家樂氏 (K) 2012 Q2 法說會逐字稿

Good morning.

Welcome to the Kellogg Company second-quarter 2012 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 Simon Burton, Kellogg Company Vice President of Investor Relations.

Mr. Burton, you may begin your conference.

Thanks, Karen.

Good morning and thank you for joining us today for a review of our second-quarter 2012 results.

I am joined here by John Bryant, our President and CEO; Ron Dissinger, our Chief Financial Officer; and Todd Penegor, President of our US Snacks business.

As we move from being a global cereal company to being a global cereal and snacks company, our intention is to highlight different business units periodically.

Todd is here to discuss our US Snacks business in more detail.

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

And as you are aware, certain statements made today, such as projections for Kellogg Company's future performance, including earnings per share, net sales, margin, operating profit, interest expense, tax rate, cash flow, brand-building, upfront costs, investments and inflation, are forward-looking statements.

Actual results could be materially different from those projected.

So 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, August 6. The call will also be available via webcast which will be archived for at least 90 days.

And with that I will turn it over to John.

Thanks, Simon, and good morning everyone.

We are pleased that results we announced this morning are in-line with our expectations and the guidance we gave last quarter.

In fact, total internal revenue growth for the quarter was in the middle of the 2% to 3% range we expect for the full year and represented an improvement from the results we posted in the first quarter.

Importantly, we saw improvement in overall revenue trends in both the North American and International businesses, with the North American business posting both good revenue and operating profit growth.

So we do feel much better about this performance and some of the traction we have achieved from actions taken in recent months.

I will speak more about this later.

The operating profit results also improved in the second quarter, although less dramatically than sales.

As we told you last quarter, we expected that Europe's profit would decline at about the same rate in the second quarter as it did in the first quarter; this turned out to be the case.

As you know, economic conditions in Europe continue to be difficult, but we are optimistic that we have begun to take the right actions across the region and that we will see further improvement.

So we have additional visibility because of the results we posted in the second quarter and we are maintaining our outlook for the full year across the P&L.

We are actively executing the strategy we outlined for you earlier this year.

We are a global cereal and a US snack company.

We are building a global snack business, and the addition of Pringles is an important part of that.

So let me talk a bit more about Pringles and slide 4. The integration is progressing well.

Just as a reminder, this was a carveout, not a straight acquisition, and was far more complicated as a result.

So we're pleased the transition is going so smoothly.

Our Pringles team and the existing Kellogg teams are working very well together, and we anticipate that we will be able to discontinue our transition services with Procter & Gamble on schedule.

We now have improved visibility into both the company's operations and the annual synergies that we expect to realize.

We remain very comfortable that ongoing annual synergies will be in the $50 million to $75 million range we discussed with you previously.

And, finally, we are seeing good sales early in the third quarter and are starting to leverage Pringles through cross-display and marketing activities.

It is also important to note that our customers around the world have a lot of confidence in the brand and, just like us, are optimistic regarding its potential.

And with that I will turn it over to Ron.

Thanks, John, and good morning everyone.

If you will turn to slide 5 you will see our quarterly and year-to-date financial summary.

We posted reported revenue growth of 2.6% in the quarter, and internal sales excluding the impact of Pringles, divestitures and foreign exchange increased by 2.3%.

And that is on top of a very strong 6% internal growth in the second quarter of last year.

Year-to-date internal revenue growth was 1.1%, driven by the improved trends we saw in both North America and Europe in the second quarter.

Internal operating profit decreased by 5% in the quarter against a difficult comparison of 8% last year.

The timing of our planned investment in supply chain lowered overall operating profit by 5 points, so operating profit would have been flat without this impact.

You will remember that our investments in 2012 will be at the same level as in 2011; however, the shape is different given that last year's investment was skewed much more to the back-half.

Also, as John mentioned, Europe's results contributed to the decline as did continued high commodity costs.

Reported earnings per share were $0.84 in the second quarter, in-line with our expectations, including $0.07 of transaction and integration costs associated with the acquisition of Pringles.

We also saw below-the-line favorability of $0.02 per share, which I will talk about in more detail later.

Slide 6 shows the details of second-quarter sales growth.

Reported sales increased by 2.6% and internal sales increased by 2.3%.

While volumes declined by 0.6 points, we continue to see favorable results in price and mix at almost 3 points.

Importantly, sales increased in the quarter across all three categories -- cereal, snacks and our other category, which is primarily frozen foods and some specialty channels business.

Pringles added 3.5 points to overall reported sales growth as a result of the sales we picked up in June.

And, finally, currency decreased overall growth by 3 points.

And now if you turn to slide 7 we will look at our gross profit performance.

Gross profit was $1.4 billion in the second quarter and gross margin declined by 190 basis points.

Commodity costs increased in the quarter, but productivity, savings and pricing helped offset the impact.

The key drivers of the margin decline were the timing of investments in our supply chain and lower production as we reduced levels of inventory.

These two items accounted for more than half the decline we saw in gross margin.

And the addition of the Pringles business also reduced our reported gross margin.

As we have said in the past, however, we intend to improve the margins at Pringles over time.

It is worth noting that gross profit dollars would have been flat if we exclude the timing for the supply chain investments.

Finally, as you are aware, some commodity prices have increased significantly over the past couple of months due to weather conditions.

We are now essentially fully covered on food and packaging inputs for the year, and we have included the impact of recent inflation in our outlook for the year.

Slide 8 shows details of our investment in brand-building over the last 18 months.

Investment was lower in the quarter, although this was the result of comparisons to strong investments the first-half of last year, which supported our innovation and marketing programs.

This year we have a lot of activity planned in the second-half to support commercial activities and innovation.

In addition, we are a proud sponsor of the Olympics.

So you can appreciate that our investment will be skewed to the second-half of the year.

As you know, investment in brand-building is one of the cornerstones of our operating principles.

We are committed to this investment, which includes effective programs and more efficient spending, specifically through increased use of digital media.

Importantly, even including these efficiencies we still expect to increase brand-building for the whole Company at a rate equal to or greater than sales growth for the full year.

Slide 9 shows the internal operating performance for each of the regions.

Total Company internal operating profit decreased by 5% in the quarter.

As I mentioned earlier, the year-over-year impact of our investment in supply chain accounted for all of the decline.

As a reminder, we stepped up our investment in supply chain by $100 million last year and held this investment in 2012.

We are getting a good return from this investment and our supply chain has stabilized.

So while the timing of the investments has been a significant headwind in the first-half of the year it will be a tailwind in the second-half.

North America's internal operating profit increased by more than 3% in the quarter.

This was due to strong sales growth, including volume, price and mix improvements.

It is also worth noting that we achieved this growth despite the headwind from the timing of the supply chain investments I mentioned earlier.

As we expected, Europe's internal operating profit declined by 20% in the quarter.

Half of this decline was the result of lower production to reduce inventory levels.

The remainder was due to lower sales and consumer pressures across the region.

Europe has been a very difficult operating environment for us.

Internal operating profit in Latin America decreased by approximately 15% in the second quarter.

While sales growth was strong, operating profit declined due to a one-time benefit from an asset sale last year and a very strong double-digit increase in brand-building in the quarter this year.

In fact, these two items accounted for all of the decline in operating profit.

And, finally, internal operating profit in Asia-Pacific decreased by almost 32%, although this was only $8 million.

This was primarily the result of the continued difficult operating environment in Australia, including reductions in retailer inventories.

However, we did see very early signs of improvement in the category and in our performance in Australia late in the quarter.

Now let's turn to slide 10 and a discussion of cash flow.

Year-to-date cash flow was approximately $525 million, an increase of more than $120 million versus last year.

As we said in the first quarter, this includes much of the working capital benefit we expected from Pringles.

And we remain focused on managing working capital and made progress in reducing our inventories during the second quarter.

Year-to-date capital spending was $155 million or 2.2% of sales.

Full-year capital spending is still expected to be in the range of 4% to 5% of sales, but it is more second-half weighted and includes investment in Pringles.

And we purchased no shares during the quarter.

As we have said, we intend to pay down debt to strengthen our balance sheet.

Slide 11 shows details of our full-year guidance for 2012.

As we have said previously, internal sales and operating profit exclude the impact of Pringles, but our earnings per share guidance includes the expected accretion and one-time costs related to the acquisition.

So as you can see on the chart, we have maintained our guidance for the year.

As a result, we continue to expect internal net sales growth to be between 2% and 3%.

This includes the impact of good price and mix growth, partially offset by a decline in volume.

We also expect that reported gross margin will be down more than 100 basis points for the year, including the impact of a lower-margin structure for Pringles.

Internal gross margin will decline less than 100 basis points, consistent with our previous expectations.

Our expectations for total cost of goods inflation, including commodity inflation, remain at approximately 7%.

And, again, we continue to expect that our supply chain will deliver good productivity savings of slightly greater than 3%, in-line with our long-term expectations.

Our estimate is that full-year internal operating profit will be lower by 2% to 4%, including the increase in investment in brand-building equal to or greater than sales growth.

And our guidance for earnings per share remains consistent, although some of the puts and takes have changed.

Let's turn to slide 12 to discuss changes to some of the components of our guidance.

You'll remember that last quarter we had a one-time $0.05 benefit from transaction-related hedging.

This quarter we had a couple of one-time items also, including that benefit reversing itself that combined to a $0.02 negative impact.

But this was more than offset by a lower tax rate that added approximately $0.04 of benefit.

So we netted a positive $0.02 impact from these one-time items in the quarter.

All of these items are related to the Pringles acquisition.

As a result of a tax benefit this quarter we now expect our full-year effective tax rate to be approximately 29%.

Expectations for currency translation got $0.02 worse and now stand at approximately $0.06 of negative impact for the year.

We have outlined all of this information on the slide.

So as a result our estimate for full-year earnings per share remains in the $3.18 to $3.30 range.

This includes a net $0.07 to $0.10 headwind of one-time items and a $0.06 headwind from currency.

And cash flow is still expected to be in the $1.1 billion to $1.2 billion range.

Finally, you can see from the full-year guidance that we are expecting continued improvement and much better results in the second-half of the year.

This should be a gradual improvement though as we progress through the remainder of the year.

And with that, I will turn it back to John.

Thanks, Ron.

Slide 13 shows the internal revenue growth posted by Kellogg North America and Kellogg International in the quarter.

Both results represent a significant improvement from the performance in the first quarter.

Revenue growth in North America was 4%.

Sales declined by 1% in our International business mostly due to the results we expected in Europe.

Slide 14 shows the US business broken out by segment.

As you can see, each of the segments posted growth in the quarter.

US Morning Foods and Kashi posted growth of 1.2%.

Cereal sales and share declined slightly as we were lapping double-digit sales growth and almost 1.5 points of share gains in the second quarter of last year.

So the performance was good considering that we proactively chose to lower incremental spending during the period.

And you have all seen that we have posted good share growth in more recent data.

The contribution from innovation has also been good, with Krave cereal continuing to do very well at 1 share point.

The Pop-Tarts business had a great quarter, posting a strong sales growth.

And we had a very favorable response to the reintroduction of the Crazy Good advertising campaign.

And the Kashi business posted good sales growth, including the Bear Naked brand, which contributed -- which continued to post very strong growth as a result of innovation and increased levels of distribution.

The US Specialty segment posted internal revenue growth of 6.3%.

This was a result of strong innovation, particularly Special K Cracker Chips, which are off to a great start in these channels.

Also, we saw double-digit growth and good share performance in the convenience channel and increased sales of frozen foods.

The North America Other segment, which is comprised of the Frozen Food and Canadian businesses, also had a great quarter.

Frozen Foods had another strong quarter, posting high-single-digit revenue growth off a difficult comparison.

In fact, our Frozen Food business is the fastest growing large frozen food business in the US over the last 52-week period, as measured by Nielsen.

The innovation we have launched is doing well in all the categories.

And Eggo Thick & Fluffy waffles posted strong double-digit growth in their second year.

And we have got Special K flatbread breakfast sandwiches and Granola Eggo waffles planned for introduction.

Veggie foods is responding to activity that started late in the quarter and we are seeing strong growth in recent measured channel data.

And the Canadian business also posted strong revenue growth.

Innovations are doing well in Canada, especially Special K Cracker Chips, which are off to a very strong start.

Now if you will turn to slide 15 you will see just some of the innovation that has either been launched this year or that will be launched in the second-half.

The purpose of this is to give you some idea of the magnitude of the activity and a look at some of the great new products that we've launched.

Remember that corporate-wide we launched approximately $600 million of innovation in 2010.

This grew to approximately $800 million in 2011.

And we are on course to introduce innovation of $900 million in 2012.

That is a lot of activity, but we know that this is essential to our future growth.

And now I am pleased to introduce Todd Penegor, the President of our US Snacks business.

As Simon said at the beginning of the call, we intend to highlight one business on these calls from time to time.

Given the acquisition of Pringles and the importance of snacks to our plans for future growth, we want to take this opportunity to have Todd talk more about our single largest business unit, US Snacks.

Thanks, John.

First of all, let's take a look at slide 17 and a discussion of the Snacks business performance in the second quarter.

As you can see, we posted very good internal sales growth of 4.1%, and this was building on strong mid-single-digit growth in the second quarter of last year.

The cracker category increased at a mid-single-digit rate in all channel data, and we increased category share.

As in previous quarters, both Cheez-It and Special K Crackers did very well in the quarter, and we are very excited about the introduction of Special K Popcorn Chips in August.

These new SKUs will build on the current Special K franchise, and we are confident this off-cycle innovation will continue to drive our business.

The cookie business posted low-single-digit growth on good performance from the focus on the core Keebler brands.

Fudge Shoppe, Chips Deluxe, and Sandies all did well, and in combination posted sales growth that exceeded the low-single-digit category growth.

Our wholesome snack business also had a very good quarter.

Sales of Special K Bars, Nutri-Grain Bars, and Rice Krispies Treats all grew in the quarter.

You'll remember that our wholesome snack innovation for the year is much more skewed to the second-half of the year, and we are starting to see some of the benefit already.

Although it is early, Special K Pastry Crisps are off to a good start and FiberPlus Nutty Delights are now being activated.

Slide 19 shows the scale of, and our share in, the four main categories in which we compete in the US.

As you can see, these are big categories which add almost $20 billion a year in sales, and they're growing too.

So although we are a strong number two in wholesome snack and cracker categories, and a more distant number two in cookies and savory snacks, we see a lot of potential in all these businesses.

This means that we have to embrace our position and act as a hungry number two.

And it also means that we have to drive our execution and innovation that much harder, and we have.

We have done a very good job with both over the years.

I will talk about some of these initiatives in a little more detail in a few minutes.

So, as I mentioned, our categories have been growing more than 4% a year.

And I like to think that the hard work we put in by the entire team has meant that Kellogg has helped drive part of this growth.

A big part of our success is due to the strength of our brands.

And if you turn to slide 21 you will see some detail regarding one of the most important of those brands.

Cheez-It has been a multi-year success story for us.

We have had some great close in innovation over the years, and have worked hard to keep the brand fresh.

The purchase rate on Cheez-It is among the highest of our large brands.

And you can see on the chart the impressive growth posted as a result over the last 15 years.

In fact, this brand increased sales every year over this 15-year period, and the compound annual growth rate was more than 9%, which is really impressive.

Recently Cheez-It scored highly in a study of popular savory snack brands.

This survey focused on a broad array of benefits and product attributes valued by consumers, and included some of the largest savory snack brands in the country.

Cheez-It is a cracker and is sold in the cracker aisle; however, consumers think of it as it as a savory snack and they consume it like one.

We have integrated our consumer programs with our sales efforts to really drive incremental sales and build the brand.

The successful Choose Your Cheese program is one example that ran over the last couple of years.

And we have also got sales partnerships with Coke and MillerCoors which we're very excited about and that will provide even more opportunities in the future.

And so as a result of these activities we have some very passionate consumers who have driven this to be one of the largest brands in the Company with almost 3.5 million Facebook fans.

Finally, though, I would like to say that we don't think we have tapped anywhere near all the potential of this brand despite the past growth you see on the chart.

In fact, we expect that sticking to our plan will bring many more years of success.

Now let's turn to slide 22 and a discussion of another important brand for us, Special K, which has helped to drive our wholesome snack and cracker businesses.

The Special K brand in snacks has benefited from strong innovation, and we have seen increased household penetration and very passionate consumers.

As a result, we posted strong growth in each of the last few years.

And you can see it all adds to a compound annual growth rate over the period of more than 22%, which is great.

In fact, the growth has been accelerated over the last couple of years by the introduction of Special K Cracker Chips, which have increased the brand's reach.

And the introduction was one of our most successful in the category.

The two SKUs we launched this year have done well on top of a strong base set last year.

It is on-trend, highly relevant proposition and brand, and it is successfully traveling to businesses outside of the US as well.

Kellogg Canada and Kellogg Mexico have both launched this product and have also seen great results.

Importantly, we are confident that Special K Popcorn Chips and Pastry Crisps, both of which are being introduced in the second-half of 2012 with strong support, will help keep this business growing.

Slide 23 shows some detail regarding the Keebler cookie brand, which is one of our strongest.

The Keebler brand, the Keebler Elves, and the Hollow Tree are all loved by consumers.

Last year we decided to focus our efforts on the broader Keebler brand, and primarily Fudge Shoppe, Chips D and Sandies.

And as you can see from the chart the results have been dramatic.

It is important to note that the Keebler brand accounts for $1 billion of sales across the cookie and cracker categories.

We changed a lot of things as a part of this refocus -- advertising, pricing, packaging, marketing partnerships, social media activities, and we even rethought our in-store activations.

And we are pleased with the performance in the latest 52-week period.

As you can see, the core sub brands under Keebler have posted strong growth, a big change from prior periods.

And as with Cheez-It and Special K, we have got increasingly passionate consumers, more activity and good innovation plans, all of which should help us maintain our solid momentum.

And now you will turn to slide 24.

The final brand I would like to highlight today is, of course, Pringles.

In US Snacks we are really excited about the opportunities that Pringles brings.

This is a big iconic brand, and it is one that allows us to leverage our strengths -- brand-building, innovation and strong in-store execution.

It also provides us with access to another aisle in the store.

As John has mentioned previously, the business has [he standing] a little constrained on capacity, but we are doing a lot of work on this as an organization.

This means that as we progress we should be able to focus on driving sales growth, particularly through the introduction of innovation and additional merchandising, leveraging our in-store presence.

The introduction of Pringles with more flavor has helped accelerate the growth of this brand.

This was a simple idea, but it is one that highlights the opportunities we have to drive this business.

We have also got a lot of really great brand-building ideas, and we have got savory snack brands that complement each other.

So as you might imagine, we are already doing co-promotions with Pringles and Cheez-It, and see a lot more potential to do this kind of thing as we look across the portfolio.

Slide 26 shows some detail on the success of our innovation that I referenced earlier.

As you can see, we have done a great job driving innovation in our largest categories in both absolute terms and versus the competition.

It is also important to note that this is a three-year rolling innovation, which highlights the longer-term success of some of these ideas.

And we have increased the amount of innovation we have launched measured in dollars consistently over the last few years.

So we're very proud of this track record, and I believe that we have the processes and ideas in place to continue this success into the future.

One final note on innovation, we recently have been recognized by both Nielsen and IRI for some of the successful innovations we've launched.

Specifically these awards were for our Town House Flipsides, Special K Cracker Chips, and Special K Pastry Crisps products.

Now let's turn to slide 27, and the final element of our growth strategy, the DSD delivery network, which is one of the largest in the country.

Just look at some of the impressive statistics on the page.

As you can imagine, visiting each store more than 4 times a week on average puts us in regular contact with both our customers and consumers.

The number of visits also helps us manage the shelf and minimize out-of-stocks.

And we can't wait to build on our in-store presence to drive even more display for our Pringles business.

So, in conclusion, on slide 28, I would just like to say that we are very motivated by the opportunities we have in the US Snacks business here at Kellogg.

There is great potential in all the categories in which we compete.

These categories are growing and we are benefiting from this.

We have the right brands.

Cheez-It, Special K, Keebler, and now Pringles, are all great brands and we have got the opportunity to accelerate their performance as we focus, integrate and expand our efforts.

We have got a great innovation plan, and as importantly, a well-run process that has been very successful.

And we have executed well in store and will continue to do so.

We are very optimistic regarding our future in Snacks, and we are very excited to welcome the US Pringles employees to the Snacks family.

And, finally, I would like to thank all the employees of the Snacks business for their hard work.

Together they have built a great organization and they should all be very proud.

And with that I will turn it back over to John.

Thank you, Todd.

Now if you will turn to slide 29, you'll see some detail regarding our International businesses.

The sales performance posted by our European business in the second quarter was better than we saw in the first quarter.

The UK business also declined much less than it did in Q1 as some of our commercial plans and pricing actions started to gain traction.

We have new Special K and Crunchy Nut advertising on air.

We have launched new Special K Biscuit Moments and Nutri-Grain Breakfast Biscuits are going into the market.

This is a growing category and we see potential in this great new product.

More broadly, we have got new ads on the air for most of our major brands.

And we have relaunched Special K in both Italy and Spain, like we did last year in Mexico, where we saw very good sales growth as a result.

We feel better about the second-half because of all this activity and because of other innovations we have planned.

However, as you have heard from other companies, the Continent continues to be a challenge given the economic environment.

Southern Europe in particular is difficult, but we are taking action in the region and are watching developments closely.

Quarterly net sales results in Asia-Pacific were impacted by lower retail inventories and a difficult competitive environment in Australia as retailers decreased their inventories around their fiscal year-end.

Australia is a developed market and has issues similar to other developed markets.

However, the third quarter is off to a better start, and we have stronger activity planned for the second-half.

In addition, we saw good growth in Southeast Asia, China, and India, and we expect better growth across the region in the second-half of the year as we have more activity planned, including a significant amount of brand-building.

Sales in Latin America increased by almost 7% as a result of strong pricing and double-digit growth in certain countries.

We increased brand-building at a double-digit rate in Q2, and are also planning for a double-digit increase across the balance of the year.

So we expect continued good revenue growth in Latin America this year because of this investment and because of innovations, such as Special K Crisps and Special K Cracker Chips, which are similar to the ones you are familiar with in the US.

Like in other places around the world, this launch is off to a very strong start.

In conclusion, I would like to say that we have increased visibility into our International business for the balance of the year.

We have taken actions across the regions, some of them significant, and we are starting to see improvement.

We remain very focused and we are excited about the opportunities we see in the second-half of the year and into 2013.

Now let's turn to slide 30 and the summary.

We are pleased that our second-quarter performance improved from the first quarter of the year.

The North American business posted internal growth in both sales and operating profit.

We have done a lot of work in these businesses, and we are encouraged by the improvement, and we're excited about the prospects for the second-half.

The International business also posted improved performance as some of the actions that we have taken have started to make a difference.

We expect that this activity will drive performance that continues to improve as we progress through the second-half.

And because of this we have additional visibility into our outlook for the year.

We plan to continue investing in our model because we know that it is the right way to run our business.

Investment in our brands and strong innovation are what drives our results.

And we are excited about both what we have planned for the remainder of this year and the longer-term prospects for the business.

We compete in great categories, and we have new, strong growth opportunities in our Pringles business.

Finally, I would just like to thank Kellogg's employees for all their hard work, and also like to welcome the new employees coming to the family as a result of the Pringles acquisition.

And with that I will open it up for questions.

(Operator Instructions).

Greg Hessler, Bank of America Merrill Lynch.

As you guys ended the quarter I think you had like $750 million in short-term debt, and you have got a couple of notes that are maturing in the next 12 months.

I was wondering how you plan to address those.

I know you're focused on using near-term free cash flow to reduce debt, but might we see you back in the corporate bond market in the next couple months or in the back-half of the year?

Yes, Greg, this is Ron.

It is possible that we will be back in the market.

We will obviously look at all of our options there, including CP as well as longer-term debt.

Okay.

And in conjunction with the debt reduction is there a particular balance that you're targeting by year-end?

We haven't communicated a specific balance that we are targeting by year-end.

What we have said is that we like our BBB plus credit rating and we are working to maintain that rating by paying down our debt and strengthening our balance sheet.

Okay, thank you.

Jason English, Goldman Sachs.

Europe, it sounds like you are feeling confident about the progress you are making there.

Can you help illuminate some of the issues?

So just give us a little more detail on exactly what the challenges have been there.

Well, I think as we said back on the first-quarter call we have been disappointed by our starts in Europe.

But I think your point, Jason, we are seeing much better progress in second-quarter.

And our second-quarter results were in line with our expectations, and the expectations we gave you coming out of that first-quarter call.

We have seen improvement in the UK and France.

Having said that, Southern Europe, particularly Spain and Italy, have been a bit softer than we would like, and that just reflects the tough environment in that part of the world.

To give you a sense of some of the actions that we have taken, in the UK we have new cereal innovation coming out with line extensions on All-Bran, Crunchy Nut and Krave.

In the UK we have Special K Biscuit Moments launching in June.

And in Spain and Italy we are actually relaunching Special K, which is our biggest brand there, similar to what we did in Latin America last year where we saw a very good response from that program.

And across the region we have new proven copy behind major brands.

And we have improved some price points in some critical brands in some major markets.

So I think we are making some good progress, and it is coming through in a better result in Q2 than Q1.

Thanks, that is helpful.

And just a housekeeping item.

On your guidance bridge here you have got it looks like a net $0.02 benefit from one-time costs, and I know FX is an offset.

But just on a currency neutral basis if we were to exclude the one-timers is it right that you are lowering the constant currency pro forma guidance by $0.02, and if so, where exactly is that coming from?

We are not necessarily lowering the constant currency guidance.

Our base or core EPS remains exactly the same, we have got $0.02 of headwind of currency.

But you have $0.02 of net tailwind from one-time costs, is that right -- that weren't included in the guidance before?

Yes, yes we do.

That is right, Jason.

It is Simon.

Those two things offset each other, so that is why we are still at $3.18 to $3.30.

But if FX hadn't changed -- okay, I will follow up off-line.

If FX hadn't changed than the rates would have gone up.

Okay, thank you.

Bob Moskow, Credit Suisse.

I want to know if you can give us a little more color on how Pringles is doing.

We can see the data in the US, but not so clearly in Europe, and this is a heavily European business.

Are they having the same kind of geographic kind of slowdown in Southern Europe, and can you help us quantify what it looks like?

And then, secondly, can you give us an update on how you're thinking about the combination of integrating Pringles in Europe, and also, I think, restructuring your headquarter platform in Europe?

And I think a lot of people are concerned that this is a lot to take on at this time when Europe in general is having recessionary conditions.

Yes, let me say a few comments first about Pringles in general and then Europe, and then maybe have Todd say a few things about what is happening in Pringles here in the United States.

The integration is going very well with Pringles, very smoothly.

We have good visibility into the synergies.

We are having good pickup with Pringles employees now becoming Kellogg employees.

And I think actually the Company has done an excellent job of executing a very difficult integration with a carveout and moving forward.

And as you say, we are seeing some good response here in the near term in the US, and I will have Todd talk about that in a minute.

In terms of Europe, the Pringles business is doing well in Europe.

We do have more of an emerging market platform for that business than say the Kellogg Company would have, but we are continuing to see progress in that business.

More broadly, as you said, we are undergoing a major set of changes in our European business.

We are organizing ourselves for the future.

That means we are looking at the best way to set ourselves up.

The beauty of the Pringles acquisition is it creates a snacking capability to add to our International business which helps transform our International business from largely a cereal business to a cereal and snacks business.

The Pringles acquisition or integration within Europe, Pringles will continue to be in Geneva.

So there is not a big dislocation there.

There is an opportunity though for us to look at how we best organize Europe, given that we have cereal in Dublin and Pringles in Geneva.

Asia-Pacific, we also have Pringles in Singapore, and seeing very good progress with that integration as well.

And it is a relatively small business in Latin America.

So early days in Europe.

A lot going on, but we think Pringles actually is an important part of the strategy to help drive the future growth of our European business, and so we feel we absolutely have taken the right long-term actions.

Todd, you want to talk a little bit about the US business?

And in the US the integration is also going very smooth.

We haven't skipped a beat.

Period 6 came in on expectations and we are off to a solid start here in period 7. Really excited about the opportunity to leverage our in-store presence to drive even bigger partnerships and in-store displays.

And we are securing the right talent to ensure our success going forward, so feel very, very good at the moment.

John, 37% of Pringles sales are in Western Europe.

Are those -- is that business down?

Coming into the year Pringles had a strategy in some parts of Western Europe to reduce their reliance on some of those markets.

Some of those markets are down, others are up, so it is a bit of a mixed story across the Continent.

Okay, I will follow up later.

Thank you.

Eric Katzman, Deutsche Bank.

Okay, a couple of questions, I guess.

First, just more specific, you're looking at the tax rate, I guess, as a -- included in the guidance, a large part of that is due to Pringles.

But shouldn't Pringles help the overall tax rate long-term?

And should we then therefore take some comfort in the fact that you're including this benefit in the second quarter as maybe a longer-term benefit to the Company?

Pringles will benefit our tax rate over the longer-term based on the tax efficient structures that are in place.

What we recognized in the second quarter was a one-time benefit associated with a liability that we adjusted in relation to International earnings.

We previously expected we might repatriate those International earnings.

Now as a result of the debt that we have overseas we will use that cash to pay down the debt.

So we made this one-time adjustment to that liability and picked up $0.04 of earnings per share benefit.

So is -- again, just on the one-time items, the $0.07 to $0.10 that you originally -- well, you updated after the first-quarter results, the $0.07 to $0.10, that includes the, I guess, net $0.03 hedging gain, but that also includes a $0.04 tax benefit and then the initial one-time items that you had put out at CAGNY?

That is exactly right, Eric.

So it has got the integration costs embedded, which are a headwind.

It has got the benefit of this -- it is a transactional foreign exchange item of $0.03.

And then it has got $0.04 of benefit related to tax.

Okay.

And then, I guess, just last question, just kind of maybe talking about, John, the cereal business in the US.

It looks like the category has still been a bit of a struggle.

Perhaps you could talk a little bit about that.

And as I go around there is still a lot of questions about the category versus other breakfast items or even versus pretty aggressive QSR movement into breakfast.

Perhaps an update there and then I will pass it on.

Thank you.

We remain excited about the long-term potential of cereal in the US.

We see it as a low-single-digit growth category.

And in the second quarter it was flat to up 1%.

So at the lower end of the range that we would like to be operating in, but not that far out of that range.

And the reason we believe it has long-term potential, obviously, is the aging population, health and wellness considerations.

And we know it is the category driven by brand-building and innovation.

Within the cereal category, in the second quarter, we were down about 1% in the US, but lapping a 13% growth last year.

And so our share did drop down about 50 basis points, but again lapping a 140 basis point gain in the year-ago period.

And within the category we're actually seeing very stable base sales performance.

And one of the categories losing a little bit of volume is on the incremental side.

I think that reflects some of the actions taken in the area of pricing through the year.

But I think longer-term what is going to drive this category is going to be more innovation and more brand-building.

And you look across our back-half plans, we have a much heavier brand-building investment in the back-half of the year, and we have new innovation like Special K Protein coming out in the back-half.

And if there is one thing we are seeing in general, there is a little bit of protein seeking going on, whether it be Greek yogurt or eggs or similar sort of items.

And so we believe that we can play into that even through cereal.

So we are comfortable with where the cereal business is.

It is improving as we go through the year.

We see a better back-half, and we believe it has good long-term growth prospects.

Thank you.

Ken Goldman, JPMorgan.

When you bought your grains for this year was that before or after the big corn spike?

I am asking because I think it is reasonable to assume it was before, since your guidance for total cost inflation has remained constant even though corn and wheat and oats and so forth have jumped since you last provided an update.

And the reason I am asking is not so much about 2012, but just looking ahead at 2013 and seeing if we can reasonably expect a little bit of a commodity headwind at that point.

So for 2012 we did have some grains purchased or hedges in place.

We did see a little bit of exposure in the back part of the year, but we have been able to manage that, Ken, and still stay within our guidance and total cost inflation expectations.

Is it reasonable for us to assume that commodities overall will still be somewhat of a headwind next year?

We do expect inflation in 2013.

Keep in mind we buy $5 billion worth of commodity packaging and energy across our business.

The grains are a relatively small portion of that overall purchase.

But we do expect some inflation next year.

Thank you.

David Palmer, UBS.

First, congrats to Todd and the US Snacks team, very -- nice presentation and obviously great long-term performance.

I have a question separately on supply chain.

You mentioned something about supply chain being a little bit disproportionately high -- investments in supply chain being disproportionately high in the second quarter.

Can you give an update about how that is flowing through the year in terms of incremental spending on supply chain first-half versus second-half, and are you on track for that same sort of -- I think it was $100 million of incremental spend?

And then any specifics about what you're spending that on and what that is supposed to achieve would be great.

Thanks.

It is very consistent with what we have communicated before, Dave.

And, yes, the $100 million is still our expectation for spending in 2012.

Because we are lapping the investment we made primarily in the back-half of last year we are seeing headwinds in the front-half of this year.

And then we will see a benefit in the back-half of 2012.

Then, David, I would like to say that the investments are having a tremendous pay-off for us.

I really do believe it was absolutely the right thing to do.

We have turned the corner with our supply chain.

We are having a much, much better 2012.

And those investments will enable us to continue to drive our business forward, continue to grow the business over time.

So I really feel like we are -- it has been absolutely the right thing and it has made tremendous progress in our supply chain.

Is there any way that you could illustrate with examples about what you mean when that is improving your ability to execute in supply chain and what sort of increment in dollars in terms of what benefit that will provide?

I think it has to do with just the stability of the supply chain, and the overall performance of the supply chain.

If you went back over last three or four years, unfortunately, we have had a number of events that have adversely affected our Company.

As we went through the back-half of last year, we really took the business apart, making sure we were getting down to root causes, understanding the issues and resolving them.

And as we have gone through this year we have had a much, much better performance out of our supply chain as a result.

Okay, thank you very much.

Matthew Grainger, Morgan Stanley.

Just one follow-up on grain costs.

As we think about the impact of the recent increase in costs on discrete categories, as we look forward to next year, and specifically thinking about cereal, as it stands today do you feel confident in your ability to cover the inflation outlook for next year through productivity, or are we approaching the point where you think additional pricing might be required in cereal at some point during the next 6 to 12 months?

Matthew, we really can't talk about prospective pricing.

I want to go back to what Ron said.

We buy a lot of different items, of which grains are just one.

And so we might have some inflation on that particular item, but we have some other items that are not inflationary.

We, as a Company and as an industry, are driving tremendous productivity to try to help offset our need to take pricing as much as possible.

And I am sure that will continue to be the approach of the Company and the industry in general.

So this is one more thing for us to manage our way through.

And we will talk about our 2013 outlook at the end of the year.

Okay, great.

Thank you.

Ed Aaron, RBC Capital Markets.

Just following up on David's question on the supply chain, does turning the corner there give you confidence that you can begin to manage down that spending in the out years?

And then just a follow-up, a separate housekeeping question.

Have you finished the inventory adjustment?

And can you maybe actually give the quarter-ending inventory level for the base business excluding Pringles?

Thanks.

Let me answer your question on supply chain.

Our goal is to always be driving productivity through our supply chain.

We see that investment of $100 million as a permanent step-up in the base.

If we can do anything over time to reduce that spend, obviously we will, but we we're looking at it in the context of owning the total supply chain, not as $100 million in isolation.

So our goal is to keep driving our productivity around 3% to 4%.

That is our long-term aspiration.

In terms of inventory, Ron?

In terms of the inventory reductions, we will still see some inventory coming out over the back-half of the year.

So we will have some adverse impact there.

In terms of getting into the exact inventory for Pringles and what our balance sheet is, I would rather not go into that level of detail.

Thank you.

Jonathan Feeney, Janney Capital Markets.

I guess I have a detailed question, and then I have a question for Todd.

The detailed question is -- just coming back to the guidance -- so I guess in a nutshell this tax rate that is now 29% for the full year means your second-half tax rate is what you anticipated it was going to be when you originally gave guidance earlier this year.

It is just part of those Pringles net costs and benefits included a tax element that we weren't counting on before.

Is that a fair characterization?

That is exactly right.

That is right, Jonathan.

Okay, great.

That is exactly the way to think about it.

Thank you.

And just a question for Todd.

You've had such success with this snack program -- and I think even going back to the Keebler acquisition and looking at how you have executed against innovations there -- what would the cost and benefits be -- why is a decision not being made to integrate Pringles into that DSD network?

And is that something that is potential for the future?

And I guess what are the aspects of that business versus the rest of your Snack business that make that the appropriate decision, and could that change?

Thanks.

Good question, Jonathan.

We have a very efficient distribution model already in place for Pringles.

So the key is for us to continue to drive that efficiency to get it to the back of the store.

The opportunity then is how do we leverage all of our great in-store presence to drive incremental merchandising by bundling some of our bigger programs to make them even better?

And you are already seeing examples of that right now with the back-to-school program.

And you saw the picture in the deck with the Pringles being integrated into our school bus program.

So we are getting it up on display, leveraging the in-store sales force.

Leveraging the in-store -- but the actual delivery component, is that right?

That is right.

And we don't have an intention to actually change the way we get it to the back of the store.

Does that limit -- I mean, let me ask it this way.

Does that limit -- does Pringles have more points of distribution in North America right now or Keebler?

Are you limiting Pringles distribution by doing that or is there -- is Pringles footprint the same size and it is just there is no point in integrating the two?

A similar footprint.

I think the biggest opportunity that we see is Pringles acts a lot like Cheez-It when you look at lift-off display.

And what we want to do is just continue to just drive the display element of it.

It has got a different shelf life, so we have got more opportunity to grab inventory to pull from the back of the store and get it up into our bigger and better and integrated promotions going forward.

I see.

Okay, that makes sense.

Thank you very much.

Ken Zaslow, Bank of Montreal.

So what are the key regions or products that you will expect to see the biggest relative change in the brand-building, because you said it is going to build?

Can you just talk about which regions and which products?

And, secondly, are you surprised given the significantly higher brand-building that volume in Latin America fell 1.5%?

If you could touch on those two points that would be great.

If you look at the brand-building investment in the back-half of the year, it is going to go disproportionately against where we believe the longer-term growth is in the Company.

So Asia-Pacific and Latin America are going to receive more brand-building in the back-half of the year.

And we have very exciting long-term growth plans there.

And then to your question on Latin America specifically, I think we do have an opportunity to improve our volume performance in Latin America over time.

In the second quarter, and even a little bit in the third quarter, you will see some trade inventory coming out of the Latin American business as we work down those inventories.

That did have a little bit of impact on the Q2 volume performance.

And which products within Asia and Latin America do you expect to be spending the most behind?

Is it certain brands or product categories?

Primarily cereal, as well as probably starting to open up the brand-building on Pringles over time as well.

I think one of our challenges or opportunities on Pringles is just to get additional capacity online.

We have a lot of growth potential, and as Todd said, we have a very exciting US Snack organization.

One of our challenges is to open up more capacity so we can drive that business even harder.

Great, I appreciate it.

Chris Growe, Stifel Nicolaus.

I just wanted to ask you a question, John, about Pringles, and just to understand the degree or the extent to which you can sort of reinvest back in that business now.

I think as I understand it, you have pretty tight capacity for that business.

I think you have got to bring on some more capacity.

And then I also want to understand in relation to that, again, the investments you can make back into the business to achieve revenue synergies, whether it is selling the product in Mexico, or it is selling more Kellogg products on the platform in Asia.

It is a bit of a wide range question, but can you give a better sense of when you could start to expect heavier investment in Pringles?

Well, I think we do have an opportunity to drive revenue synergies in Pringles day one.

As Todd mentioned, in the US we are bolting on the Pringles to the in-store execution within our US business.

And so we are seeing some early response from that.

And to enable us to supply those initiatives we are going back into our facilities and challenging the mix and challenging the opportunity to get more volume out of the current network.

Going forward though we need to add to that network and it is going to take us a year or so to get that capacity online so we can really drive the business even harder.

Karen, we have time, I think, for one more question.

Alexia Howard, Sanford Bernstein.

I just wanted to ask about Latin America, because it is clearly your main driver of growth internationally.

I know the focus has been on Mexico historically.

Your main competitor is about to close a pretty meaningful snacking acquisition in Brazil, and I just wanted to ask about your strategy for Brazil.

Is Pringles going to give you enough of a platform to start to rollout snack products there or are there other alternatives that you would consider to get bigger in that market, or is the focus going to continue to be Mexico?

If you look forward over the next 10 years we would like to see more balanced profile for Latin America.

We continue to have growth opportunities in Mexico, but we believe we have even stronger growth opportunities in the Southern Cone, and in Brazil in particular.

We are the category leader in Brazil, and the category is growing strong double-digits, as are we.

And we are actually investing more in Brazil this year.

In fact, we will probably see more of that come through in the back-half of the year.

And we also believe that Pringles represents a long-term opportunity in Brazil as well.

That is great.

Thank you very much.

Okay, everyone, thanks very much for joining us today.

We will be available throughout the rest of the day and the rest of the week for follow-up questions.

Thanks again.

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

This does conclude the program, and you may now disconnect.

Everyone, have a good day.