家樂氏 (K) 2011 Q4 法說會逐字稿

Good morning.

Welcome to the Kellogg Company fourth-quarter and full-year 2011 earnings call.

(Operator Instructions) Thank you.

At this time I would like to turn the call over to Simon Burton, Vice President of Investor Relations.

Mr.

Burton, you may begin your conference.

Thank you, Tyrone.

Good morning, everyone, and thank you for joining us today for a review of our full-year and fourth-quarter 2011 results.

I am joined by 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, investments 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, February 6.

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

Now I will turn it over to John.

Thank you, Simon.

The fourth quarter was a strong finish to a difficult year.

We delivered continued strong top-line growth in the quarter and the full year.

In fact, fourth-quarter growth was 6%, and we ended the year with full-year growth of 4.5%, above our long-term targets and in line with guidance, and the growth was broad-based across most geographies and categories.

In addition, our categories continue to perform well, and we gained share in many of them around the world.

However, the results below net sales, while in line with recent guidance, were below our initial expectations and our long-term targets.

As you all know, we increased the scope of our existing supply-chain investment in the third quarter.

This had a significant impact on the fourth-quarter and full-year results, as expected.

In addition, increased investment and reinstated incentive compensation costs also had an impact on full-year results.

We view 2011 and 2012 as transition years, given investment in our supply chain and incremental support of our brands in 2012.

While we don't want to be in the position of lowering guidance, we recognized during the year that we had issues in our supply chain that needed to be addressed, and we know that addressing those issues as quickly as we can is the right thing to do.

We look forward to 2012 and beyond with optimism as we continue this investment, make significant additional investments in future growth, and focus on the long-term drivers of our sustainable growth operating principle.

Now let's turn to slide four, which details these drivers.

Our sustainable growth operating principle, the actions we took in 2011, and the things we are doing in 2012 are all designed to get us back on the path to sustainable growth.

This is a familiar slide to many, but not all, of you.

As you can see, on an ongoing basis, we constantly focus on the consumer and the strength of our brands.

And as we said on the third-quarter conference call, we expect an increase in the investment we will make in brand building in 2012, and we expect significant sales from innovation during the year.

That's on top of posting approximately $800 million in incremental sales from innovation in 2011.

In addition, we have a disciplined approach to overhead and have done a good job with this over the years, and 2012 will be no exception.

Innovation, building on a foundation of consistent brand building, will help improve price and mix, which has an impact on sales and should increase gross profit dollars, and in a year of normalized inflation should also increase gross profit margin.

While gross margin in 2012 is likely to be down slightly because of our expectations for another year of unusually high inflation, we believe that the sustainable growth model is the right way to run our business over the long term.

We recognize that we have to invest this year to help next year and beyond.

Now I will turn it over to Ron for a review of our financial performance.

Thanks, John, and good morning, everyone.

If you will turn to slide five, you'll see, as John mentioned, that we delivered strong internal top-line growth of 6% in the fourth quarter and 4.5% for the full year.

Both results are above our long-term targets, and we are pleased with the Company's continued top-line momentum.

Internal operating profit growth was 20.5% in the fourth quarter, driven primarily by our sales growth.

For the full year, internal operating profit declined by 2.9%.

These results were in line with our guidance.

As we said on our third-quarter earnings call, full-year operating profit was significantly impacted by our supply-chain investments, commodity inflation, and the reinstatement of our incentive compensation costs.

In fact, for the full year, the incentive compensation costs lowered operating profit by approximately 5 points, and the supply-chain investments also impacted operating profit by a similar amount.

So underlying operating profit growth would have been in line with our long-term targets without the impact of these discrete items and lapping the cereal recall from 2010.

Both reported and currency-neutral earnings per share increased by 25% in the fourth quarter.

For the full year, reported earnings per share were up 2.4%, and currency-neutral earnings per share were flat, in line with our guidance.

Now let's turn to slide six for a review of the components of revenue growth.

Volume decreased slightly in the fourth quarter and was flat for the full year, in line with our expectations.

We are happy with our net sales growth this year, including the very strong price/mix growth of 6.6% in the fourth quarter and 4.5% for the full year.

While pricing actions were the primary contributor to our growth, we also saw good mix improvement across our businesses.

Currency translation benefited our full-year results by 2 points, but it reduced our sales growth by 0.6 of a point in the fourth quarter.

And we expect currency to be a headwind in 2012 as well.

So we remain pleased that revenue growth for both the full year and the fourth quarter exceeded our long-term targets, and importantly, we expect continued strong growth in 2012.

Slide seven details gross profit and gross margin results for the fourth quarter and full year 2011.

Fourth-quarter gross profit was $1.2 billion and internal growth was 4%.

For the full year, gross profit was $5.4 billion and internal growth was 1%.

Our gross margin declined by 70 basis points in the quarter to 40.9%.

The supply-chain investments had a considerable impact on our fourth-quarter results, lowering gross margin by more than 100 basis points.

On a full-year basis, gross margin declined by 140 basis points to 41.3%, in line with previous guidance, with supply-chain investments contributing more than half of the decline.

These investments were primarily made across our US network and included costs to add people back into our plants, increased logistics costs, and reduced operating leverage caused by some production lines being down for refurbishment.

Now let's turn to slide eight and our brand building investment for the full year.

As you can see, brand building investment was back-end weighted in 2010, but was much more evenly distributed in 2011.

This led to some unusual comparisons as we progressed through this year.

For the full year, our brand building was essentially flat, due to our decision to reduce investments across Europe.

We make our investments where we see the greatest returns, and quite frankly, we didn't see the returns we wanted in Europe.

What you can't see on this slide is the shift of our spending in recent years to digital media.

This shift has allowed us to partially offset inflation and increase effectiveness at the same time.

We have done a lot of work measuring the optimization of our mix, and we will continue to review our spending plans in 2012.

We expect brand building to increase at a rate at least equal to sales growth in 2012, providing us with funds to support our innovation pipeline and exciting commercial ideas.

Slide nine shows our advertising as a percentage of net sales versus the peer group.

We have the highest investment rate in the peer group.

While this is partially the result of the categories in which we compete, it is also due to our commitment to advertising and brand building as a whole.

We are a branded food company, and we recognize that having strong brands is essential to our success.

Slide 10 details internal operating profit performance for the Company and each of the businesses for both the full year and the fourth quarter.

Operating profit increased by 21% in the quarter, but decreased 3% for the year, driven by supply-chain investments, commodity costs, and the reinstated incentive compensation costs.

North America internal operating profit increased by 18% in the quarter, driven by very strong sales growth and the timing of brand building.

Of course, our ongoing supply-chain investments and reinstatement of incentive compensation had a negative effect on operating profit growth, resulting in a decline of 1% for the full year.

Europe's internal operating profit declined by 11% in the fourth quarter, due in part to a decline in sales that resulted from the continued difficult operating environment in the region.

While we saw some pricing and mix improvements in the region, they were not sufficient to cover commodity cost increases and volume declines.

In Latin America, internal operating profit declined by 10% in the fourth quarter, largely as a result of significant double-digit increases in the level of brand building.

We also increased brand building at a double-digit rate for the full year, driving sales growth of 10% and operating profit growth of 9%, so a great achievement by the team in Latin America.

Internal operating profit in Asia-Pacific increased by 430%, due largely to last year's impairment of assets in China.

Without this impact, operating profit would have increased by approximately 50%, driven by broad-based sales growth.

Now let's turn to slide 11 and cash flow.

Our full-year cash flow was slightly more than $1 billion.

Working capital was higher, due to an increase in receivables.

This increase resulted from strong sales in the quarter, driven by our innovation launches and Special K New Year's Resolution programs.

Our inventories also increased year-over-year to support our new product introductions and maintain appropriate levels of service while working on our supply-chain infrastructure.

Importantly, though, year-end trade inventories were approximately unchanged from last year's level.

Capital spending equaled 4.5% of net sales, due to investment in our supply-chain infrastructure and capacity requirements in certain markets.

And for the full year, we repurchased approximately $800 million in shares, which means we have approximately $650 million of our $2.5 billion three-year program remaining.

Slide 12 shows the history of our improvement in core working capital over the years.

We have gone from a high of almost 12% in 2000 to an industry-leading level of less than 7% today.

We realize that core working capital has increased slightly over the past few years, but we see this as an opportunity for future cash flow improvement in 2012 and future years.

As I mentioned, 2011 was impacted by the timing of our Special K Resolution program and new product introductions.

Slide 13 details the cash we returned to shareholders over the last five years.

As you can see, we returned approximately $6 billion over that time, and the amount has been well balanced over the period between both dividends and share repurchases.

We also used our cash to maintain targeted levels of debt and to allow us to pursue complementary acquisitions.

We remain committed to returning cash to shareholders and are pleased with our performance over the years.

Slide 14 shows the detailed full-year guidance that we always provide on fourth-quarter conference calls.

We are reaffirming the guidance that we provided last quarter.

We expect continued strong revenue growth of between 4% and 5% in 2012.

This growth will be the result of price realization and mix improvements, driven by innovation and supported by increased investment in brand building.

In fact, we continue to expect that annual brand building investment will increase at a rate equal to or greater than the strong rate of revenue growth.

Gross margin will be down slightly.

We anticipate around 7% cost of goods inflation, most of which will be driven by commodity and packaging inflation.

We expect savings from productivity to be slightly above 3%, consistent with our long-term targets.

We continue to expect that operating profit will be flat to up slightly for the full year.

This is the result of our increased brand building investment and IT costs associated with the update of our SAP platform.

We expect interest expense to be slightly favorable versus 2011 and the full-year tax rate to be higher, at approximately 30%.

Currency-neutral earnings per share are expected to increase between 2% and 4%, or to a range between $3.45 and $3.52 per share.

When we ran spot rates a couple of days ago, the analysis suggested that currencies will reduce earnings per share by approximately $0.04.

Obviously, that estimate will change during the year, and we will update you each quarter with our expectations.

We anticipate that cash flow will be in a range between $1.1 billion and $1.2 billion.

Capital spending is expected to be between 4% and 5% of sales, above our long-term run rate of 3% to 4%.

And we plan to finish the remaining $650 million of our current share repurchase program.

So all in all, 2012 will be a year where we continue to set the foundation for future growth through our sustainable growth operating principle.

As John said, we remain committed to this principle and the generation of profitable sales growth and improving cash flow and return on invested capital over time.

We are making good progress and will continue to drive improvement in 2012 and beyond.

While we don't normally provide quarterly guidance, I thought it would be important to remind you of a few items that will impact the first quarter.

As you know, we increased the level of investment in our supply chain in Q3 of 2011, and that investment is continuing.

Second, we had some discrete items that lowered our tax rate several points in the first quarter of 2011.

And finally, the $0.04 of currency impact we expect this year primarily impacts the first half of the year.

And with that, I'll turn it over to John for a review of the individual businesses.

Thanks, Ron.

If you turn to slide 15, you will see some of the recent innovation we have launched.

As you know, every year we launch a significant number of new products across both regions and categories.

For example, this year we have MorningStar Farms Meal Starters, for people lowering their intake of meat.

We have All Bran Breakfast Biscuits in Europe, an on-the-go breakfast for adults, and we have Kashi steamed meals, to name just a few.

This isn't all the innovation we have, but it does give you an idea of the activity we've had and some of the exciting new products we've introduced.

Slide 16 shows a few highlights from the innovation that's been launched recently.

The intention of this slide is to highlight some of the kinds of innovation we've targeted.

For years, we have successfully transferred ideas from one region to another, and we continue to focus on this.

The slide shows just two recent examples -- Mini Max, a version of the US's small Mini-Wheats, which we recently launched in the UK; and Krave, a product launching in the US and Mexico that's been very popular in Europe.

And it's not just the food that travels.

The positioning of Mini Max in the UK -- full and focused children -- is very similar to the US positioning of Mini-Wheats.

A new product for us, Special K Cracker Chips, has been very successful in its first year, and we have two new flavors that have been introduced early in 2012.

In fact, Cracker Chips is one of our most successful cracker innovations.

We've gained share, and sales have far exceeded our expectations.

Gluten-free Rice Krispies is an example of innovation that addresses the trend toward gluten-free products.

This is also something that we successfully focused on the past.

And finally, the natural food channel has posted strong growth over the years, and our Kashi brand is well positioned to capitalize on this.

As a result, we have recently introduced a new version of GOLEAN Crisp!

cereal and other products within this exciting category.

And as we mentioned last quarter, we have a significant amount of innovation planned for 2012, which will build on the good year we had in 2011.

Slide 17 shows the top-line results for Kellogg North America and Kellogg International over the last year.

Both businesses posted strong revenue growth for the full year and in the fourth quarter.

Kellogg North America posted 5% growth for the full year and 7% growth in the fourth quarter.

Kellogg International posted 3% growth for the full year and 5% growth in the fourth quarter.

Now let's look at slide 18 and some more detail regarding the North American business.

The total North American business exceeded our long-term sales growth targets in 2011 and in the fourth quarter.

And as you can see, each of the individual businesses met or exceeded these targets.

Cereal, snacks, and frozen and specialty channels all benefited from good innovation programs, which helped drive the sales growth.

These results are further evidence of the continued underlying strength of our business.

Slide 19 details the performance of the North America retail cereal business.

Fourth-quarter growth was 1%, and full-year growth was 4%.

In conjunction with this, we also gained category share in 2011, and you can see in measured channel data that we've done this while moving our focus away from promotional spending and while growing quality merchandising.

Of course, we remain committed to investment in brand building.

Innovation drives category growth, and we significantly over-indexed in cereal innovation.

New products contributed to the quarterly and full-year growth, including Special K Oats & Honey, Crunchy Nut, and Touch of Fruit Mini-Wheats.

In addition, core products such as Frosted Flakes had a very good year as a result of effective brand-building programs.

We expect the cereal category to be more challenging in 2012.

However, we do have a strong innovation program planned, which includes the introduction of Krave.

And although it is early, initial indications are that Krave is off to a good start.

We also have flavor extensions planned for two innovations from 2011 -- Crunchy Nut and Touch of Fruit Mini-Wheats.

And we also have some packaging innovation underway and brand-building programs planned behind Frosted Flakes, Special K, and Mini-Wheats.

Turning to slide 20 and retail snacks, we closed the year with another quarter of excellent growth.

In fact, the snacks business posted full-year revenue growth of 5%; and crackers, wholesome snacks, and cookies all posted growth.

The cracker business posted double-digit growth in the fourth quarter and high single-digit growth for the full year, and we gained share behind strength in Special K Cracker Chips and Cheez-It.

As I mentioned earlier, Special K Cracker Chips have been one of our most successful new launches ever in this category, and we are excited by the strong start to 2012 posted by both the existing flavors and the two new ones we have just introduced.

In cookies, our focus on the Keebler brand is working.

In fact, the brand had a very good quarter, posting strong sales growth, and the category grew in both the quarter and the full year as well.

And in the wholesome snacks category, growth was good and built on a double-digit comp last year.

Growth in our business was driven by Special K bars, which posted good results in both the fourth quarter and for the full year.

And FiberPlus continues to do well in its third year; and the newest introduction, Caramel Coconut Fudge, is already as large as each of the other three flavors.

Finally, Pop-Tarts again grew share in 2011, behind new introductions such as the popular Mini Crisps.

Now let's turn to slide 21, which shows the performance of our frozen and specialty channels businesses.

The business posted 10% growth for the full year and 14% sales growth in the fourth quarter, lapping 8% growth in the fourth quarter of 2010.

Eggo posted category share gains in 2011, and the category itself continued to grow at mid-single-digit rates.

And we expect the frozen business to continue to grow faster than the Company overall.

We recently launched six new products, including Wafflers, new large Eggo Thick & Fluffy, Simply Eggo, and Eggo Protein Original waffles.

And we also have a strong brand-building program planned for the first quarter.

MorningStar Farms continued to increase its category share as well in 2011, and we have new brand-building planned and innovation being launched in the first quarter.

And we are also launching four SKUs of new Kashi steamed meals.

These meals prepare in minutes and provide the combination of taste and nutrition you would expect from Kashi.

Our specialty channels business posted strong double-digit growth in the fourth quarter, and we increased sales in all of our major customers in 2011.

Slide 22 shows the performance of our international businesses for the quarter and the year.

Total internal sales growth was 5% in the fourth quarter and 3% for the full year.

Europe posted sales declines of 1% for the quarter and the year.

The operating environment in Europe continues to be difficult as a result of economic conditions and competitive activity.

In the UK, our largest business in the region, we have seen high levels of competitive activity in a challenging retail environment.

As we mentioned last quarter, we had too little innovation and support in the UK in recent months; but we have recently launched All Bran Golden Crunch, new flavors of Krave, and Mini Max, as I mentioned earlier.

We have a better pipeline of ideas and support planned for the UK in 2012, although we recognize that it will continue to be a difficult environment.

The rest of Europe also reported mixed results in 2011, with France and Italy posting good growth, and weaker results in some other markets.

Sales growth was good in Russia, where we continue to transition from a nonbranded to a branded product mix.

We remain confident regarding the long-term prospects in Europe and we won't be happy until we return this business to its historical rates of growth.

However, the entire region is being affected by the current economic situation, and although we have stronger plans for 2012, we expect the environment to remain challenging.

In Asia-Pacific, net sales increased 8% in the fourth quarter and 4% for the full year.

In Australia, we gained cereal category share in the fourth quarter, and the customer issue we referenced last quarter has been resolved.

In Asia, sales in the quarter increased at a high single-digit rate, driven by strong growth in India, South Africa, and Korea, and we expect continued strong growth from this region in 2012.

Our Latin American business grew by 10% in 2011 and closed the year with 15% internal sales growth in the fourth quarter.

Investment in brand building increased at a double-digit rate in the fourth quarter behind increased innovation activity and also increased at a double-digit rate for the full year.

The business doubled its rate of innovation in 2011, including the introduction of Krave in Mexico in September, which has had early success and already has more than a point of category share.

In addition, we relaunched the Special K brand across the region, which has also gone well.

We launched new versions of Rice Krispies, Choco Krispis, Froot Loops, Special K bars, and All Bran bars.

While Latin America is always a volatile economic environment, we are confident in our growth plans for the region.

Now let's turn to slide 23.

We are running the business the right way for the long term.

We continue to invest in our brands and bring exciting innovation to consumers.

We have invested back in our supply chain to ensure that we have the right supply chain for today and the future.

We remain committed to our proven operating principles and our strong businesses in good categories.

And finally, we also remain committed to our long-term targets of 3% to 4% internal sales growth, 4% to 6% internal operating profit growth, and 7% to 9% currency-neutral earnings per share growth.

I believe that we are doing the right things for the future of the Company, things that are driving strong sales growth now and that will drive sustainable performance in the years to come.

And with that, I will open it up for questions.

(Operator Instructions) Ken Goldman, JPMorgan.

Good morning.

I wanted to jump into the lower SG&A margin a bit.

You cited lower brand building, and that makes sense.

But wasn't this an issue last quarter, too?

So, I'm curious what the other drivers were beside that and the lapping of the China impairment costs, of course, to the lower SG&A margin.

If you could walk us through some of the magnitude there, it would be helpful.

And maybe address some of the sustainability if that margin has declined, too?

Thanks.

Yes, Ken, it's Ron.

Really, the primary driver of the decline in SG&A margin is the strong sales growth that we had in the quarter.

We did say that our brand building timed a bit differently over the course of 2012 versus 2011.

Quite frankly, that was relatively small in the fourth quarter.

We were down around $10 million on brand building, 30 basis points of that SG&A margin impact.

So really it's a function of a strong sales growth, Ken.

Just as a quick follow-up, you've had strong sales growth in the past and we haven't seen this kind of drop in SG&A.

So is there something different, maybe, this quarter that would've driven it down?

I understand that the higher sales and the higher volumes will, of course, benefit your fixed cost leverage.

But I was just a little surprised to see the magnitude there this time.

There isn't, Ken.

It's really the strong sales growth.

There were no other usual or unique items.

You mentioned the China impairment, but frankly, our overhead is relatively consistent year over year.

Great.

Thank you.

Scott Mushkin, Jeffries.

Thanks for taking my questions.

I just wanted to -- our first blush at this Nielsen data was pretty poor, at least in the measured channel, as we look at it, just generally speaking; we haven't gotten into a lot of details.

And I just want to understand what your thought process is.

We've seen some comments from other people about a lot of channel shifting, but it seems like it can't all be channel shifting.

So I wanted to see what your thoughts are on what's going on in January?

And do you think the consumer is really taking a step back in the food channel, or is there something else going on?

And then my second question -- really, you talked a lot about your new product development, and I look forward to it.

But I was wondering if you could maybe delve into, a little bit, your acquisition strategy, if things have changed in your thought process there, particularly maybe acquiring some of these healthier brands.

Thanks, Scott.

Firstly, on the measured data, we are seeing a larger gap between measured data and our assessment of how some of the categories are performing.

I will give you one example, US cereal.

The measured data would suggest something like 1% to 2% category growth in the fourth quarter, and we saw more like 2% to 3%.

So I think you need to add roughly 2 points of growth to the measured data to get to the non-measured or total category performance.

So I would suggest some channel shifting going on within the environment.

Secondly, on acquisition strategy, we continue to look at acquisitions around the world, bolt-on acquisitions.

They can be in the area of healthier brands like Bear Naked, or they can be in the area of snacks.

They can be international.

So we continue to look, and it is something that we are always focused on.

And as you look forward, to follow up a little bit on how you deploy capital, how do you -- as you look at this, how do you think acquisitions play into it?

Our uses of cash, Scott, are very consistent with what we've done in the past.

Certainly, we recognize the importance of our dividend.

I talked about the share repurchase program and repurchasing approximately $650 million of shares in 2012, so basically the remainder of our program.

And then we will look at complementary acquisitions.

So it's really a combination of those three.

Scott, in the past, when we've done small acquisitions, it has tended to be a small increase in our debt.

I think if we did a larger acquisition, that might look at the share buyback piece.

But in general, it's really just in addition to our cash returns.

Perfect, and thanks for taking my questions.

Ed Aaron, RBC Capital Markets.

John, did I hear you right, that -- I think you said that you expect the cereal category to be a little bit more difficult than 2012 than it was in 2011?

If so, is that more of a consumer concern, or is it more related to your expectations for what the promotional environment is going to look like this year?

You know, Ed, I think the cereal category is always an intensely competitive category.

I think it's a good long-term category.

It's on-trend from a health and wellness nutrition perspective, aging population, out-of-breakfast snacking, and so on.

But this really is a sort of a low single digit growth type category.

We are expecting that sort of performance in 2012 as well.

I think it's also worth pointing out that we have been moving some of our promoted price points in the category, so in the fourth quarter we increased our promoted price points on our medium-size kid brands from a $1.99 to $2.49, and on Special K and Rice Krispie treats, or Rice Krispies, from $2.49 to $2.99.

And as we've done that, we have seen some volume loss as consumers get used to the new price points.

And I expect that to continue, probably, into the first quarter.

So I think that's more where we are seeing just some of the impact of the pricing go through the category and the consumers getting used to the new price points.

Andrew Lazar, Barclays Capital.

John and Ron, you talked about gross margin likely being down a bit in 2012 for the year.

Just trying to get a better sense of the drivers there.

You've got, probably, 4% to 5% pricing.

You talk about productivity of 3%, which should be, I would think, more than enough to offset what is still going to be clearly an inflationary year for you.

Are there other things?

Is it some additional supply-chain spending working through?

Maybe just a little of the buckets that are impacting your margin for the year would be helpful.

Sure, Andrew.

This is Ron.

In terms of our cost inflation, we said it was around 7% and cost savings around 3%.

So think of it at approximately a net 4% of inflation.

We talked about top line being up 4% to 5% and the combination of price and mix.

And it's probably somewhere in the neighborhood of 75% price, 25% mix.

So when you rattle all that through, our gross profit dollars are growing slightly lower than our sales growth, which is driving the margin down.

In terms of the supply-chain investments, Andrew, as we said, very consistent level of spending in 2012 as we had in 2011.

Got it.

Okay; thank you very much.

David Driscoll, Citi.

Good morning, everyone.

I wanted to follow up on SG&A, but my question will be a little bit more detailed.

So during the first three quarters of 2011, SG&A costs rose by 8%; in the fourth quarter declined by 0.4%, and that's after backing out the China impairment charge in 4Q '10.

So I'm trying to make the numbers all apples to apples.

I realize that incentive comp was up about $100 million, and on a dollar basis that seems to leave about $100 million of increase year on year in SG&A for the full year to be explained.

So, Ron, can you try to tackle the question in that form?

And then there will be a follow-on related to how to think about 2012.

In terms of our SG&A, it being up in the front part of the year, remember we discussed the timing of brand building.

In 2010, our brand building was a little bit soft in the front half, and in 2011 our brand building was up in the front half versus 2010.

So that's certainly a factor.

You talked a little bit about the incentive compensation.

That was spread more over the back end of the year.

So really it was a function of those two items, and then just general overhead inflation, very consistent with our expectations of growing our overhead at half the rate of sales growth.

And then in 2012, would you -- obviously, we don't have the incentive comp issue.

But would you expect the rate of growth underlying that -- you made the explicit comments on brand building.

Leaving brand building out of it, the rest of the bucket in SG&A, would you expect it to grow consistent with what we saw in 2011?

We still are very disciplined on overhead, and recall our operating principle on overhead growth is to grow it at half the rate of sales growth.

So you would see kind of that level of growth flowing through our overhead.

And then we said we were making a meaningful step up in brand building.

Can you quantify in $100 million that you are spending on supply chain, can you quantify how much of that is related to asset write-downs in 2011?

Same question for 2012?

There would not be a lot of asset write-down, necessarily, within that $100 million.

We do have some money tied up in upfront costs, David, but the $100 million is a combination of ongoing and a small amount of one-time costs, and then depreciation related to the step up in capital spending.

It's John here.

If I could just jump in on that, I think it's important on the supply chain just to step back here a bit.

We've completed our evaluation across our network of the things that we need to do.

We're making the right decisions here to build the foundation for the long term.

In 2011, a portion of that $100 million was additional people in the plants and additional depreciation from a step up in capital, as well as some one-time type costs as we did some changes in our network.

In 2012, we now have a full year of those people costs.

We have another step up in depreciation from the additional capital, and we have a small amount of one-time costs, if you like, or unusual costs.

As we go forward, we see that $100 million as a step up in our cost structure.

So we don't expect that to come back out again.

However, of course, we're always looking to be more efficient in our supply chain.

If we can find a way to decrease those costs over time, we will.

But we're confident, also, that these investments is will generate a return for us long term, because these people in our plants will help us identify additional different productivity savings in the future.

That was very helpful.

I appreciate that.

I'll pass it on.

Thank you.

Chris Growe, Stifel Nicolaus.

Good morning, everyone.

I just had two questions for you.

I wanted to ask about the Europe, or really, the UK outlook.

And just, again, it sounds like you pulled back on brand building there; probably the appropriate move.

I'm just curious what you see there for, say, 2012 with the category and with your own performance.

We've had I think some new products launch and that kind of thing in the category.

Chris, Europe is our most difficult region as a company.

And really, it breaks down into three different businesses.

First, Russia -- and Russia grew high single digits in 2011.

I think we are building a stronger business there over time.

It's continuing to transition from a bulk or nonbranded business to a branded business.

And some of that happened in the fourth quarter.

In fact, you saw some volume decline in Europe in the fourth quarter.

About half of that volume decline was actually some nonbranded business that we're walking away from in Russia.

On the continent, we saw improvement in the continent as we went through the year.

But then as we got into the back part of the year, the continent started to go a little soft as well.

So we're seeing some growth in France and Italy, but the remainder is mixed.

I think the difficult economic environment and the state of the euro zone is weighing on our business in the continent.

In the UK, we have better plans in place for 2012.

We have a new General Manager; he started January 1.

We actually managed to hold share in cereal in the fourth quarter, but it is going to be a difficult environment, with a tough retail environment, a very competitive environment, and a consumer under pressure.

As we look at Europe in 2012, we are hoping to see slight top-line growth in Europe, and hopefully we can hold operating profits stable year on year, but there may even be a slight decline in operating profit, just recognizing the difficulty of the environment.

Are you increasing promotion in, say, the UK?

Sounds like your toughest market.

Is that a factor in your revenue assumptions for 2012 for Europe?

We did increase a little bit of spend in promotional activity in the fourth quarter to help stabilize the share.

What is interesting is in some of these markets in Europe, our share of voice actually jumped to 75% to 80%, as some of our competitors have pulled back dramatically on brand building and put their spend more into allowances.

That is not the game that we like to play.

Obviously, we have to keep watching our plans in Europe, and we will have to take the appropriate action as we go through the year.

Okay.

And just a final or a quick one would be the US cereal inventories, and where they stand today, or generally how you feel about those inventories today?

We feel good about the inventories.

They are at a very similar level from a trade inventory perspective as last year.

And so it's a pretty good position.

Ken Zaslow, BMO Capital.

Good morning, everyone.

Can you just -- you touched on it a little bit, but can you talk about the progress of the supply-chain investments?

Have you found any surprises, either to the upside or the downside, in how you were allocating the capital?

And can you also talk about, again, the progress of where you are and what you're spending on right now, and what you will be progressively spending on throughout the year?

Well, we're tracking along right in line with our expectations on the supply chain.

We are executing against the plan that we developed in the back part of last year.

I wouldn't say there's been any major surprises one way or the other.

And that plan includes adding people back into some of the facilities, additional capital and depreciation related to that, and some movement of parts around the plants to do some things we want to do in these plans.

So no real changes there.

And in terms of the timeframe, what have you done now and then what do you expect to do in the back half in terms of, maybe, a little bit more specifics, if possible?

Well, maybe I'll go to the weighting of investment over the course of the year.

I think we'd expect that investment to be relatively consistent or even over the course of the year, versus it being somewhat backend weighted in 2011.

Tim Ramey, D.A.

Davidson.

Good morning.

The performance in 2011, 2012 reminds me a bit of back in '98, '99, when volume to value was kind of introduced as a concept, and it worked, then, longer term.

I know it's always worked for Kellogg.

But your guidance for '12 sounds like it implies, maybe, flat to slightly down volume.

When do you think we will be able to start to see more tonnage increases?

And if you could give us any kind of color on what the regional tonnage outlook is?

Do you expect volume to be down in Europe, for instance?

I agree with you that if you go back to '98, '99, it is similar to that timeframe right now for the Kellogg Company.

I think we are back on our sustainable -- we're trying to get back on our sustainable growth model.

I think if you look in 2011, we had strong underlying sales growth.

And if you try to get to the true earnings power of the Company, I believe it's a stronger than it appears on the surface.

So if you adjust 2011 for the incentive compensation, you've got 5 points of headwind; you adjust for the supply-chain changes we've made, then another 5 points of headwind; and then you adjust, say, for lapping the recall last year.

You try to put all that together, I think you'll see the core earnings power of the Company is at mid single-digit operating profit growth.

I think as we go forward here, we will continue to play the mix game element of the sustainable growth model.

So it's not about just the focus on volume.

It's about driving at top line and up weighting the consumer, or driving the consumer to a higher value added products, which we are seeing with the launch of Crunchy Nut, Fiber Plus, and Krave in the first quarter of this year.

So I think we are on that path.

In terms of volume itself, I believe the volume growth is being held back by the level of pricing that's being required to take to offset inflation.

Unfortunately, I think we need to take that level of pricing.

We need to protect the economics of the business first and foremost so we can invest back in brand building and drive the business the right way.

Hopefully we get a period here of more normalized inflation.

We probably then have less pricing and have a better balance of volume, price, and mix to drive the top line.

On the regional volume costs, I don't want to give guidance at a regional level.

I think it's fair to say that volume is likely to be under pressure in Europe in 2012.

Eric Katzman, Deutsche Bank.

Good morning.

Simon is a little more physically intimidating than Katherine, so I'll try to keep my questions to the limited number.

I guess first, just more specifically on upfront charges, what do you expect for 2012?

Our upfront costs, Eric, in 2012 will be very consistent with 2011.

Okay.

And as usual, I assume that you are including those in your dollar earnings guidance?

Absolutely, we are.

And then maybe this goes back to Ken's question, but on the segment results, looking back over the last, whatever, 10 to 15 years, the fourth-quarter profit has been anywhere -- in North America, anywhere from $50 million to $100 million lower sequentially.

And I have asked about this in the past, you've always said, well, it's kind of the way we accrue things, etc., etc.

But with the supply-chain investments and -- I'm just kind of very surprised that the sequential profit in North America was so solid.

Was there, like, those recall insurance proceeds in there, or -- because it just doesn't seem that because you had some sales lift, which again, isn't that different versus history, that you would just have such solid sequential profits when history has suggested the exact opposite, even excluding all the spending.

Eric, in terms of the performance in North America, and really the Company as a whole, the fourth-quarter results were primarily a function of that strong sales growth and really good price realization in that quarter as well.

Eric, I think if you look at the SG&A absolute dollar spend year on year, it didn't change very much.

The sales line comes through the top and just rolls through the P&L.

So our economics are very top line sensitive.

We can drive the top line.

We get very good operating leverage and expansion.

Yes, okay.

And then just as last follow-up, I was a little bit surprised at your response to the M&A question.

You brought in a lot of new people.

You are literally fixing some plant floors.

The last couple of acquisitions have been a real struggle.

So are you kind of suggesting that you're comfortable enough to make a deal tomorrow?

Or was I really more of a long-term type of response?

Eric, I think we're always looking at acquisitions.

I think we've had a reasonably good track record over the years of acquisitions.

So I'm not trying to signal anything here to you.

I'm just saying it's always something that we are constantly reviewing and looking at in the marketplace.

Okay.

I'll pass it on.

Thanks.

Alexia Howard, Sanford Bernstein.

Good morning, everyone.

Can I ask about the emergence of alternative channels?

And I'm thinking, particularly, very fast-growing areas like the Dollar Store channel.

It seems to me that in the past, a lot of the growth was coming from the Wal-Mart supercenters, and we've heard number of companies, or a couple of companies, recently saying they're moving more towards third-party distribution models.

Could you basically just give us some commentary about how this change in the retail environment is changing your operations from a manufacturing and supply-chain perspective?

Is it a big burden on the Company as it changes?

We are seeing growth, Alexia, and channels like dollar and club.

And I think it is a consumer looking for value, whether it's an absolute price point in dollar or price per pound and club.

I don't think it's impacting our go-to-market strategy.

We try to keep our margins relatively stable across the channels, if you look at the total cost to serve of that channel.

And we have very good execution capabilities in those channels already.

Okay.

Thank you very much.

I'll pass it on in the interest of time.

Eric Serotta, Wells Fargo.

Thanks.

Most of my questions have been answered, but wanted to follow up on Tim's question with respect to volumes.

This is basically the third year in a row of kind of flat to down volumes.

When you look at 2011 and the 2012 outlook, how much did the volume deleveraging have an impact on your gross and operating margins?

If you could sort of -- I know you're not going to give us a specific number, but if you could help dimensionalize that, that would be real helpful.

Yes, Eric, this is Ron.

Certainly, running volume through our manufacturing plants has an impact on operating leverage.

But we try to manage that cost structure effectively, even when volumes are down.

So I'd rather not quantify the impact of volume absorption across our business.

And to put our volume into context, 2011, our volume is essentially flat.

If we back out some of the abnormal items such as China, volume (technical difficulty), which is a business as we subsequently sold, and some volume loss in Russia as we move away from nonbranded business in that market, our volume as a company actually would be up slightly.

Okay.

And then as you look to 2012, are you anticipating a negative impact from volume deleveraging?

I think it's reasonable to expect volume again to be under pressure, flattish, maybe down slightly in 2012, reflecting the level of pricing we've had to take.

And obviously we've put that thinking into our cost structure as we run our plants.

But we are not talking about dramatic volume declines here.

Okay, that's helpful.

I'll pass it on in the interest of time.

Jonathan Feeney, Janney Capital Markets.

Good morning.

John, thinking back, I thought Tim made a good point about volume devalue.

In a more pointed way, your stacked volume since Q4 2007 -- I'm just looking at the disclosed numbers here -- is down about 11.4%, it looks like, and on a consolidated basis it's down about 4%.

So when we think about the next four years, I see how volume to value might make sense, and so you're -- Ron mentioned you're short of shifting ad spend out of some markets and into others to where there is return.

What you saw, it seemed to me, in early 2000s, though, was an increase in advertising spending.

Of course, while coming off high levels, you seem to be decreasing advertising spending at the moment.

So I just want to understand how you think about that ROI.

And if that's in fact the plan, do we get -- where are relative ads spend levels appropriate to the current opportunity set that you see?

Thanks.

Yes, as you know, our business responds to innovation and brand building, and we are increasing our brand building and our advertising meaningfully in 2012.

Certainly we'd expect that to have an impact on volume, but with the level of price that we are putting into the marketplace, we think our volume, as John said, is more likely to be flat to slightly down.

I think as our position on brand building is looking to increase it in 2012, and we think that's a part of getting us back on our sustainable growth model.

And that in time should help us drive a better balance between volume, price, and mix.

Tyrone, I think we've got time for one more question.

David Palmer, UBS.

Just a follow-up, another follow-up, on your US cereal comment, John, being difficult, and you mentioned that pricing is hurting the category and the promoted price points in particular are going up.

And that makes sense; that was going to probably hurt promoted volume in the near term.

But we've seen cereal do well during periods of inflation before and pricing go through in this category, because it's still pretty cheap eats, particularly for the food value that it gives Americans.

It tends to do well during these periods of inflation.

And this time, it just doesn't feel like the momentum is, there.

It's not all that great, even when you look at the behavior of the companies, like, they doesn't have this flywheel of innovation and increased spending behind it, where the momentum is there and you're feeding this animal that is very responsive to that spending.

Is that comment fair, John?

That this category doesn't seem to have the momentum yet?

Well, I think, David, the category's doing reasonably well in a difficult environment.

In the fourth quarter, we think the category up something like 2% to 3%, for the year up 1% to 2%.

When you take into account all of the channels, not just the measured channels, which unfortunately lack some of the growth that we're seeing elsewhere in the category.

And we've taken a number of price increases in US cereal, and our base sales are actually hanging together reasonably well.

I think when you move your promoted price points, you're going have a little bit more of an impact in the short term as the consumers get used to that.

I think that's what we're seeing in the case of our business in the fourth quarter, and probably into the first quarter of this year.

So I think if you step back from the category, it is a good category.

It is driven by innovation and by brand building.

I believe that the category growth is determined by the combination of what all the manufacturers do.

We are driving innovation hard.

We're driving brand building.

I think some other players are talking about doing similar things.

And I expect that in combination to grow the category.

I don't see it as a zero-sum game.

Okay, everyone.

Thanks for much for participating today, and we'll be available afterwards for calls as usual.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.

Have a wonderful day.