growth.

Australia's cereal business was down in the quarter, reflecting the continued competitive pricing environment and a 3% decline in the category.

The 2010 cereal innovation of Sultana Bran Buds continues to perform well, achieving 1.3 points of market share.

The second-half 2010 innovation in the Australia snacks business, including additional SKUs of Special K Chocolatey Mint Bars and Be Natural Four Bars, contributed to double-digit sales growth and a 1.9 share point increase in the quarter.

We are excited by the launch in Australia of five SKUs of Be Natural Cereal in January of this year.

Before I turn it over to Ron to talk about the financial highlights, I want to mention that we expect significantly better topline performance in 2011 due to increased pricing and a very strong innovation pipeline.

We started to see a gradual improvement in our business in the fourth quarter.

Our initial execution of 2011 commercial plans is progressing well, and while it is still early, our latest innovations in US cereal and snacks appear to be well received.

Let me now turn the call over Ron, who will review the financial highlights of our business.

Thanks, John, and good morning, everyone.

As John mentioned, our results were in line with the guidance that we communicated on the third-quarter conference call.

Net sales for the full year 2010 declined 1% on both a reported and internal basis.

For the fourth quarter, reported net sales declined 1% and internal net sales were flat, due primarily to performance in our core cereal markets.

Reported operating profit was down 1% for the year, while internal operating profit was flat, as expected.

For the fourth quarter, reported operating profit was down 7%.

Internal operating profit was down 5% and included an impairment charge for our business in China.

I will discuss the impact of this charge later.

Earnings per share grew 4% on a reported basis and 6% on a currency-neutral basis for the year.

Earnings per share benefited from lapping the costs associated with the bond tender in the fourth quarter of 2009, as well as share repurchases in 2010.

Now let me discuss the key components of our financial performance.

Slide 10 shows components of our net sales growth for the quarter and the year.

Our volume declined by 2.1 points for the year, driven by US cereal, including the impact of the midyear recall, the supply disruption in Eggo and the ongoing transition from bulk to packaged products in our snacks business in Russia.

Partially offsetting the volume declined was improvement in price and mix for both the quarter and the year.

Price and mix contributed 0.8 points of growth for the year and 0.6 points of growth for the quarter.

Currency adversely impacted net sales by 0.1 points for the year and 0.9 points for the quarter.

Slide 11 recaps our gross profit and gross margin performance.

Gross profit declined by 2% for the year to $5.3 billion due to lower sales volume, increased commodity costs and a competitive pricing environment.

In addition, the cereal recall adversely impacted gross profit.

Internal gross margin contracted by 20 basis points for the year to 42.7%.

As planned, we increased our advertising investment in the quarter, ending the full year up mid-single digits.

We continue to improve the effectiveness and efficiency of our media investment by engaging consumers through digital and TV media.

The North America business drove most of the investment in the fourth quarter, as reflected in its operating profit.

Now let me turn to slide 13 to review internal operating profit in more detail across the regions.

Internal operating profit was flat for the year, in line with our expectations.

In the fourth quarter, operating profit declined 5% on an internal basis, including the impairment of our business in China.

Without the impairment, internal operating profit would have been up 1% for the year and up 4% for the fourth quarter.

North America internal operating profit declined 2% for the year.

Lower sales volume in our US cereal business, due to the recall and competitive activity, were the primary drivers of the decline in profit.

These were partially offset by lower incentive compensation costs and lower upfront costs.

Internal operating profit declined 10% in the quarter, due primarily to timing of advertising investment.

Europe delivered 8% internal operating profit growth against strong operating profit growth of 7% in 2009.

Lower input costs and lower upfront costs were key contributors to profit performance.

Internal operating profit increased 36% in the quarter, primarily as a result of timing of advertising costs and lower upfront costs.

In Latin America, internal operating profit declined 2% for the year.

Commodity costs increased significantly throughout the year.

In addition, we experienced a supply disruption in Brazil earlier in the year.

For the fourth quarter, internal operating profit increased 46% due to sales growth and lower upfront costs, which were partially offset by higher input costs.

Internal operating profit declined 30% for the year in Asia-Pacific, including the impairment charge for our China business.

Without the impairment, Asia-Pacific internal operating profit would have increased approximately 2% for the year.

Lower profit in our China business, combined with increased advertising across the region, also impacted our performance for the year.

Slide 14 provides a recap of our cash flow for the year.

We delivered 2010 cash flow of approximately $1 billion before a voluntary contribution to the Company's pension and postretirement benefit plans.

In the fourth quarter, we issued $1 billion of 10-year bonds.

This issuance provided us with the flexibility to contribute $467 million net of tax to the Company's plans, with the intent to keep our funding levels at approximately 90% and reduce funding requirements for the next several years.

Including the contribution, cash flow for the full year 2010 was $534 million.

Capital expenditures were $474 million, in line with our expectations.

We purchased just slightly over $1 billion in shares in 2010, the first year of our three-year, $2.5 billion share repurchase authorization.

We plan to continue to repurchase shares under this authorization, with approximately $800 million in 2011 and the balance in 2012.

Now let's turn to the slide 15 to review our outlook for 2011.

We are updating our guidance for 2011.

Since our third-quarter call, our outlook on commodity cost inflation for 2011 has increased.

As a result, we expect more net price realization, and we have already announced price increases in many of our businesses.

Volume is still expected to be flat to down slightly.

And as John said, we do anticipate mix improvements.

We now expect internal net sales growth of 3% to 4%.

Internal operating profit is still expected to be flat to down 2%.

However, as I said on our last call, this includes a 6-point headwind from the impact of reestablishing the incentive compensation plans.

We now expect cost pressures as a percentage of cost of goods sold to be approximately 7% and cost savings to be about 4%.

We are approximately 80% hedged on commodities for 2011.

Our gross margin is expected to be down slightly for the year, and we have included $0.12 of upfront costs in our plan.

We expect both brand-building and our internal advertising to grow low single digits as we invest behind our brands.

More efficient and effective investment combined with the gradual shift in media mix allows us to maintain good pressure.

Below operating profit, interest expense is anticipated to be in the range of $235 million to $245 million, and the full-year tax rate is forecasted to be approximately 30%.

Average shares outstanding are still expected to decline by 4% year over year as a result of our 2010 and 2011 purchase activity.

We continue to expect earnings per share to grow low single digits on a currency-neutral basis.

In terms of foreign currency impact, the latest spot rates as shown in our appendix are estimated to benefit full-year 2011 earnings per share by $0.06.

Note that this estimate is based on January 31 rates.

Currency rates will move around as we progress through the year, so we will update you each quarter.

During the first quarter, we are launching more innovation, but we are also investing to regain our momentum.

Also, remember that we had strong earnings per share growth of 27% on a currency-neutral basis in the first quarter of 2010.

As a result, we expect earnings per share to be down in the first quarter.

We expect cash flow to be $1.1 billion to $1.2 billion in 2011, and we expect capital spending to be approximately 4% of net sales.

2011 will continue to be a challenging operating environment, but we believe we are establishing a solid foundation to regain our momentum, deliver our 2011 goals and position the Company for long-term growth.

With that, let me turn it back to John.

Thanks, Ron.

In conclusion, we are excited about the year ahead.

2011 will be a year focused on regaining our momentum and returning to a path of sustainable growth.

We are confident that successful execution of our key initiatives, driving innovation, brand-building and improving the supply chain, will enable Kellogg to deliver value to our shareholders and excite both consumers and our retail partners.

We recognize that this process will take time, focus and effort, and we are committed to the task ahead.

This is a great company, and I'm excited about the future.

We have the right people, resources and strategy in place to deliver on Kellogg's long-term sustainable growth model.

I'd now like to open up for questions.

(Operator Instructions).

Chris Growe, Stifel Nicolaus.

I just had a couple quick questions for you.

First, to start off, on US cereal, John, can you talk about how much of a list price increase you've taken across the portfolio?

It seems like it's been quite different across brands.

Can you give a rough approximation of what sort of the actual price component in US cereal could be this year?

I don't want to get into the pricing mechanism by category.

What we've said is, in the third-quarter call, we told you we're going to get around 200, 300 basis points of price mix.

As we come into 2011, we now think that's closer to 300 to 400 basis points.

And obviously, the higher cost inflation is driving that.

That's across all categories globally, different amounts in different categories, different amounts, different countries.

I really don't want to get into the specifics of any one category in any one market.

Okay, fair point.

And then my other question just was regarding the US cereal category.

You had some good IRI data today.

I just had a chance to take a quick glance at it, but I guess the point being that -- or the question being, do you think the category is sort of developing the right way?

Are you seeing competitive activity reduce from a promotional standpoint?

Are you seeing pricing go in place?

Just trying to get an assessment of how you see the category at present kind of developing in 2011.

Well, one of the great things, Chris, about the cereal category is it really responds to innovation and brand-building and ideas.

I think what we're seeing here, it's early days in January, but we're seeing some good innovation hit the marketplace.

We are seeing the consumer respond to that and the categories doing better.

It's too early to say how things will evolve as we go through the year, but I think the early signs are very positive.

And you had indicated that you expect cereal category growth in the US.

Maybe it's going a bit too far -- do you expect that there will be volume growth as well this year in the cereal category?

I think the volume is hard to predict, Chris.

I think there will be cereal category growth behind the innovation and behind the pricing.

I wouldn't want to give you a volume-level forecast for a category.

Eric Katzman, Deutsche Bank.

John, congratulations on the appointment.

Good luck.

Thanks, Eric.

I guess just kind of the detail question on the impairment charge with regard to China, and so, is that a wipeout of goodwill, or is it cash or noncash?

And given the difficulties that you've also had in Russia, although that sounds like that's turning around, was there any consideration of a need for a charge there on that acquisition?

And then I will follow up with a broader question.

I will let Ron handle the specifics on the China impairment.

Yes, Eric, in terms of the China impairment, it was noncash.

It was a combination of both goodwill as well as impairment against some fixed assets.

I think it's important to note as well, we quantified it from an operating profit perspective.

In terms of earnings per share, it's $0.07 of earnings per share, so there's really very little or essentially note tax offset to the charge that we've taken.

And so, Eric, I think if you step back from this and you think about China, it's a relatively small business.

It's more of a price-based cookie company in Northeast China, and it really hasn't met our expectations.

Having said that, we remain very excited about China as a market long term, particularly in the area of cereal.

And we are looking at strategic alternatives for how we continue to progress in a successful way in the Chinese market.

If I go to Russia and sort of compare that to Russia, Russia -- the business there is a much larger business.

It's across three categories.

It's a leading company in crackers, strong position in cookies.

And a third of that business, broadly speaking, is cereal, growing at around 20% to 30%.

So in the Russia case, you've got a much larger business, much smaller scale, and much more of a cereal business.

And even though it's exposed to bulk biscuits, we are making less money in Russia than we would have liked.

I think the business has much better long-term potential.

Just like China, we do an impairment test in Russia at the end of each year, and obviously at the end of last year it passed that impairment test.

Okay.

And then, again, just another detail question.

You know, you took the -- I don't know what the final number was, maybe call it $0.10, $0.11, $0.12 on the recall costs in 2010.

But I didn't hear any mention of the expected insurance proceeds in your guidance in 2011.

Could you give an update as to how that claim is going?

That is still ongoing, but it's going to take a very long period of time to sort out, Eric.

So we have no amount in our guidance for 2011 from that insurance claim.

Okay.

And then a last thing and then I will pass it on.

The pricing, I guess you didn't want to comment on the cereal stuff, but I think it's probably fair to say that on the grain-based products, you've taken pricing.

Have you seen -- I mean, we know that most of the cereal companies, if not all of them, have followed, but have you seen a follow-up pricing on the grain-based snacks and stuff?

Again, I don't want to talk about other companies' pricing.

I think from our perspective, we are seeing that broad-based grain inflation.

We've taken broad-based pricing to help offset that.

And we are seeing that work its way through the marketplace.

Okay, fair enough.

I will pass it on.

Thank you.

David Palmer, UBS.

This is actually [Mineo Sakan] filling in for Dave.

Just a quick question for you guys, but it appears that many of the end-aisle displays of new Kellogg's cereals seem to be featuring aggressive price points.

And we're just wondering, are you being extra-careful to price new product correctly to drive new product trial?

I think if you look in January, which I assume you are referring to, we've had some very good quality merchandising support from retailers.

It's important to note that actually from our -- from the data we are looking at, that our price per pound is actually up in January.

And what's going on there is a couple things.

One is, we have strong innovation, and retailers are excited by the innovation, and they are giving us excellent quality merchandising.

And the second is that we also have the resolution period in January.

And as you know, resolution is a big deal for Special K.

And I will give you one example.

We moved the Special K price point from $2.49 to $2.99 in January this year, on deal, and the business is responding extremely well.

In fact, we hit over a 10 share in the early weeks of January on Special K alone.

So I wouldn't confuse good retail support with deep price discounting.

I think we are seeing very strong retail support based on strong ideas and good consumer offtake from that.

Great.

Thank you guys very much.

Jonathan Feeney, Janney Montgomery Scott.

Congratulations, John.

First conference call.

At least we don't lose the Australian accent, right?

Still here.

Just one question.

I wanted to talk about the kind of systems and management incentives and whatnot you've put in place around quality.

I mean, when I think about -- you know, you've had some good IRI numbers.

I think this is a little better than expected quarter.

But I think the big question is going to be, were these two kind of quality events we had in the past 18 months -- so atypical for Kellogg -- were these outlier events, or did we misunderstand what Kellogg is and always has been?

And I kind of -- what have you done?

Have you done thinking?

Have you been communicating about sort of preventing high-profile letdowns in the supply chain again?

And what confidence can you give us that those were kind of outliers, and to the extent they weren't, the steps -- the right steps have been put in place that that is ancient history?

Jonathan, it's a great question.

And we have, as you say, a long history as a company of great food quality, a food safety heritage.

And we've been disappointed by some of the events over the last 18 months or so.

And we've gone back into our system and really looked from the top down and bottom up at what else can we do to improve the food quality programs in the Company.

That's resulted in us putting more resources in place in areas like supplier audits, doing more raw material testing and so on.

And if you look at some of the issues that we've had as a company, they've generally come from the supply base, from outside the Kellogg facilities themselves.

Having said that, I personally been to just about every Kellogg facility in the Kellogg world over the last six months or so, and there's a tremendous focus in the Company to make sure that we are an industry leader in the whole area of food safety.

Having said that, there's always risks out there, and we're always looking to mitigate those risks as best we can.

Okay, fair enough.

Thank you.

Eric Serotta, Wells Fargo.

Congratulations, John.

I wanted to circle back on the question -- on the issue of innovation.

You've talked about a 25% increase in innovation for 2011 versus 2009 and 2010, and sort of getting back to 2008 levels of innovation.

I'm wondering, what's changed in the innovation process, as it seems that -- what's changed in the innovation process that gives you confidence in this innovation sticking and really moving the needle in terms of your overall business, given that the '08 innovation was followed by the SKU rationalization in 2009 and some disappointing -- or lack of stickiness of some of that innovation?

So, Eric, a couple ways of looking at that.

One is, the increase in innovation in 2011 is getting us back to those '08 levels, which was in line with '07, '06 and '05.

So in some respects, '09 and '10 were the anomaly in that we had less innovation out there.

Now, that's because we moved more of our resources towards renovating our foods -- reducing sugar, reducing salt, adding fiber and so on.

And that was all great renovation and it set us up for the long term, but it had a short-term impact in terms of less innovation in the marketplace.

As we look at the innovations coming out in 2011, we think that's high-quality innovation, and we've done a few things to improve the likelihood of success of that innovation.

One is, we looked at the consumer segmentation in our various markets, looked at where our portfolio fits on top of that segmentation, looked at the gaps in our portfolio and filled those gaps in.

So, for example, in the US we don't have that many adult-taste-oriented offerings, and we also have little nut-based foods in our cereal portfolio, so Crunchy Nut works.

In addition to that, we have been even more aggressive at leveraging great ideas from around the world.

And great ideas travel.

So Crunchy Nut, the number two brand in the UK, meant that we had not just a food offering that works, but a brand positioning that we could pick up and apply to the US market.

Same with Mini-Wheats with fruit in the middle.

So a combination of, one, you go back and look at five years ago, we had high levels of innovation that were successfully driving our top line; second, far more rigorous review of portfolio and where the gaps are; and third, more aggressive sharing of international ideas that work gives us more confidence in the 2011 innovation pipeline.

Great.

Well, thanks.

That's real helpful.

I will pass it on.

Terry Bivens, JPMorgan.

John, congratulations on being the top guy out there.

Two things.

You and Dave talked about some of the difficulties you were having in the, quote, nonmeasured channels.

I know that's a bit of a euphemism for a certain retailer.

Our understanding is things have gotten worse there, that stock-outs are pretty bad.

I understand it was to the point where they refused some DSD shipments late in the month of January.

How has your business fared there recently?

You know, Terry, I think if you look at the nonmeasured channels, there's actually been a great source of growth for the Company over the last 10 years.

The issue that we had in 2010 was partially specific to our Company in that we have very strong support in 2009 and we had to lap that very strong support.

I think in addition to our specific issues as a company, there have been some broader issues in some of those retailers in that there have been some SKU reductions, some reduction in merchandising space.

I think as we go into 2011, we feel better about those nonmeasured channels.

We are seeing some SKUs come back.

We are seeing some more merchandising opportunities.

It's hard to look in December/January and take too much away from some specific stock issues.

There's been so much -- some big snow events even over the last few days that have impacted the ability of various companies to ship.

So I wouldn't want to extrapolate too far from a few isolated events.

Fair enough.

And just one quick follow-up.

I know the number three player in the industry has from time to time kind of roiled the category.

Any repercussions you see to Kellogg?

I mean, it seems like Post took a heck of a lot of price and got pounded on volume.

Does that worry you at all as you look at the health of the category going forward?

You know, Terry, I come back again to what drives the category, is brand-building and innovation.

And if you have great brand-building innovation programs, I think that really excites the consumer, can drives the category and go forward from there.

I think on the Post business specifically, you have to ask them about their business.

Understood.

Okay.

Thank you very much, John.

Vincent Andrews, Morgan Stanley.

Just two quick ones.

I just wanted to make sure I understood -- do you have all of your pricing in place for 2011 right now at retail, or is it being staged and there's more to come?

We've taken the vast majority of our pricing, has been accepted by retailers and it's in place.

Okay.

And then secondly, you put out a number of 7% cost inflation for 2011.

I assume that is inclusive of the 80% hedging that you have on.

Would you be willing to give us what a total cash unhedged level of inflation would be for 2011?

There's still some open positions, obviously, from a hedging perspective.

We are 80% hedged at this point in time, slightly above where we were at this point in time last year.

Is there any risk that still sits out there from a commodity perspective?

Yes, there is, but we expect we would be able to manage that within the context of our guidance.

Okay.

What I was really trying to get at was, let's assume you weren't hedged at all, and let's assume that current prices were status quo for the balance of the year, which are -- and you never hedged at all; would you expect inflation to be 10%, 12%, 15%, something along those lines?

It would be higher.

It would be higher?

It would be higher, yes.

It would be higher than the 10%, 12% or 15%?

Or it would be higher than the 7%?

Yes.

It would be higher than the 7%.

Our hedges are in the money, but we are not going to quantify by how much.

Okay, thanks very much.

I will pass it along.

Andrew Lazar, Barclays Capital.

You know, John, if I look at -- let's call it if you are able to get through the 400 basis points of pricing, let's say, or price/mix, and you end up with 7% COGS inflation, that about offsets each other, more or less, dollar for dollar.

And that allows your productivity and everything else to fund all the other things you're doing.

And I'm sorry, I can't recall -- is that similar to how it played out in '08?

I think it is, where pricing basically offset your input costs, and then productivity was extra.

And do you think that the consumer environment, the retail environment this time around openly allows you to do the same thing?

Or was there any discussion of taking a little less pricing and having some productivity fund some of the input cost pressure?

I mean, how do those discussions get turned around internally?

Yes, I don't think we quite think about pricing in that way, Andrew, in that we say, hey, we are going to price to offset inflation.

I think the way we work through it is we drive productivity to help offset inflation and then we price accordingly.

So when we say 300 to 400 basis points of price mix, that includes an element of mix.

So it's not 300 to 400 basis points of pricing as such.

Okay.

You see what I'm getting at, just around the consumer environment obviously being potentially different this time around?

I think the -- yes, and just on the consumer environment, Andrew, I think it is a difficult environment with unemployment as high as it is.

The situation we have, though, is with grain-based pricing, for grain-based inflation, all the food industry is going to be going up, including meat and poultry and so on as well.

So there's not a lot of places for consumers who go for cheaper food than, say, a bowl of cereal with milk at $0.50 a serve.

So it's a relatively cheap serve, so I think we are well positioned from that perspective.

And secondly, we are seeing some return at the high end with consumers in that we are seeing Special K get some growth back again.

Bear Naked and Kashi were both up mid-single digits in the fourth quarter.

So there's some opportunity there.

Got it.

Okay.

And then one last one would be, your guidance for 2011, is that -- what earnings base is that off of?

I assume that's off of the base that you reported, the $0.51 in the fourth quarter, as opposed to excluding that $0.07 impairment.

It is off of the earnings per share that we've reported, so the $3.30 for the year.

Got it.

So if that, obviously -- so if that doesn't -- I mean, obviously it's not expected to repeat this year.

Does that just give you that much more, I guess, just flexibility in the model for this year?

There are a number of things that came into our performance and profit and loss statement as we progressed through the past couple of months, including, as we referenced, the increase in input inflation.

So we looked at the China impairment and basically have included that in the guidance at this point in time.

Okay, thanks very much.

David Driscoll, Citigroup.

John, congratulations; a very exciting time for you.

Congratulations.

My first question, just really details here.

Following up on some other folk's question, data analysis on the US cereal category really does suggest to us, at least, that the pricing is trending better, such that the category looks like it might be getting more rational.

This is not through today's date; I haven't had a chance to review that fully.

Do you just fundamentally agree that we are seeing rationality come back into the category?

And how would you categorize it at this point, taking into account commodities?

I would probably articulate it a little bit differently and say that broad-based grain inflation is driving a similar response amongst the players in the category, that we are all being forced to price to reflect that higher cost of goods.

I've noticed that Malt-O-Meal is actually selling at prices below that of private label.

How disruptive is this to the cereal category?

Well, Malt-O-Meal is being very aggressive out there, and it seems to be coming at the expense of private label.

And if you look in the fourth quarter, private-label share was down 40 basis points, and down 50 basis points for the full year.

So I think there's an issue there really between what we call the price-led segment, when we think about Malt-O-Meal and private label together.

Okay.

Moving to the UK, you mentioned a few comments in your prepared remarks about this, but have you really begun to see anything positive in terms of trends?

You know, when I just look at the sales number in the fourth quarter for Europe overall, it maybe perhaps actually makes me a little nervous.

Can you give us a little more color on the UK cereal market?

The UK is going through similar dynamics to the US in that the category in 2009 was up 5% to 6%, and then the category in 2010 was down about 3%.

We broadly held share in that category.

But it's a difficult environment.

As we go into 2011, we have taken pricing to offset inflation, and there is significant inflation in Europe, particularly around sugar.

And so we've taken that pricing.

We've got strong brand-building, strong innovation in the Special K Clusters and Milk Chocolate Krave in the UK.

Having said that, the first quarter is a tough comp for the Q1 for the UK.

And we expect better trends through the back part of the year.

But Europe is going to continue to probably be the most difficult operating environment for the Kellogg Company around the world.

A final question, for Ron -- was China always in your fourth-quarter guidance?

No, it was not in our fourth-quarter guidance when we communicated that in the third-quarter call.

We went through the fourth quarter.

We did our normal impairment testing that we do for goodwill across all of our businesses.

And it became clear -- we obviously did an evaluation of the business performance as well, and it became clear that we needed to take that impairment charge.

So then you would agree with us that adding the $0.07 back versus your prior guidance would suggest that this quarter did come out considerably better than you had originally expected.

Is that fair?

The underlying growth or performance of the business did come out better than expected, yes, that is true.

Thank you.

Alexia Howard, Sanford Bernstein.

The supply chain investment, you did a really nice job of quantifying a lot of the puts and takes for 2011 here.

But I don't know that you actually gave us a number for how much you are investing or spending on the supply chain side of things this year.

You know, I don't think we've ever quantified that.

A lot of the supply chain investment actually occurred in 2010.

That will be permanent investment that we will just carry forward with us.

There's a little bit more going into 2011.

It's not that significant.

Again, most of it is behind us in '10.

Great, thank you very much.

I will pass it on.

Robert Moskow, Credit Suisse.

You know, I hate to nitpick with the language, but you said that fourth quarter fundamentally came in better than you thought, but sales were flat, North America cereal I think down 3%.

What was fundamentally better than you thought?

I think as we look at the fourth quarter, just to be clear, we are not saying that we are happy with our fourth-quarter performance.

We think we need to do better as a company than we did in the fourth quarter and in 2010.

I think what we were saying there was, against the guidance that we gave at the end of the third quarter, the business did a little bit better than what we guided to.

So we obviously have some work ahead of us.

We are working on that.

We've been through the issues that set us back in 2010.

And we recognize that we need to do better in '11 and '12 and beyond.

Okay, and I agree with that.

But another follow-up question.

Another thing about the guidance for '11 is that you have a lot of reinvestment to do in '11.

But quantitatively, brand-building, advertising is only up I think you said mid-single digits, and your upfront costs are only $0.12 a share.

Can you give us a sense of what other investment is going on in 2011 besides those two things?

I think when you look at the Company, and you question if we should be spending, say, another $100 million in brand-building or something to get the business going, we have over $1 billion -- in fact, $1.1 billion to $1.2 billion of advertising spend as a company.

And then we have $300 million or $400 million of additional consumer promotion spend in addition to that.

So our total brand-building spend is about $1.5 billion, and that's sort of ballpark.

And we're going to grow that by somewhere around $30 million in 2011, ballpark again.

As you look at the amount of sheer spend that we have, we spend about twice the average food company on advertising.

We have these strong consumer promotion programs.

We have a lot of the investment that we need.

And I think we've demonstrated that 2001 through 2009, when we had great performance from innovation, brand-building and execution.

And that's what we need to get back to.

I don't think it's a case of undue investing in the business.

I think we had some other issues in 2010, and we really need to get back to that long-term growth.

And we have the firepower in the business to achieve that.

Okay, so the idea is to spend smarter, not necessarily more, but to spend smarter and innovate more?

It's about ideas.

If you have great ideas, you can drive the business.

That's what it comes down to.

All right, thank you very much.

Judy Hong, Goldman Sachs.

Just follow-up questions on sales guidance for 2011.

It seems like obviously the delta between what you've given us in the third quarter is mostly price- and mix-driven, and I'm just trying to understand the delta as it relates to what gives you the confidence in that higher sales guidance at this point.

Is it more just because of the grain inflation that you think everyone will be more rational from a price perspective?

Is it that you feel better about some of the price increases that you've taken already, or just from a volume perspective, you feel that the elasticity will be better?

I guess I'm just trying to understand the delta between where you were three months ago and today.

Judy, the grain inflation was certainly a factor.

I would say the change in our sales guidance is as much price- as it is mix-driven as well.

So price went up a little bit.

The fact that commodities have gone up gives us a bit more confidence in that position.

The other thing that gives us confidence is the receptivity of our innovation as we've put it out into the marketplace, and what we've seen from a pricing perspective from other competition within our categories already on the street.

So that gives us a bit more confidence in raising our sales guidance at this point in time.

And you'll note that from a volume perspective, we are still expecting our volume guidance to be very consistent with what we've communicated before.

Okay.

And then just going back to the comment about the nonmeasured channel, you've talked about the Company-specific issues in 2010, or just the lapping of the strong support in 2009 that negatively impacted the 2010 performance for you guys.

Does that mean in 2011 we really shouldn't be expecting a very strong snapback in that channel, that you wouldn't see the drive but not necessarily a snapback, because you've had basically the lapping of the '09 support that's dragged your 2010 performance?

I think that's fair.

I think that the issue here is 2009, so as we go into 2011, we think we are building off a strong base in 2010 as opposed to a deflated base in 2010.

Okay.

And then just finally, on the commodities and sort of the price realization going forward, obviously if the grain prices continue to move up, I would assume that continues to pose some challenges in terms of the industry's need to take more pricing.

And typically, you see a lag between pricing and commodities.

Just given how I guess the retailers and everyone else is expecting that inflation pressure, is this time around that the industry can really be much more nimble and quicker in terms of getting all those price increases through?

I can't talk for the industry.

I think that comes down to a series of independent decisions that are hard to predict.

But our perspective, or my perspective, is that we are looking at long-term commodity inflation.

This is not a 2011 issue; this is going to continue for quite a few years.

And in fact, in some respects, the recession broke a cycle that was already underway before the recession occurred.

And the reason that I say that is, if you look at what's going on right now, the supply has come down a little bit.

Demand continues to be strong for these grains.

Closing stocks are very low.

There is something like 40% of the corn crop going into ethanol, and the ethanol suppliers are still making money.

So this is an ongoing pressure on grain prices.

And we think that we are going to be in this environment for several years to come.

James, we will take one more question, please.

Bryan Spillane, Bank of America.

Just a couple of follow-ups.

First, in terms of pricing, I just wanted to make sure I understand -- did you have to go back to some customers and go for a second round of price increases?

Or did you just sort of alter what you thought you were going to present relative to what you might have thought in the fall?

I don't want to get into the exact dynamic of how we did it, but we have had to increase our price expectations between the third-quarter call and today.

And we've done that a couple different ways.

Okay.

And then in terms of just the volume expectation for 2011, in 2010, there were still some trade-inventory-level issues or inventory-level issues that sort of bounced volumes around in a couple of areas, at least quarter to quarter.

So you sort of get into, as we think about 2011, are trade inventory levels generally where they should be, or are you going to be shipping below consumption in certain markets?

You know, Bryan, I think that's a great question.

We did end 2009 with inventories higher than we wanted them to be.

I'm happy to say we ended 2010 right where we wanted them to be.

So I think we're in much better shape as we come into '11 on the inventory position.

Okay.

And then just a final one, John.

Now that you've taken your new role, have you had the time yet or are you in the process of -- are there going to be any organizational changes or personnel changes?

Any changes to the organization that are pending or have happened?

Well, there have been some organizational changes that quite frankly were probably going to occur irrespective of my change in role.

But we are looking for a new head of supply chain as a company.

We have some internal and external candidates as we go down that path.

We haven't filled that role yet.

Tim Mobsby retired from being the Area President of Europe.

He's been in that role for 10 years, did a fantastic job for us.

And we were very fortunate to have Steve Twaddell, who was right in place and ready to step into that role.

The morning foods role here in the US, which includes cereal -- we've got David Denholm stepping into that role.

David was running our Asia-Pacific position -- Asia-Pacific business.

And when you step back for a minute, I think we have a great team at the Kellogg Company.

We are committed to winning, and I feel very good about where we are.

Okay, great.

Thanks, John, and good luck.

Thank you, appreciate it.

Thank you all for joining us today.

Please feel free to call me if you have any questions, and we will see you at CAGNY on February 23.

Thank you.

This does conclude today's teleconference.

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