家樂氏 (K) 2011 Q1 法說會逐字稿

Good morning.

Welcome to the Kellogg Company first-quarter 2011 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 first-quarter 2011 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 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 Monday May 9.

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

Now let me turn it over to John Bryant, Kellogg Company President and CEO.

Good morning, and thank you for joining us today.

We are pleased with our first-quarter results.

Our performance reflects the building of momentum in our business and represents a good start to the year.

We delivered strong topline results in both our North America and International businesses.

As Ron will discuss in more detail, operating profit declined for the quarter on a year-over-year basis as timing of net price realization lagged input cost inflation during the quarter and increases in supply chain investments and advertising spending impacted our growth.

These results are also on top of the toughest quarterly year-over-year comparison that we face in 2011.

We remain on track for the year, raising our internal net sales outlook and reaffirming our 2011 internal operating profit and currency neutral EPS guidance.

As we said at CAGNY, regaining momentum is our primary focus in 2011.

Our first-quarter results set us on the right path to rebuild momentum throughout the year.

We are in great categories which respond well to innovation, brand building and nutrition to drive topline growth.

We are focused on exciting consumers with new innovation in every major category to drive topline performance.

As we shared with you last quarter and at CAGNY, we plan to launch more than $800 million worth of new products in 2011.

Our first-quarter results demonstrate the importance of innovation.

Within the US cereal and snacks categories, we had over 60 share of all innovation dollars in the quarter.

We introduced the UK cereal brand Crunchy Nut into the US where it was immediately embraced by consumers.

Our new Special K Oat and Honey cereal is off to a strong start as well.

In the snacks business, we benefited from the early success of Special K Cracker Chips.

Additionally Eggo launched Thick & Fluffy waffles which in my opinion is the best waffle we have ever made.

Overseas we started off the year with strong innovation as well.

In Europe, we introduced Special K Clusters and Krave milk chocolate cereals as well as two varieties of Rice Krispies Squares.

Our five new varieties of Be Natural cereals continue to gain momentum in Australia.

Our focus on innovation continues with a solid pipeline that extends through the second half of 2011 and beyond.

We continue to invest heavily in brand building as demonstrated by our 10% spending increase during the first quarter.

This brand building helped support the introduction of our innovation to the market including programs behind Crunchy Nut cereal and Special K Cracker Chips.

We still expect advertising to grow by low single digits for the year.

As we have discussed, digital media is an important tool for increasing the effectiveness and efficiency of our ad spend.

With an ever-increasing number of ways to target our consumers through new media platforms we can often spend less to reach the same and a potentially larger audience.

Our goal is to engage our consumers, forging stronger relationships with our brands whether through traditional television, print media or online programs such as Special K Resolution.

Let me give you three examples of how we engage consumers and bring our programs to life.

An example of a recent integrated promotion is our Share Your Breakfast program, part of our ongoing effort to drive category growth.

We are asking consumers to take a picture of their breakfast and post it on shareyourbreakfast.com.

For every breakfast shared, we will donate one to a child in need, giving away 1 million breakfasts.

We also celebrated National Breakfast Day on March 8 and served cereal to thousands of New Yorkers in Grand Central Station.

During this week, we had the highest cereal consumption of the year.

Cheez-It is another great brand that benefits from strong consumer engagement programs.

In February, we launched a campaign inviting consumers to help choose the next flavor of Cheez-It.

Consumers purchased samples and then went online to vote for their favorite flavor.

We had 29 million votes and nearly 1 million views on Facebook.

Not only did we engage with the consumer during the voting process, we're now able to build brand loyalty for a digital connection going forward.

We believe that we are off to a solid start in 2011 and are well positioned to continue to build momentum throughout the remainder of the year.

Turning now to our results, let me take you through the highlights of the first quarter and how we are working to achieve our 2011 goals.

In North America we delivered strong topline results across the board with internal net sales growth of 3% versus 2% growth a year ago.

We are pleased by the return to growth of our North American cereal business after a very difficult 2010.

We see improving trends in the category in general and in our business specifically.

The deflationary environment that defined 2010 improved during the quarter as average prices continued to increase across the category.

In our US cereal business, we posted a 2% increase in internal net sales driven by stronger innovation and higher promoted prices.

We were able to deliver this growth without the benefit of the full impact of increased list prices across much of our portfolio.

Across measured channels, we gained 0.7 share points in the quarter, our base sales outgrew the category while our incremental sales declined which highlights the quality of our growth in the quarter.

We also saw strong performance in Club and Dollar with double-digit internal sales growth in both of these channels.

Kashi cereals stood out this quarter by delivering mid-single-digit internal sales growth and gaining 0.3 share points.

As the growth of this premium brand demonstrates, not all consumers are chasing the latest deal and are prepared to pay for added value.

Our strong performance was also driven by robust innovation launched in January.

Crunchy Nut Cereal gained a 0.6 share in the quarter, while Special K Oats & Honey and Mini-Wheats Touch of Fruit in the Middle both gained a 0.3 share.

We will continue to support our strong first-half innovation throughout the remainder of the year and we are excited about our second-half innovation which includes Rice Krispies Gluten Free and FiberPlus Caramel Pecan Crunch cereal.

Turning to retail snacks, we had a great quarter with broad-based sales growth.

Our North America retail snacks internal net sales grew 5% even against a tough comparative of 5% growth a year ago.

Pop-Tarts gained over 2 share points in the quarter driven by the introduction of 100 calorie Pop-Tarts Mini Crisps.

First-quarter cracker sales were up 4% and delivered a 2 share point gain in measured channels.

Early 2011 innovation helped drive the results.

We had an overwhelming response to our Special K Cracker Chips.

It has been one of the most successful new product launches in the cracker category in the past decade, exceeding our expectations with a 1.5 share in measured channels in the quarter.

Townhouse Flatbread Crisps were also up nearly a share point in the quarter.

The digital outreach I referred to earlier around the Cheez-It Choose the Cheez promotion helped drive additional sales as well.

Our second-half innovation includes Cheez-It Colby, the winner of the consumer voting campaign, and Kashi TLC Pita Crisps.

During the first quarter, we saw improving trends in our cookie business with flat share gains and a flat sales growth.

We implemented Keebler Cookie line sales in anticipation of our upcoming Keebler Master Brand initiative.

This aligns all Keebler Cookie pricing and packaging, thereby creating scale behind the Keebler brand.

The new packaging will hit the shelves later this week.

Our recent innovation is performing well with two varieties of Fudge Shoppe JUMBO Fudge Sticks delivering a combined 0.4 share.

During the first quarter, wholesome snack sales were up 6% and we held our share leadership in this health focused category.

Across both our business and the category, we saw increased price realization and strong innovation.

Our first-half innovation including Special K Dessert Bars and FiberPlus Caramel Coconut Bars helped drive our strong sales results.

Second-half innovation includes a range of Keebler granola bars which target the afternoon snack occasion.

We are excited about the great start to the year in our snacks business with strong sales, share gains and base growth across most of our snack segments.

Our frozen and specialty business posted a 4% gain in internal net sales growth for the quarter driven by high-single-digit growth from our frozen foods business.

Our Eggo business which is celebrating its 75th anniversary this year continued to regain momentum, growing consumption by more than 60% and nearly 12 share points in the quarter.

However, our shipment growth was not as high as consumption this quarter as we lap the rebuilding of trade inventory in the first quarter of 2010.

New products such as Thick & Fluffy Waffles which launched in late 2010 performed well, gaining nearly a share point across measured channels in the quarter.

We will continue to introduce more innovation in the second half.

The veggie category remains strong growing at a healthy mid-single-digit rate.

While our veggie shipments were down slightly, we saw strong underlying consumption growth for MorningStar Farms.

We saw some decline in our Kashi frozen entree business which we are addressing with more innovation in the back half of 2011 and across 2012.

Also, our food service business was largely flat in a difficult environment.

Turning to our International business, outside North America, we posted 2% internal net sales growth driven by strong topline performance in Latin America and growth in Asia Pacific.

This helped offset Europe's 1% internal net sales decline.

As expected, the UK faced a challenging operating environment, a tough economy combined with a highly competitive retail landscape.

The UK cereal category was flat in the quarter in line with most UK food categories while our cereal consumption was down 2%.

During the quarter we began to see positive trends on the continent.

Within our French business, consumption increased 6%, yielding a share gain of 0.6 points.

The Tresor and Miel Pops cereal brands helped drive this growth.

We continue to expect Europe to be our most challenging operating environment in 2011.

In the first quarter, Latin America internal net sales rose 10% and volume increased 4%.

The increase was led by volume recovery in Brazil as well as higher average prices throughout much of the region including Venezuela.

In Mexico, internal net sales were up slightly in the quarter against difficult comparisons.

Results in Mexico for the first quarter were also negatively impacted by a customer issue which is now largely behind us.

The Special K brand relaunch continued to drive share gains across the region.

Specifically, in Mexico, Special K gained nearly 2 share points.

In keeping with the transfer of great ideas, we are rolling out the European favorite Krave cereal in Mexico during the second half of the year.

In Asia Pacific, first-quarter internal net sales grew by 2% driven by topline delivery in both the cereal and snacks businesses.

Strength in our South African and Indian businesses drove the topline, offsetting softness in shipments in our Australian business.

Consumption in the Australian cereal business grew more than 1% and we gained 0.4 share in the quarter.

First-half innovation helped drive share with the introduction of five new varieties of Be Natural cereal with 1.5 share points for the quarter and the strong performance of Sultana Bran Buds.

However, our first-quarter net sales growth does not reflect consumption due to a retail inventory build in the first quarter of 2010.

The Australian snacks business continued its momentum, increasing share by 3.2 points in a category growing approximately 14%.

South Africa was a bright spot for the quarter.

The cereal category grew at a double-digit rate and we delivered sales and share growth in the region.

Let me turn it over to Ron to walk you through our financial highlights.

Thanks, John, and good morning.

As John mentioned, we're pleased with our first-quarter results.

We delivered strong topline growth with net sales for the quarter increasing 5% on a reported basis and 3% on an internal basis.

Operating profit was down 10% on a reported basis and down 12% on an internal basis primarily as a result of increased commodity and brand building costs as well as investment in our supply chain.

Earnings per share declined 8% on a reported basis and 10% on a currency neutral basis in the quarter and included the benefit of share repurchase activity.

Operating profit and earnings per share declined as we invested to build our momentum.

And remember that we lapped 17% growth in internal operating profit and 27% growth in currency neutral earnings per share in the first quarter of 2010.

We recognize that we did not provide specific quarterly guidance.

However, it is worth noting that we are pleased with our performance which was ahead of our expectations for the quarter.

Now, I'll review the components of our financial performance.

Slide 14 shows the components of our net sales growth in the quarter.

Our volume increased by 1.8 points for the quarter driven by gains across our cereal, snacks, and frozen foods businesses.

Price and mix contributed 1.3 points of growth.

We have executed our price increases as planned in the first quarter and they have been accepted by our customers.

You can expect price execution to have a greater impact over the balance of the year as we benefit from the first-quarter increases and already announced second-quarter pricing.

Currency contributed 1.9 points of growth for the quarter.

Slide 15 lays out our gross profit and gross margin performance.

Reported gross profit dollars were flat in the first quarter.

Gross profit dollars on an internal basis declined 2% in the quarter primarily due to increased input costs and planned supply chain investments which were partially offset by the profit generated from our sales growth.

Our reported gross margin contracted 220 basis points to 40.8% in contrast to a year ago when our reported gross margin increased 190 basis points.

Our net price realization lagged input inflation in the first quarter.

We expect trends to improve as our previously announced price execution is fully recognized in our performance.

While we are currently hedged approximately 85% on commodities for 2011, we expect gross margin to remain under pressure from input inflation including fuel costs.

For the full year, we now expect cost pressures on the cost of goods line to be in the 7% to 8% range and we expect full-year gross margin to be down approximately 50 basis points.

Now let's turn to slide 16 to review advertising.

As John discussed, we are committed to investing in our brands through brand building activities.

This quarter, we increased both advertising and total brand building by 10%.

Brand building includes advertising and consumer promotion events such as National Breakfast Day.

The most notable increases occurred in our North America and Asia Pacific businesses.

Investments behind our major innovation launches contributed to the growth in advertising.

Our investments also drove one of our strongest Special K Resolution events ever.

It is important to note that timing of our innovation launches and other key events can impact year-over-year comparisons.

We continue to expect advertising investment to be up low single digits for the year and we are confident that our media investment is sufficient to successfully engage consumers.

Now let's turn to slide 17 to review internal operating profit in more detail across the regions.

First-quarter internal operating profit declined by 12% facing the tough comparisons I mentioned earlier.

North America internal operating profit also declined 12% against a 22% increase in the first quarter of 2010.

This was due primarily to higher input costs and increased brand building investment.

Europe's internal operating profit declined by 9%.

As John mentioned, the challenging operating environment in the UK impacted our sales performance.

In addition, the benefit from our price execution is lagging significant input inflation in this region.

We expect sales and profits in Europe to remain under pressure this year.

In Latin America, internal operating profit increased 1% for the quarter.

While sales grew 10%, cost pressures were significant.

Much of our pricing is largely in place and we expect to benefit from this price execution as we progress through the year.

In Asia Pacific our internal operating profit decreased 23% in the quarter against a 10% increase a year earlier.

The decline in operating profit was driven by Australia which was lapping retail inventory growth in the first quarter of 2010 and increased advertising to support innovation launched in 2011.

Slide 18 provides an update on cash flow and our uses of cash.

In the first quarter, cash flow was $207 million, up slightly versus prior year.

For the full year, we still expect cash flow to be in the range of $1.1 billion to $1.2 billion and we expect capital spending to be roughly 4% of net sales, at the high end of our 3% to 4% long-term range.

In the quarter, we repurchased more than $300 million of shares and we will continue to repurchase shares throughout the remainder of the year.

As we said on the fourth-quarter conference call, we estimate repurchasing approximately $800 million of shares in 2011.

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

We also remain committed to returning cash to our shareowners through dividends.

Last week we announced an increase to our quarterly dividend of 6% effective in the third quarter of this year.

Now let's turn to our outlook on slide 19.

We currently expect internal net sales to grow approximately 4%.

This reflects recent price increases implemented to offset higher input inflation as well as improvements in our volume outlook for the year.

We now expect price and mix to be at the higher end of our 300 to 400 basis point range.

We expect volume to be roughly flat based upon our first-quarter performance, the strength of our innovation and improvements in category trends.

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

The increase to our sales outlook is offset by higher input costs.

As I mentioned earlier, we anticipate cost pressures as a percentage of cost of goods to be approximately 7% to 8%, up from our initial estimate of 7%.

Our estimate of cost savings remains the same at about 4% of cost of goods sold.

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

This includes a full-year outlook on our tax rate, approximately 30%.

We have estimated the impact from currency at the forward rates in our appendix.

We believe that forward rates are a more conservative approach than spot rates.

The latest estimate indicates $0.09 benefit on forward rates.

This implies a reported earnings per share range of $3.42 to $3.49.

Currency movements can fluctuate positively or negatively, so we will continue to update you with our estimates as we progress through the year.

And now let me turn it back to John for some closing remarks.

Thank you, Ron.

2011 is a year of building our momentum.

And with our first-quarter results, we are off to a solid start to the year.

We see positive signs with strong end-market performance across many regions.

In the US, we've increased share in most of our categories.

This performance reflects the importance of a strong innovation pipeline and effective brand building to drive topline growth.

I am confident that through continued investment in innovation and brand building, we will continue to regain momentum in 2011 and beyond.

We are well positioned to grow our internal net sales at approximately 4% and to deliver our 2011 operating profit and EPS guidance and to reach our ongoing goal of delivering long-term sustainable growth to our shareowners.

I'd like to thank our 31,000 employees whose continued dedication is enabling us to achieve this goal.

I would now like to open it up for questions.

(Operator Instructions) Diane Geissler, CLSA.

I guess I'm struggling a little bit with the topline and your volume commentary.

So your volume was up this quarter but you're projecting flat for the full year?

And if I remember correctly, volume in 2010 was down, so I guess for me there's a little bit of a disconnect between what you're saying about the percentage of your sales that is coming from new innovation.

Could you maybe just walk me through your volume expectations for the full year?

Because otherwise it's looking like your topline is basically all inflation.

Is that an accurate way to look at it?

Or am I missing something?

Here's how we think about volume.

We're expecting it to be sort of largely flat, maybe down a little bit for the year and the first quarter was a great start.

We had volume growth of 1.8%.

We had strong innovation and you can see the benefit of innovation coming through in the volume performance in the first quarter.

However, we had relatively limited amount of our price mix benefit in Q1, only 130 basis points, and now we're saying price mix is in the high end of the 300 to 400 basis point range.

So clearly there is a large amount of price mix that's built into the expectation for Q2 through Q4 and we expect that to have an adverse impact on volume.

This is the line of our P&L which is probably the most difficult for us to predict.

Clearly the innovation is having a very positive impact but we do expect some price elasticity and some adverse impact on volume from the higher price mix performance in the back half of the year.

And then I guess just a follow-on question and then I'll leave it at that is when do you expect the consumer then to accept the price increases?

Should we look -- is 2012 the year it kind of comes together and you see the topline driven by more volume than pricing?

Or is it just too early at this point?

I think as you look at the consumer acceptance on our pricing, firstly step back.

The retailers have accepted the pricing that we're putting through, so it is playing into the market.

It's not fully in place in the first quarter because we took pricing throughout the first quarter and of course there's some element of price protection for deals that had already been negotiated before the pricing went into place.

So the pricing is moving through.

We expect there to be some adverse consumer reaction just because there's a segment of population that is under pressure.

At the same time, there's a segment of the consumer population that's doing quite well and we see that in the growth of Kashi cereal.

So, as we look at this year, we're being cautious in our volume expectation.

I don't want to get into 2012 volume forecasting, but if you look over the long term, we expect our growth to be roughly one-third from volume, one-third from price, one-third from mix over time.

Okay, I appreciate the comments.

Ed Aaron, RBC Capital Markets.

Thanks, good morning everybody.

So, at CAGNY you talked a little bit about looking to reinvest in the earnings upside that you might have this year.

I'm just curious to get a feel if you're any more or less confident that you will have some operating upside to reinvest by the time the year is done.

And then to the extent that you do, where would you be looking to prioritize that?

I know you just brought somebody on from a supply chain perspective, so that just kind of comes to mind as an area where you might look to spend some money.

Thanks.

Well, I think the guidance we've given you is the right guidance.

I don't think we're giving guidance here that we think is conservative and we're going to beat, therefore reinvest.

If you look at our first quarter, delivery of $1.00 of EPS in the first quarter is broadly speaking 29% of the full-year EPS guidance and that is right in line with the five-year historical average of about 29% of our EPS coming out of the first quarter.

So I feel like Q1 is on track with our full-year expectations.

If we do get an opportunity to overdeliver and reinvest, that's likely to be in the areas of brand building to continue to drive the topline momentum as we go into 2012 and beyond.

Ken Zaslow, BMO Capital Markets.

I think on your third quarter last year, you talked about the lack of support, that your non-measured channels led to a 2 point drag on topline in US cereal.

You didn't talk really towards that channel.

Can you give us where you stand on the momentum of regaining those share points in that channel and what you're doing to address those issues and where you stand?

I think we are seeing improved performance from the non-measured channels.

If you look at, say, Club and Dollar there's some good growth going on in those channels.

If you think back historically, when we talked about non-measured channels, and let's take the cereal category as an example, we would've said you would add 200 to 300 basis points of growth to the measured channels to get to a total category performance.

I would suspect right now you're adding about 90 basis points of growth or 1% of growth to the measured channels to get to the total category performance.

So the non-measured channels last year were a bit of a drag; this year, they're growing a little bit faster but not as fast as they were say three or four years ago.

Great.

Thank you.

Bryan Spillane, Bank of America.

John, just in terms of your outlook in Europe, understanding that the business or the conditions in the UK are tough, but just in terms of -- if you could talk a little bit about just the improvements that you have made or the progress you've made improving I guess some of the more secular issues that you were having there.

And then also just in terms of outlook, how much of your outlook now is just colored by it's more difficult to price inflation through in Europe than it has been in the US?

Okay, as we look at Europe, as you said, UK is a tough market right now and there's a couple things going on in there.

One is the cereal category in the UK as we said in the prepared remarks is flat and our consumption is down slightly.

We do have good innovation in the UK and we do expect the trend to improve as we go through the year but it will take time to get us there.

Also in the UK, we have about 20% of our UK business in the snacks category and that business was actually recently moved to the biscuit aisle and that has disrupted that business to a degree.

So we'll have to take some time to work through that.

So it's not just cereals, there's also some issues in snacks in the UK.

On the positive side, we are seeing some greenshoots if you like in Continental Europe.

As I said before the French consumption is up about 6%.

We saw some slight consumption growth in Italy and gained nearly a share point there.

Having said that, Spain remains very difficult.

So it's bit of a mixed component coming out of Continental Europe.

And we saw some good growth in Russia, some double-digit growth in Russia in the quarter as well.

In terms of pricing in Europe, Europe is one of the more difficult parts of the world to execute pricing.

We have executed our 2011 pricing actions in Europe, so we're going through the retailers.

That's now flowing into the consumer environment.

All right.

So it's fair to say that the biggest challenge in Europe right now is more just the macro issue as opposed to Kellogg specific in terms of getting things moving?

I think so.

I think there's a macro element and then on a Kellogg specific issue, I'd say the snacks moving into the biscuit aisle in the UK is a little bit specific to us.

But beyond that, it is more macro consumer concern.

Okay, great.

Thank you.

Robert Moskow, Credit Suisse.

I was just wondering if you could give us a little color on how much commodity inflation you had in first quarter and then how it kind of ramps up as the year goes on.

And then a follow-up, thanks.

Of course, Robert, we would be happy to.

First of all, the first-quarter performance, we did expect our gross margin to decline in the first quarter.

Our cost pressures in the first quarter were very consistent with what we expect for the full year.

So they were in the 7% to 8% range and that's what we expect for the full year as well.

So we don't necessarily see a significant ramping up.

The issue for us in the first quarter obviously was that our pricing was settling into the marketplace and as a result, our gross margin performance was down.

Okay.

And I thought I heard some color somewhere that the launch of Crunchy Nut was okay but not doing particularly great.

How does it compare to like other major launches you have had?

Just a little color on that.

Thanks.

Well I think Crunchy Nut is doing very well.

It's still the first quarter and it's got about 0.6 share and it's at or above our launch expectation, so we're very happy with the performance of Crunchy Nut.

Okay good, tastes good too.

Andrew Lazar, Barclays Capital.

John, can you give us a sense as -- I know pricing was pulling through over the course of the quarter, maybe some color on where.

Maybe towards the end of the quarter what the net price realization was starting to look like, if you give us a better sense of maybe how to think about it in the second quarter and therefore obviously to get some comfort that you're going to be catching up if you will to some of the input cost inflation you are seeing.

Andrew, this is Ron, be happy to help you with that.

When you look at the price mix improvements that we saw in the first quarter, we communicated about 1.3 points.

So our pricing was settling in over the course of the quarter.

When you look at the balance of the year, what you will see if we stick within this 300 to 400 basis points of price mix improvement, we said we would be at the high end of that range, that implies basically around 5 points of price mix benefit or thereabouts over the balance of the year.

You'll see that progressing in the second quarter and then clearly the full impact in the back half.

But our second quarter will certainly be better than the first quarter.

Great.

Thank you and then this is a really tough one to really know, but the way you're thinking about elasticity, I think it makes sense to take a more conservative wait-and-see approach.

But the way you are modeling for it internally, is it any different than you might have been modeling for it based on what you learned back in 2008 just because of the tougher consumer environment?

Or is it really tough to model in any case anyway and you're just being conservative to be prudent?

Andrew, I think it is very difficult to get at what the real elasticity number is going to be.

We have obviously a series of very complicated models that help us model out the elasticity and then we tend to give it quite frankly a bit of a haircut out of what those models tell us.

If you are trying to get a sense of how much elasticity is out there, we're not seeing very much to date.

So the first quarter we did have some price mix, we had -- within US cereal, our promoted price points were up 6% in the first quarter, and yet we continued to get good merchandising support and the business continued to do well.

If you look say at another proxy around sensitivity to price, is private-label doing well?

Well private label is down in share in US cereal, it's down in a lot of the International markets, it's moving up or down by 10, 20 basis points in some of the snack categories.

So as we look at the consumer elasticity, with certain expectation out there for the back three quarters of the year, that as we sit coming through the first quarter, we're not really seeing a whole lot of elasticity yet.

Got it, that's actually a very helpful perspective, thanks so much.

Vincent Andrews, Morgan Stanley.

You said that you had about a 60% dollar share of US cereal innovation in the quarter.

Can you compare that to where you were last year and then maybe where you were in other first quarters where you thought you had a very good innovation coming into the year?

I think 60% is probably a bit higher than what we would normally do.

But certainly our innovation -- we're an innovation intensive company and we normally overindex on innovation.

So I think cereal is a little heavier than normal.

I would probably go back over to some of the snacks categories in the US where we really had very strong innovation and significantly outindexed what we would have done historically and maybe even -- that's probably even true in some of the frozen foods elements as well.

But you don't have a number for last year?

No, I would suspect it was in the 40% to 50% range.

Would that be closer to normal or below normal?

That would be close to normal.

We would normally overindex by 10 to 20 points above our market share.

Okay.

Thank you very much.

Terry Bivens, JPMorgan.

John, two quick things.

Number one, if you look in the US, you guys continued to get some nice distribution gains.

Now I know those are coming against your SKU cut in the recent past as well as some of the troubles with Eggo.

But I am wondering are there distribution gains elsewhere and how much in promotional monies are being spent to get those?

For example maybe Wal-Mart returning to Action Alley would be an example of what I'm trying to get at there.

Terry, you're right, we are picking up distribution gains in a variety of places in the business.

I think what's driving that is actually the strong innovation pipeline and retailers wanting to support the innovation.

The retailers are looking at their business and recognizing that to drive their business, they need to bring news to the category, news to the consumers and put that out in front of their consumers.

So they are actively and aggressively seeking new ideas and then supporting them when we bring them to the retailers.

Okay and just a quick follow to -- just shifting quickly to Australia.

We hear there's obviously a tremendous price war going on there between the two big retailers.

My question is how much do you think that is compromising your Asia Pacific results?

I think you can see if you look in the first quarter as we said in the prepared remarks, our consumption was up slightly, we gained some share in Australia.

So we're happy with our in-market performance but our shipments did lag the in-market performance and that did pull down the segment results for Asia Pacific.

There's no question that the retail environment in Australia right now is very complicated and there is I guess a degree of risk as you look into the future because of that interaction between those retailers.

We're trying to navigate that as best we can.

Okay.

Thanks very much.

David Palmer, UBS.

A question for you on just price elasticity of packaged food in general.

I think it was Andrew mentioned 2008, we look at the last 12 weeks of data across all packaged food, pricing has been creeping up to about 2% in the last 12 weeks, volumes trended off about a percent or so excluding some Easter category companies like a Hershey.

So does look like things are playing out okay and in a way that would give us cautious optimism.

Is that the way that you see things now, that the price elasticity doesn't look as bad as one-to-one or worse across many of your categories?

Yes, I mean I think the price elasticity is probably a little bit less than one-to-one and that's kind of what's built into our expectations.

If you think about what is embedded in our outlook here, in the first quarter we had positive price mix of 130 basis points, so expecting let's call it 400 basis points for the full year, so towards the high end of our 300 to 400 basis points range.

That implies that the run rate on price mix is going to improve quite a lot and our volume would be down slightly, so it would almost imply like a two-thirds, a 0.6, 0.7 type price elasticity is what's built into our outlook.

As I said earlier in answering Andrew's questions, we're not seeing a lot of elasticity just yet.

But that is what's built into our outlook.

Then a separate question on costs.

It seems very early to be talking about anything past 2011 on costs, but these things tend to play out over time because people hedge and pre-buy supplies of things.

The current crop may be coming into focus, energy costs are higher.

It feels like already like 2012 is going to be shaping up to be even more inflationary perhaps than 2011in terms of everyone's actual costs and that the average food companies are going to be going in for a round of price discussions by the end of this year.

Is that -- I know you're not going to touch the pricing topic -- but does it feel like from a cost perspective that is the way it's playing out so far?

David, the way we look at it is that we are in a long-term upward trend on cost of goods.

The supply of grains has been relatively limited, the demand for grains is increasing whether it be ethanol production, whether it be emerging-market consumption or direct grains or meat-based products.

And the result of that is you're going to see increased prices for grains over time.

So we would look at 2012 and say, yes, it's probably going to be inflationary.

How inflationary?

We'll have to wait and see where all the supply-demand shakes out and where the prices shake out.

David Driscoll, Citi Investment.

Could you discuss -- you wrote in the press release that the first quarter exceeded your internal expectations.

It was below the consensus, so perhaps you could describe how it exceeded your internal expectations.

You bet, David, be happy to handle that one.

From a topline perspective we did a little bit better than what we had expected particularly in our North America business.

From an underlying operating profit perspective, we were a little bit better as well.

Our earnings per share was better as a result of our tax rate and a little bit of currency that flowed through there, and also our cash flow came in a little bit better than expected.

So broadly across all of our key measures, we performed slightly better than what we had planned.

And then moving on to the volume question, I just want to follow up some of the things that some of the other folks asked.

We've done a lot of work here on your SKU rationalization from last year.

And it would look that you took a fairly large number of SKUs off shelf.

When you think about this big surge in new product activity in 2011, number one, is it incremental to your shelf space?

And then second, can you comment on your thought process on the incrementality of the $800 million in new products?

Well I think as you look at the distribution gains, we are seeing some level of incrementality from the new products from a shelf perspective.

It's never 100% incremental, there's always some in and some out at the same time, but probably more incremental than normal given to your point the SKU rationalization that we executed last year.

And then when you think about the incrementality of the $800 million, the key there is when you do the innovation, to innovate into areas that you're going to bring new consumers into the category as opposed to just switch consumers around.

We think that the adult orientation of products like Crunchy Nut, the direct taste orientation of those products really will help us bring new consumers into the category.

So we believe -- our goal is to make innovation not just larger but more incremental over time and time will tell to see how well that works.

And finally, two details.

What is the upfront spend for the year and what is interest expense guidance?

Thank you.

Our upfront costs are in line with what we previously communicated.

So we estimated approximately $0.12 of upfront cost and our outlook on interest expense is still in the range of $235 million to $245 million, so still very consistent with previous communications.

Jason English, Goldman Sachs.

Housekeeping item on the supply chain investment, I noticed you had some favorability on the upfront cost line.

Can you quantify the supply chain investment this quarter and confirm that it was not in the upfront cost?

The supply chain investments were not in the upfront costs.

These are your items such as people, process and infrastructure that we are investing in.

I should point out though that those supply chain investments are embedded or included in our cost pressures estimate of 7% to 8% for the year.

That's helpful, thank you.

And I want to return to Europe.

There was some news about some restructuring in Europe and how you guys are segmenting the market.

And I was particularly interested about the focus on emerging markets there.

Can you talk a little bit about the restructuring and what if anything the implications are or how we should interpret the focus on emerging markets there?

That restructuring was in our Russian business unit in Europe.

We closed one of the facilities, one of the manufacturing facilities in Russia.

We have six facilities, so it's one of six.

We continue to be excited about the Russian business.

It achieved double-digit growth in the first quarter.

Strong growth in cereal, just below 20%, and saw high single-digit growth in snacks as well.

So we feel like we're well positioned long term in cereal and in snacks in Russia.

And I would see that restructuring as just an opportunity to improve the profitability of the business so we can continue to reinvest in the business and gain long-term momentum in Europe.

Globally, can you give us a sense of how big emerging markets are now and what that growth trend is?

It's always difficult when you get into emerging markets how much of the portfolio is there.

So we look at Latin America and say obviously all that region for us is emerging markets.

You take Asia Pacific and just take Australia out of that and the rest of Asia Pacific would be an emerging market.

Even when you come across to Europe and you come out of the UK, for us Continental Europe is an emerging cereal category.

It's relatively low per capita consumptions and has potential for long-term growth.

So we don't have a metric as such for emerging markets, but you can see 10% growth in sales and on an internal basis in Latin America in the first quarter; some signs of growth returning in Continental Europe; double-digit growth in Russia.

And if you took Australia out of Asia Pacific, it would've been a very good growth performance as well with double-digit growth in India, South Africa, China in the quarter.

Thanks a lot, I'll pass it on.

Eric Katzman, Deutsche Bank.

Hi good morning everybody.

I guess I have two questions.

One is the K-LEAN; this is like the last year of the ramp up of the savings that you had put together a couple years ago and yet it sounds like inflation continues to be a challenge.

I don't remember who asked the question, but how do we think about the outperformance on the K-LEAN and the cost savings beyond this year?

Yes, Eric, when you look at our performance on this billion-dollar challenge in K-LEAN, we are in the last year as you suggested of the billion-dollar challenge and performing quite well against that.

We communicated roughly 4% of savings across cost of goods sold and K-LEAN is a big part of that.

However, if you look back at what we demonstrated in the past, we have been in the range of 3% to 4% productivity savings against cost of goods sold.

So we feel quite comfortable that going forward we will still be in that similar range of opportunity.

Okay, and then just as a follow-up on I guess John, you must've noticed the bid by ConAgra for Ralcorp going hostile.

So now it looks like ConAgra may be a cereal company and they haven't been historically been known as the most rational competitor.

I'm not sure that you would view Ralcorp as necessarily being a rational competitor with Post over the last year or so.

But how do you assess the change if that happens?

And just to the extent that you and your -- General Mills maybe take some share this year within the category if you both achieve your targets, what does that mean for the rest of the players out there, whether it's branded or private-label?

I can't really talk to Ralcorp or how their strategy may or may not change depending upon who may or may not own Ralcorp.

At the end of the day we're driving our business and we know that what drives our business is strong innovation, brand building, nutrition; and we are making those investments and improvements in our business; and we're seeing the consumer response to that.

So I think there will always be a part of the consumer segment that will play on price and private-label will play in that area.

We're playing in the added value consumer engagement end of the category and it is working for us.

Can I just sneak in one more and that is just on the regulatory environment.

I know maybe six, nine months ago when you guys had your recall, the politicians were all over David and it seems like you were unfortunately the bit of a poster child for a while there, undeservedly so in my opinion.

But in any case yet, it seems like every day there's another article in the papers about the regulatory environment and the cost.

Is that another thing that maybe isn't within COGS inflation but could be in SG&A inflation?

Well I think the regulatory environment is coming in two different places.

One is to the point we have had some unfortunate issues over the last couple of years such as the cereal liner issue.

And to Ron's comments earlier, we are making the supply chain investments to try to protect ourselves from those sorts of issues going forward.

The other regulatory issue is things like restrictions on advertising to kids and so on and the four-agency release that came out late last week.

And as we look at that, we believe we make great foods for consumers.

We believe that cereal is a low-calorie nutrient-dense food form.

People who eat cereal, whether they are kids or adults, have a lower body mass index than people who don't.

And we just quite frankly don't understand why you would want to restrict advertising of what is essentially a very healthy food to people.

So obviously that can have an impact.

Over the last couple of years, we have made significant changes to our food in terms of reducing sugar, reducing salt.

There's been costs associated with that that were borne in our P&L through the cost of goods line.

And we've moved the spend of some of our brand building from more kid targeted to mom targeted; and that has resulted in some in inflation in our SG&A line as you point out in terms of just higher cost of media.

So it is coming through a little bit in our financials.

We are moving with it over time.

I am hoping that we can have a good dialogue here about what really is a good public policy as we go forward.

Alexia Howard, Sanford Bernstein.

Can I ask about your International expansion strategy?

We're a few years beyond the acquisitions you made in Russia and China.

Perhaps you could comment sort of in hindsight what the biggest lessons learned from those moves were and how that shapes your strategy going forward.

I'm thinking particularly with respect to Brazil.

Right, good question, Alexia.

I don't want to talk specifically about any individual market.

If you look back over the last three years or so, we have made a couple acquisitions such as Russia and China and a joint venture with Ulker in Turkey.

And I think we have learned some things from that.

A part of it is to make sure that when we buy businesses, we buy businesses with a pedigree of scale and strong brands, and when we do joint ventures, that we JV with companies like Ulker, companies that have strong positions in-market.

So as we go forward, there are some parts of our geographic footprint that we want to improve the footprint and we will look to those sorts of joint venture type ideas and we will look to continue to make acquisitions.

And the extent to which we make acquisitions, we want to ensure that we're buying a strong business in that market with strong brands.

Great.

Thank you very much; I'll pass it on.

James, we just have time for one more question.

Eric Serotta, Wells Fargo.

Just wondering whether the restoration of incentive comp accruals had an impact on a year-over-year basis in the first quarter; or whether you were accruing in the year ago at normal levels and the adjustments are really later in the year as the results started to disappoint.

Yes, Eric, in the first quarter virtually no impact from the restoration of our incentive compensation accruals.

There will be some impact in the second quarter but much of it really falls into the back half of the year.

And recollect, we communicated in the third quarter the impact of adjusting our incentive compensation accruals downward last year.

So virtually nothing in the first quarter, it's all Q2 through Q4.

Okay.

That was if I remember correctly for the year you were looking for about a 400 basis point drag on internal segment operating profit from restoring IC levels?

I think what we said, Eric, was it was about 6 points of operating profit.

And then we discussed the impact of the cereal recall and we said that was about 2 points of tailwind to 2011, so the net was about 4 points.

Okay, thank you.

My other questions have been asked and answered.

Thank you Eric.

Thank you very much for joining us today.

If you have any follow-up questions, please feel free to call me.

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.