家樂氏 (K) 2012 Q4 法說會逐字稿

Good morning.

Welcome to the Kellogg Company Fourth-Quarter and Full-Year 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)

Please limit yourself to one question during the Q&A session.

Thank you.

At this time, I will turn the conference over to Simon Burton, Kellogg Company Vice President of Investor Relations.

Mr. Burton, you may begin your conference.

Thanks, Laura.

Good morning, and thanks, everyone, for joining us today for a review of our fourth-quarter and full-year 2012 results.

I'm joined here by John Bryant, our President and CEO; Ron Dissinger, our Chief Financial Officer; and Michael Allen, President of our US Frozen Foods business.

As you know, we highlight different business units periodically, and Michael is here to discuss our frozen food business in more detail.

In addition, due to changes in how we account for pensions and other post-retirement benefits, we have provided additional detail in this presentation, in the earnings press release, and in an 8-K, which was also filed this morning.

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

As you're aware, certain statements made today, such as projections for Kellogg Company's future performance, including earnings per share, net sales, margin, operating profit, interest expense, tax rate, cash flow, brand building, up-front costs, 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 Friday, February 8. The call will also be available via webcast, which will be archived for at least 90 days.

I'll now turn it over to John.

Thanks, Simon.

Thank you, everyone, for joining us today.

2012 was an important year for Kellogg Company, and we're pleased to have announced full-year results which were in line with our expectations.

Sales growth was right in the middle of our guidance range, and our results improved sequentially as we moved through the year.

North America, Latin America, and Asia-Pacific all posted growth for the year, and Europe saw much better performance in the second half of the year.

Internal operating profit also met our expectations, and we continued to invest in the business.

In North America, our US cereal business posted a strong performance as a result of food innovation, investment in brand building, and strong execution by the team.

Also in North America, our frozen foods and specialty channels businesses had another very good year, with both posting strong internal sales growth.

In Europe, which was our most challenging region early in 2012, we saw improved internal sales performance as the year progressed.

For the full year, our reported earnings per share were toward the high end of our guidance range, and cash flow came in at $1.2 billion, also the high end of our expectations.

We achieved this performance while successfully integrating Pringles into the business.

As you know, the acquisition of Pringles is the second largest in the Company's history, and the business is a great strategic fit.

I'm happy to say that the integration is going well.

Now let's turn to slide 4, which shows some highlights for the fourth quarter.

As you can see, we ended 2012 with strong results.

For the total Company, internal sales growth increased by 5.3% in the fourth quarter, with all of the regions contributing to growth.

In North America, we saw 5.5% internal sales growth.

US cereal had a strong quarter, as did the Canadian business, and both US specialty and frozen foods posted double-digit gains.

The sequential improvement we saw through the year continued in the international businesses as well.

Europe posted internal sales growth of just less than 3% in Q4.

Asia-Pacific saw good growth at 5%, and Latin America posted 9% growth.

Our plan for the year was for sequential improvement.

As the year progressed, this is what we achieved.

The plan included higher levels of brand building later in the year, and our results in the fourth quarter included the effect of this investment.

In fact, brand-building activity increased at a double-digit rate in Q4.

This investment, combined with the strong innovation we launched throughout the year, helped drive our results.

2012 was a transition year.

We posted improvement, and we ended the year in a much stronger position.

We invested in the business, drove our model, and the results reflect this activity.

We recognize that we still have work to do, and that economic conditions remain difficult in some regions.

However, I'm encouraged by the progress we've made.

We are well-positioned, and I am optimistic about our potential as we enter 2013.

Now I'll turn it over to Ron.

Thanks, John, and good morning, everyone.

Before I review the performance, it's important to note that our reported results for operating profit and earnings per share include the impact of the pension accounting changes we highlighted at our Investor Day in November.

Our comparable internal results have been adjusted to show results prior to the pension accounting change, and also exclude acquisitions, divestitures, and the impact of foreign currency movements.

We're providing underlying earnings per share, which excludes integration costs.

Our 2011 results have also been re-cast for comparability.

Slide 5 shows our fourth-quarter and year-to-date financial results.

For the quarter, reported sales growth was 18.2%.

Internal sales growth was 5.3%.

Reported operating profit was impacted by a $401 million non-cash mark-to-market charge on pensions.

Comparable internal operating profit decreased by 7.6%.

This was driven by cost inflation, a double-digit increase in investment in brand building, and timing of up-front costs resulting from an initiative in Australia.

For the full year, reported sales growth was 7.6%, and internal sales growth was 2.5%.

Comparable internal operating profit decreased by 5.9%, consistent with our expectations.

The full-year decline was a result of cost inflation, the impact of the third quarter's limited recall, and increased investment in brand building.

Reported earnings were a negative $0.09 per share in the fourth quarter, and $2.67 for the full year.

Both fourth-quarter and full-year reported results include a pension mark-to-market charge for decline in the discount rate, partially offset by better-than-expected asset returns.

Earnings per share were $0.67 in the fourth quarter, excluding the pension accounting change and $0.05 of Pringles' integration costs, up 4.7% versus last year.

For the full year, earnings per share, excluding the pension accounting change and Pringles' integration costs, net of one-time benefits, were $3.37.

Slide 6 shows a walk for earnings per share to provide clarity on the performance for the year.

As you can see, we reported 2012 EPS of $2.67.

The mark-to-market adjustment was $0.85, and the one-time step-up due to the elimination of the amortization of previous losses on the pension assets was $0.24, in line with our previous estimates.

Adjusting for these items, earnings per share was $3.28, at the high end of our previous as-reported guidance of $3.18 to $3.30 per share.

If you add back the net integration costs associated with Pringles, which were $0.09 per share, you get a better picture of our underlying earnings per share, which were $3.37.

We believe this method is comparable to how analysts and investors are viewing our earnings.

It's worth noting, too, that the $0.24 will be a permanent step-up in the earnings base, as it's the elimination of the amortization of losses on pensions.

As a result, the base 2012 EPS we use for comparisons includes this step-up.

I'll discuss guidance for 2013 in a few minutes, and how this change should be viewed in terms of our basis for growth in 2013.

Slide 7 details the components of fourth-quarter and full-year sales growth.

As you can see, internal sales growth increased by 2.5% for the full year.

Reported sales increased by 7.6%.

Volume increased by 2.6% in the fourth quarter, and reflected the strong growth posted by most of the North American businesses.

We've seen consistent improvement in our volume performance as we have moved through the year.

Price and mix increased by 2.7% in the fourth quarter, and by 3.3% for the full year.

We had a good balance of volume and price/mix growth in the fourth quarter.

The sales growth in the fourth quarter and the full year was broad based.

We saw growth in all of our key categories -- cereal, snacks, and our specialty and frozen businesses.

In addition, all of our regions across the globe contributed to the growth for the quarter.

The addition of Pringles was the primary contributor to the increase of 12.7 points in the quarter, and 6.5 points for the full year, related to acquisitions and divestures.

Currency reduced sales growth by 1.4 points for the year.

Slide 8 shows our gross profit and gross margin performance for the full year.

Full-year gross profit increased by 3% to $5.7 billion.

Full-year margin declined by 1.8 points, consistent with our expectations, and was impacted by cost inflation, as well as the lower margin structure for Pringles.

As we mentioned before, though, we have begun to make changes which will increase the margins of the Pringles business over time.

Our productivity savings were in line with our expectations for the year, and our long-term target of 3% to 4%.

Now let's turn to Slide 9 and our investment in brand building.

We increased brand building at a double-digit rate in the quarter.

This follows a significant increase in the third quarter, as well.

We showed strong investment growth across most regions, behind brands such as Special K and Frosted Flakes, and our investments supported strong sales growth across the regions.

Our brand-building investment can vary by quarter, and from year to year, due to commercial plans and the timing of innovation.

In 2012, our brand building was weighted more to the second half of the year.

For the full year, our brand-building growth was also broadly in line with the rate of sales growth.

We've got some exciting plans for investment in 2013, and we also expect improvement in efficiency and effectiveness.

We'll focus on increasing investment in advertising in 2013, including in the digital space, and with Hispanic-oriented programs, while also maintaining strong levels of consumer promotion.

Slide 10 details the quarterly internal operating profit performance for each of the regions.

Comparable internal operating profit for the total Company decreased by 7.6% in the fourth quarter, as I mentioned earlier.

North America's internal operating profit decreased by 1.6%.

As has been the case all year, commodity inflation had a meaningful impact on results.

In addition, the North America business increased its investment in brand building by more than 15% during the quarter.

This was a significant increase, and helped drive 5.5% sales growth.

Internal operating profit in Europe declined by 7.7% in the quarter.

This was in line with our expectations, and included significant commodity inflation, as well as an increase in brand building.

In addition, macro conditions in the region, especially in southern Europe, continued to be difficult.

We do expect to see this region grow profit in 2013.

Internal operating profit in Latin America increased by 19.7%.

This was driven by strong net sales growth of more than 9%, and a relatively easier comp.

Asia-Pacific posted a decrease in internal operating profit of more than 70% in Q4, mostly due to up-front costs associated with a plant closure in Australia.

This was included in our guidance for total up-front costs, but it has had a significant impact on Asia-Pacific's Q4 operating profit.

In addition to this, Asia-Pacific also increased its investment in brand building at a double-digit rate.

Slide 11 shows our year-to-date cash flow.

Year-to-date cash flow was just over $1.2 billion, an increase of $220 million versus last year.

This does include the working capital benefit from the acquisition of Pringles, as well as slightly lower capital spending.

Full-year capital spending was $533 million, or 3.8% of sales, slightly below our previous expectations due to the timing of investment between 2012 and 2013.

Of course, we have continued our capacity investments in Pringles to support future growth.

Share re-purchases were $63 million for the full year, with all the re-purchases occurring in the first quarter.

Options proceeds were $229 million, so we have seen some dilution.

In 2012, we focused on paying down debt, but as we move into 2013 we are likely to re-purchase shares to the extent of options proceeds to reduce dilution impact.

Consistent with our commitment, we have reduced our debt by nearly $400 million from the time of the Pringles acquisition.

Slide 12 shows our guidance for 2013, which hasn't changed since our Investor Day in November.

We continue to expect that reported net sales will increase by approximately 7%.

The impact of Pringles will be about 5 points of the reported growth, and we expect currency to be a 1-point headwind.

So, we anticipate that internal net sales will increase by approximately 3%.

However, as I told you at our Investor Day, 3% is just an estimate.

Pringles is included in our comparable results for the last seven months of the year, but we could see business shift between the periods impacting our comparable results, but not reported results.

It is important to note that we do expect continued cost inflation in 2013.

We expect inflation to be approximately 5%, but we are anticipating cost savings at the high end of our 3% to 4% range to partially offset the impact.

As we think about the shape of the year, inflation is more front-end loaded, and our savings are a bit more back-end loaded.

We expect that gross margins will be down approximately 50 basis points, primarily due to the full-year impact of a lower margin on Pringles.

Reported operating profit growth will be slightly higher than reported earnings per share growth of 5% to 7%.

EPS growth is impacted by a headwind from certain favorable one-time benefits we saw in the second quarter of 2012.

Recall that we have discussed these items several times -- one-time benefits in taxes and transactional currency totalling $0.07 of earnings per share.

Our earnings per share also includes an estimate of a $0.02 headwind from currency translation, so results could be impacted if currency rates differ significantly from our estimates.

We expect our 2013 tax rate to be approximately 30%, up approximately 1 point from our underlying rate in 2012.

Also included in the results are Pringles' integration costs of between $0.12 and $0.14 per share.

We posted good cash flow growth in 2012, partially due to some benefits from the acquisition.

We expect cash flow in 2013 will be between $1.1 billion and $1.2 billion.

We anticipate that capital spending will be slightly more than 4% in sales, due to the timing of spending that I mentioned earlier.

This will allow us to continue to invest in capacity needs for Pringles, as well as other capacity, productivity, and infrastructure requirements across our business.

During the first quarter, we expect solid sales growth, but commodity inflation and timing of other costs will impact operating profit.

So, we expect the comparable operating profit may decline slightly year over year.

Also, we'll be lapping the $0.05 benefit from interest rate hedges from the first quarter of 2012.

These were related to the Pringles acquisition.

So, our earnings per share is expected to be down in the first quarter.

Of course, our guidance on operating profit and earnings per share excludes the impact of mark-to-market adjustments.

Slide 13 is a walk from 2012 earnings per share to our 2013 guidance.

You can see the reported 2012 EPS base, excluding the impact of mark-to-market, and before the changes to pension accounting, $3.28 per share.

As we said earlier, the change in pension accounting adds $0.24 to this base to give a 2012 earnings per share of $3.52.

We expect reported growth, including a $0.02 currency impact, of between 5% and 7% for 2013, or a range of $3.70 to $3.77 a share.

Excluding the $0.12 to $0.14 per share of integration costs, our earnings per share range is $3.82 to $3.91.

So, we have good growth in earnings per share in 2013 on both a reported basis and excluding integration costs.

With that, I'll turn it back over to John.

Thanks, Ron.

Slide 14 shows the internal revenue growth posted by Kellogg North America.

We've seen a lot of improvement during the year, and ended with strong 5.5% growth in Q4.

Each of the segments posted growth for both the quarter and for the year, which is excellent performance.

Now, let's turn to Slide 15 and the performance of the morning foods and cashew segment.

Internal sales growth was 6.3% in Q4, building on a strong growth of 4% last year.

Our Q4 sales benefited from a build in retail inventory in preparation for a strong resolution program and new product launches.

In cereal, we gained 0.7 points of category share in the quarter.

Crave continues to hold almost 1 point of share, as it has all year, and we saw good growth in some of the other brands that we supported, such as Frosted Flakes, Fruit Loops, and Raisin Bran.

Frosted Flakes did very well all year due to strong, family-oriented advertising that really resonated with consumers.

The innovation we launched in the second half also contributed, as Special K Protein posted very good sales growth and also gained share.

And our Bare Naked brand continued to post strong results.

Pop-Tarts posted consumption growth of 3.4%, and gained 1 point of a share in Q4.

Share also increased for the full year to 83.8%, with innovation like Oatmeal Delights and Wild Fruit Fusion contributing to the growth.

We expect good performance from the segment in 2013, as we have innovations such as Special K Chocolate Strawberry and Mini-Wheats Crunch that are just launched, as well as the Kellogg's breakfast drinks we showed at the Analyst Day in November.

Slide 16 shows the internal net sales performance of the US snack segment over the last couple of years.

The business posted (inaudible - background noise) internal sales growth of 0.7%, but this was lapping a very difficult comparison of almost 9% growth in Q4 of last year.

We saw mid-single-digit sales growth in the crackers business in the fourth quarter, building on a comp of more than 9% last year.

Our four core brands -- Cheez-It, Club, Special K, and Town House, posted combined growth of 5%.

Special K Cracker Chips and Popcorn Chips, which were introduced during the third quarter of last year, both continue to do very well.

We've got some great innovation planned for 2013, including barbecued Cracker Chips, and new flavors of Popcorn Chips and Cheez-It.

The cookie business posted increased internal net sales for the full year, although we saw a decline in sales in the quarter.

We were lapping a mid-single-digit comp last year.

The [snacks] business did well in the quarter, and we have a lot of activity and innovations planned for 2013, including brownie and pretzel bites, and Chips Deluxe Triple Chocolate.

The wholesome snacks business was lapping a very difficult double-digit comp in the fourth quarter.

However, we continued to see strong results from innovation, including Special K Pastry Crisps, and we also expect that innovation will contribute to growth in 2013.

The launch of a new Fiber Plus protein bar is going well, and we have NutriGrain Fruit Crunch, Special K protein bars, and a new flavor of pastry crisps all being launched.

Finally, we remain very pleased with our US Pringles business.

Sales increased at a mid-single-digit rate in Q4, and the brand responded well to holiday activity, and ended the year with even stronger results in December.

As you know, we exclude the impact of Pringles from our internal growth rate calculation.

Slide 17 shows recent performance of the US specialty segment.

Internal net sales growth was 10% in Q4, and was more than 7% for the full year.

We increased sales with our top customers in both the quarter and the year, driven by strong results from innovation, and an excellent effort by the team to expand points of distribution.

In addition, each of the businesses -- food service, convenience and vending -- posted strong rates of growth for the year.

We're very pleased with 2012's results, and expect great performance from this business again in 2013.

Slide 18 shows the performance of the North America other segment, which includes the Canadian and frozen food businesses.

The Canadian business posted mid-single-digit sales growth in the quarter.

New products such as Crave, Special K Cracker Chips, and Special K shakes helped drive our growth.

We've also seen good growth in our frozen food business in Canada.

Now I'll turn it over to Michael Allen, who will discuss our US frozen food business in more detail.

Thanks, John, and good morning, everyone.

I'm going to start today with a couple of slides that some of you might remember from the Analyst Day in November.

However, I realize that some of you might not have seen them, and they do give important context.

If we turn to slide 20, you'll see some information regarding the history of the frozen food business at Kellogg.

Eggo was the first toaster waffle, and dates all the way back to 1953.

As you can see, Kellogg purchased Eggo in 1970, and I'll show you some data later about how the brand has grown more recently.

We added Worthington Foods and the Morningstar Farms brand in 1999, and Gardenburger in 2007.

You'll see, too, that we took our own Kashi brand into the frozen food category in 2006.

Given the attractiveness of our brands, and the growth of the categories in which we compete, we are focused on continuing to drive organic growth.

Page 21 provides some detail regarding the segments of the frozen food category in which we compete.

As you can see, we're in three segments that are posting significant rates of growth.

This makes these segments much more attractive than many others in the frozen food category.

And within these segments, we have differentiated brands and products.

The frozen breakfast category, which includes waffles, pancakes, breakfast sandwiches and entrees, posted consumption growth of 3.4% in 2012.

These products provide convenience, and, in the case of our new Special K flat bread sandwiches, protein and relatively fewer calories.

Our flat breads have only recently been introduced, but we've seen great retail acceptance, and strong velocity.

The frozen veggie category posted consumption growth of more than 7% in 2012, as many consumers choosing between meat and veggie alternatives chose our veggie alternatives.

Those are not all converts to vegetarian diets.

Instead, the growth comes predominantly from people who continue to view meat as an option.

Our products provide alternatives for consumers without requiring them to give up any of the taste or protein that they love.

Finally, the natural and organic segment grew more than 10% last year, due to the combination of convenience, and increasing demand for natural and organic foods.

Our Kashi brand plays very well in this space.

It's a brand that consumers know and trust, and we've added innovations to our existing pizza and entree businesses.

In 2012, we launched Kashi steamed meals, a convenient and easy way to get delicious, natural meals.

Now let's turn to slide 22 and a discussion of recent performance.

Many of you may not realize, but the frozen foods business is one of Kellogg's fastest growing.

As you can see on the chart, we posted internal net sales growth of almost 13% in the fourth quarter, and full-year sales growth of almost 11%.

While we're seeing very strong rates of category growth, we're also focusing on innovation to continue to provide healthy options for consumers.

I've mentioned Special K flat breads already, but we have quite a few other new products that have contributed.

The Eggo brand remains very popular with moms, and we see very strong rates of all family consumption.

This has been increased by the introduction of several innovations, including thick and fluffy waffles, which have been a huge success, and more recently, Wafflers.

These are really strong results, and they are a testament to all the hard work the team did last year.

Slide 23 shows the progression of sales growth for the frozen foods business over the last three years.

The results have been impressive, and you can see that we've seen considerable growth over much of the last decade.

We've posted a sales compound annual growth rate of more than 8% over the last nine years, which is fantastic performance, and we've seen even faster growth more recently.

Eggo's share of the waffle category is now at an all-time high, and we've managed that with fewer SKUs, so a real achievement.

Slide 24 is a slide I showed at the analyst meeting.

It details the recent revenue growth posted by the peer group of frozen food manufacturers.

As I mentioned earlier, we compete in advantaged segments of the broader category, which obviously contributes to our growth.

However, the innovation I discussed is also a factor, and you can see that we've out-paced the sales growth of the rest of the industry in 2012.

It's interesting to note that our nearest competitor on the chart is actually a combination of private label manufacturers, and we grew at almost twice their rate.

So, we're in the right segments of the category, and we're executing well.

Finally, I should also mention that we're seeing very good rates of growth in more non-traditional channels, such as food service, schools, and drug and discount stores.

As consumption and shopping habits change, we're adapting accordingly.

Chart 25 shows some of the drivers of the Eggo business.

Eggo is a very attractive brand that responds very well to brand building.

As a result, we're continuing to make significant investments, including in the digital space.

Eggo is one of the strongest equities at Kellogg, and we continue to see penetration upside.

This brand has grown historically behind the line of Leggo my Eggo.

And because the brand is so popular, we get great support from our customers.

They like its responsiveness to investment, how incremental the innovation is to sales, and the long track record of growth.

It's also interesting that a majority of our sales are base sales.

In fact, this is a category that has very low level of incremental activity, and we see very little seasonal effect, unlike many other categories.

Chart 26 shows the sales growth that's resulted in the last few years.

As you can see, we've seen 8% compounded growth over the last nine years, which is really excellent performance, and the growth has been even faster in the last couple of years.

Obviously, given the plans we have for 2013, we're optimistic regarding growth again this year.

Slide 27 and 28 show a similar look at the Morningstar Farms brand.

Again, Morningstar competes in a fast-growing, on-trend categories, and the brand really responds to investment in brand building.

We ramped up our activity in May of 2012, and we saw a significant response in sales as a result.

Consumers are looking for more meat alternatives, and Morningstar provides this while delivering great taste.

Innovation is important in this segment, as well.

Existing consumers like the choice alternatives, and new consumers can be drawn into the category by innovative new products.

For these reasons, variety is important, and we've done a very good job of expanding our offerings.

The avoidance of meat is an important consumer trend, and we're well-positioned to benefit and even drive the category.

As you can see on slide 28, all this activity, and the growth characteristics of the category, have resulted in strong growth from Morningstar Farms as well, in recent years.

The nine-year compound annual growth rate for net sales is more than 6%.

Again, we have strong plans for 2013, and expect the good results to continue.

Now let's turn to slide 29 and a look at some of the innovation we've got planned for 2013.

I've mentioned the importance of innovation a number of times today, and you can see on the chart that we've got some great new products planned for introduction.

We have new varieties of Kashi steamed meals and Kashi pizza.

We have the Special K flat bread sandwiches I discussed earlier.

We have a new Morningstar Farms burger, the Mediterranean Chickpea Burger.

We have S'mores Eggo Waffles, Special K Red Berries waffles, and new Eggo Drizzlers in two flavors, blueberry and strawberry.

These waffles come with a topping, and are a delicious addition to the brand.

As I mentioned, innovation is largely incremental in our categories, and we're optimistic about the great line-up of new products we have ready for 2013.

Let's turn to slide 30 and the summary.

Hopefully you can see we have a strong frozen foods business in the United States.

The business is anchored by strong brands, which are growing in attractive, on-trend categories.

Our innovation has been largely incremental, while our core business continues to grow.

We will continue to invest in this business and build upon our leadership position.

We have a dedicated team of frozen foods professionals who are focused on these categories and our key customers each and every quarter.

Thank you, and now I'll turn it back over to John.

Thanks, Michael.

Now let's turn to slide 31 and our international businesses.

The European business posted internal sales growth of almost 3% in the fourth quarter.

This was a sequential improvement, and continued the trend we've seen all year.

The cereal category in the UK continues to be competitive, but we saw improvement in our total UK business in the second half of the year.

Crunchy Nut has responded to recent activity, and the snacks business has done very well.

Recent innovation, including Biscuit Moments, breakfast biscuits, and Special K Cracker Crisps are all off to a good start, and we're optimistic regarding the snacks business as we start 2013.

We also saw good results in Northern Europe, particularly in France and the Germanics; however, Southern Europe remains difficult.

As we have said before, we realize an improvement in Europe will take time, but we are addressing the challenges.

We have a new team in place, and we expect to see continued progress in the region in 2013.

We posted internal sales growth of 4.6% in Asia-Pacific in the fourth quarter.

We saw continued improvement in Australia, and we gained category share in both cereal and in snacks.

In cereal, NutriGrain, Sultana Bran, All Bran, and Crunchy Nut all did well late in the year.

In snacks, NutriGrain and Special K saw good growth.

We did a lot of work in Australia earlier in the year to improve our commercial plans.

The results have been strong.

We also saw good growth in other parts of Asia.

In India, China, and southeast Asia, we posted double-digit internal sales growth, and we saw high-single-digit growth from our South African business.

Finally, the integration of Pringles is going well in the region, as we continue to transition distributors.

In Latin America, we posted 9.4% internal sales growth, as a result of share gains and improved price/mix.

Mexico posted mid-single-digit growth, driven by strong innovation in the snacks business, including Special K Crisps.

The rest of the Latin American business did very well in Q4.

Central America, Venezuela, Brazil, Argentina, the Andean countries and Chile all posted good growth.

We gained share in Central America behind growth in Froot Loops and Choco Krispies.

We also gained share in Colombia, and saw good results in Brazil.

The growth in these other Latin American countries has been good all year, and we expect to see continued growth in the region in 2013.

Now, let's turn to slide 32 and the summary.

2012 was an important year for Kellogg Company.

We posted improved performance as the year progressed, and net sales, operating profit, and EPS all ended the year in line with our expectations.

In fact, if you look at our results in the second half of the year, and compare them to the first half, you can see the dramatic improvement we posted later in the year.

All the regions contributed to sales growth in the second half.

North America posted strong results, and we saw improving performance throughout the year in the international businesses.

We achieved these results while continuing to invest in future growth, with significant increases in investment later in the year.

And our Pringles business continues to exceed expectations.

The integration is going well, and the team is doing a great job.

Sales growth has been strong since we closed in late May, and the business has responded well to all the activity we've introduced, both in the US and internationally.

We have given strong guidance for sales growth, operating profit, and EPS in 2013.

We plan to continue to increase our investment in advertising this year from a strong base.

And as you heard at our Analyst Day, we have a lot of exciting innovation launching now, and planned for introduction later in the year.

So, 2013 is really a return to the Kellogg operating model.

We've done a lot of work in recent years to set the right foundation.

We've invested in the business.

We have adjusted our strategy to focus more on growth, and we acquired Pringles.

These have been significant changes for us, and we're confident that they are the right ones, and we're optimistic about the future.

Finally, I'd like to thank all of our employees for their hard work and dedication in 2012.

With that, I'll open it up for questions.

(Operator Instructions)

Our first question is from Ken Goldman of JPMorgan.

I have a quick one and then a longer one.

First, when you say 1Q comparable EBIT and EPS may be down year on year, would you mind clarifying what exact EBIT and EPS base numbers you are referring to?

Ken, this is Ron.

In terms of the comparables, it's based on the re-stated information that we provided to you for 2012, and then going forward, including the pension accounting change.

So our comparable operating profit, as we said, we expect to be down slightly.

Then earnings per share is impacted by this one-time benefit that we recognized in the first quarter of 2012.

It's about $0.05 related to the interest rate hedges on Pringles.

Remember that did reverse out in the second quarter, but we're lapping that benefit in the first quarter.

Okay.

I'll follow up on that.

Then, as you look at your model getting to that EPS growth next year, it seems like there's a number of non-recurring issues going away next year.

Guidance seems a bit conservative to me.

I realize there's some head winds, too, right?

You have stock compensation that should increase, but I guess I'm curious, if your model turned out to be light, where do you think you're being most conservative?

What are the key pivot points there, as you look at it?

Look Ken, we believe we're providing realistic guidance for 2013.

It's very consistent with what we communicated at the Investor Day.

It includes accretion in both our Pringles business and operating profit growth within our base business as well, so we're comfortable with the guidance.

Ken, as I look at the 2013 guidance, clearly we have a strong performance from Pringles in there.

We go right back to the date of the acquisition.

We gave you some guidance on Pringles, we did a little bit better than that in 2012.

Some of that accretion is helping us in 2013, as well.

If you kind of go back to the underlying Kellogg guidance that's implicit within that, we have internal sales growth of around 3%, the low end of our long-term guidance.

We have some internal operating profit growth to make those numbers work, as well.

I think what you're seeing is us getting back on our model of re-investing in our business, of increasing our advertising over time.

Our gross margin is down a little bit year on year, but that's largely the Pringles integration, and we'd would love to see that gross margin start to track in the right direction, improving over time.

I think you're seeing an underlying improvement in our results.

Thanks, John.

Thank you.

The next question is from Alexia Howard of Sanford Bernstein.

Can I ask about cereal category dynamics?

You yourselves are clearly doing very well on the back of very strong innovation, but the category still looks pretty weak from a volume perspective, and I think two of the key competitors have taken their net pricing down quite a bit.

I'm just curious about how you see your share gains evolving through the year.

Are you planning on maintaining that momentum?

Specifically, can you maybe comment on how Kashi is doing?

It looks as though in the last quarter or so, it's really taken a bit of a down-turn and I'm wondering if that's just a temporary slow-down in innovation, or whether there's something else going on.

Thank you.

Thanks, Alexia.

Let me take the cereal category trends first.

We are seeing improving volume trends in the cereal category over time, although I must admit that in total on dollars, the category is relatively flattish.

Within that, across the back half of 2012, we gained about 70 basis points of share.

That's even with the slight disruption to our Mini-Wheats business.

What we're seeing in our business is really driven by innovation and by brand building.

We're seeing the business respond to that.

I'm confident that if the category in totality drives more brand building and more innovation, I think the category will respond to that.

It is a great brand.

It is relatively rational.

Pricing is still up year on year in the category.

Price-led actually lost 20 basis points a share, and to get the price-led, we add private label and multi-meal together as one group.

Talking about Kashi specifically, Kashi is a great brand.

It's had tremendous growth over the years and it's still growing where we've extended it in areas like frozen and wholesome snacks.

However, in cereal we do have a couple of challenges around our Kashi business.

Some of the innovation in recent years has not been as strong as our core Kashi SKUs, so we've lost some core SKUs that we think would have done better than the innovation.

Some of the brand building has moved away from the core benefit of Kashi, so we have an opportunity to sharpen our focus a little bit more.

And some of the shelf presence in some of our smaller SKUs on shelf is not what we need it to be.

We're not happy with the performance of our Kashi business.

We think it's more tactical in nature.

Over the next six months, we're going to work to fix and improve that business, get it back in the right direction.

But we obviously have some work to do there.

Okay, great.

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

Thank you.

Next, we have a question from Jason English of Goldman Sachs.

Hi, good morning.

It's Varun Gokarn in for Jason.

Just a quick housekeeping question.

What was the gross margin in the fourth quarter before the pension adjustment, and what was the realized inflation rate in the quarter?

Our gross margin was down about 250 basis points in the quarter, very consistent with expectations.

It would have been impacted by some dilution from the Pringles business.

Around 90 basis points of that is the Pringles business, so underlying gross margin in our business was down about 160 basis points.

Our inflation was pretty consistent across the entirety of the year, so we saw just over 7% cost inflation, and that was very consistent in the fourth quarter.

Okay, thanks.

I'll pass it on.

The next question is from Eric Katzman of Deutsche Bank.

I've got a couple of questions.

Sorry, Simon.

I guess first, John, can you give a little bit more detail on how Pringles internationally is doing kind of year over year?

You do have some challenges with this, the distribution changes.

You've kind of noted how the business is doing in America.

How's it doing internationally?

Sure.

Maybe if I step back, Eric.

In terms of the integration in totality, it's going very smoothly.

We've had excellent people retention, and some great people have joined the Company.

We're very excited about that.

As Ron said in the prepared remarks, the financials are a bit better than we expected.

We're actually getting improved output from some of the plants, and we have some new capacity coming on, so we're feeling a little better about the capacity situation.

If you look at the top-line performance to your question, specifically, Eric, in the US we saw about 5% growth in the fourth quarter in Pringles.

In Europe, we were up slightly, up to around 1% in the fourth quarter, and that reflects a couple things.

It reflects that we are a bit tight on capacity.

It also reflects a pre-existing P&G strategy, which is the right strategy to reset the level of trade activity in the UK.

The UK has been particularly soft, more because of a strategy around what Pringles was trying to do.

In Latin America, we saw good double-digit growth in the region.

In Asia-Pacific, Pringles is actually down double digits.

It's down around 10%, 12%.

That's really because of a distributor transition in Asia-Pacific as we move from P&G distributor to a Kellogg distributor.

Within that, obviously you burn through the pre-existing inventories that the distributor had.

Okay, thanks for that.

I guess in the Nielsen data, which is pretty relevant to the US market today, it showed that your pricing was down and yet in the fourth quarter, you noted that North America price mix was up.

So was mix a very strong component in your internal pricing, probably because the promotion was down?

I think if you look in the fourth quarter, price and mix were both favorable.

I think about two-thirds price, one-third mix, thereabouts.

That's right.

It is down a little bit in some of the more recent measured data.

Part of that, Eric, depends on which category you're looking at.

If you remember in the first quarter last year, we had a relatively weak resolution period on cereal.

We tried to increase our promoted price points, and we came out in Q1 kind of soft.

We've gone back in Q4 to -- sorry, we've come back in the first quarter of this year -- to our historical price points, and so you're seeing a little bit of a year-on-year change; but that's more an issue of Q1 last year being the anomaly, than we're doing something fundamentally different in Q1 of this year.

Last thing, if I slip it in.

Ron, I think the insurance that you -- benefit that you would had expected from the business disruption two years ago, year and a half ago, was, like, $0.10.

Then I think this latest recall should have been insured.

Don't you have something like $0.10 to $0.15 of insurance benefit coming to you, and is that included anywhere here?

How would you treat that if you got that back, given that you took the hit when you had the recalls to ongoing operations?

Eric, these types of things take not just months, but years.

As you mentioned, the first recall we had on cereal was back in 2010, and we're still working through that process.

We're not certain exactly when that will settle, but it is an ongoing process.

We don't have anything that's been recognized in 2012, and we don't have anything included in our 2013 guidance in association with any type of settlement.

That obviously would run back through the profit and loss statement.

Okay, thanks.

I'll pass it on.

Our next question is from Bryan Spillane of Bank of America, Merrill Lynch.

Question, I guess going back to new products.

One of the things that you have done very well over the last two years is really refill your new product pipeline.

I guess if you think about, as we look at 2013, can you give us any idea or some color on how much you think or you expect new products to contribute to your overall sales growth in 2013, and whether we're sort of at a normal pace of contribution from innovation?

I think as we look at 2013 innovation, we expect it to be at least a large an impact as the 2012 innovations.

We continue to have a very strong pipeline as we go into 2013.

We also continue to look at the incrementality of that innovation.

So for example, the cracker chips that we launched here in the US were very incremental.

We've now launched those in Canada, Mexico, the UK.

We're seeing more of that sort of expansion.

Even something like the breakfast beverages -- the Kellogg to go that you can see here in the US, we believe that will be quite incremental to our business.

It's the absolute size and the incrementality of the innovation; but even in absolute size terms, we expect the dollars from innovation to 2013 to be at least the same as what we saw in 2012, as we keep going back towards around 15% of our sales from innovation on a rolling, three-year metric.

Are we spending at a normalized level, as well?

Will you need to increase spending against new product innovation, or are we now at a base level that supports that 15% target?

I think we have a good support level.

I think we had a good amount of brand-building investment.

What really drives up the brand-building investment is when you're launching whole new brands.

We're not doing a lot of that.

We're more extending more of the strong brands we have, and re-framing when the consumer can get the benefit of that brand, as we have seen with the beverages and cracker chips and so on.

We feel good with the level of brand-building investment that we have.

Okay, great.

Thank you.

And the next question is from Andrew Lazar of Barclays.

John, you mentioned that you would have productivity probably at the high end of your 3% to 4% range in '13, and that inflation would be around 5%.

So productivity -- I think your words were would partially offset some of the input cost inflation.

I guess my question would be normally pricing would then come into play to sort of fill that gap, right, to at least protect your gross margin dollars.

I guess has there been any incremental announcements around pricing that you can talk about?

If not -- I'm just trying to get a sense, what does that say around either your ability, or maybe the industry's ability to kind of take a little bit of pricing here to help with the inflation, even though I know the experience around volume over the past year has not been great for the industry as a whole?

Andrew, I don't want to talk too much about prospective pricing, but if you look at 2013 sales growth, we're expecting a pretty good balance between volume, price, and mix.

There's a combination within there.

If you look at what's happening in 2013, we do have inflation of around 5%, and cost savings around 3% to 4%.

That's a little bit more inflation than we would normally like to have.

I think in more normal times, inflation would be more around 3%, maybe 4%, which means that we could get gross margin expansion just through the productivity savings.

I think if you are looking at gross margin specifically, if you back out Pringles, we are more or less flattish year on year.

In a perfect world, I'd like to see gross margin expansion.

What's holding that back a little bit is that 5% inflation versus 3% to 4% inflation.

But if your concern is around pricing, we believe we can take pricing to the modest amount that we will need to in order to make our economics work in 2013.

That's very helpful.

I appreciate it.

Lastly on Pringles, it seems as though, at least the best of our ability to estimate this, that maybe the margins for Pringles have come in a bit better than we have been at least modeling.

I think we assume margins may take a step back to account for a lot of the re-investment that I know you want to do and you plan to do behind the brand, the integration of the European part of the business.

I'm trying to get a sense of have margins been better on this business than you would have anticipated?

Do they take a step back, ultimately, before the longer-term opportunity that I know you believe you have in Pringles really starts to kick in?

Yes, Andrew, as we came through 2012, the end of the year, our gross margin performance in particular did get better on Pringles.

We saw better through-puts in the manufacturing plants.

We had even talked about being able to improve and expand the amount of capacity we had available to run products.

We saw good through-puts, good margin expansion as we invest; and we've talked about more capital behind the business to support our growth needs over time.

You will see an initial slight step-back, because of the depreciation drag associated with that capital spending, but obviously, our intent would be to fill that capacity up as quickly as possible.

I think going forward, Andrew, our goal would be to improve the gross margin of Pringles over time closer to the Kellogg Company average, and then put that money back into brand building, so it won't have the same impact on operating leverage.

Thanks everybody.

Thank you.

Next, we have a question from [Thela Reed] of Jefferies.

Good morning, everybody.

When I look at the Nielsen data for Kellogg, it looks like the frozen breakfast segment is actually really slowing, or it has slowed down over the course of the year.

When you talked about the category, you sounded much more positive on it.

Is there a disconnect, or is Nielsen not showing the full picture?

It's Michael, thank you for the question.

When you look at frozen breakfast categories composed of a couple of things, one is syrup carriers, which is where our waffle business is.

If you look at the overall effect, you've seen part of one segment that drives frozen breakfast slow down a little bit.

That's hand-helds.

What you've seen the growth underneath that is syrup carries, which is waffles, which is where the majority of our business has been.

That would probably explain the dynamic.

Are you seeing the same slow-down for your frozen breakfast business that we are seeing in scanner data?

Is the slow-down continuing into 2013, or is it just the way Nielsen reports and there is no slow-down from your perspective?

We feel very confident where our performance has been through Q4, and we would expect our growth to continue.

Thela, I think the discrepancy is the sub-segments within that frozen breakfast category, as Nielsen reports it.

Largely, where our business is has been growing faster than the overall frozen breakfast segment.

There are other pieces in there that have been growing a little less quickly.

We can talk off-line about it, if you like.

Okay, great.

Thank you.

And the next question is from Chris Growe of Stifel.

I had two questions for you.

The first one would just be in relation to Europe, where I think Ron, you said you expect some profit growth in the year.

I want to get a better sense with the improving top-line growth you saw the last couple quarters, do you expect continued recovery and improvement in revenue growth there as well in 2013?

As we look at Europe and we go into 2013, we do expect Europe to return to top- and bottom-line growth in 2013.

Having said that, it does remain the one region that we're most cautious on, given the economic environment in Europe.

Also, the level of change in our European business -- it's the region that's undergoing the greatest integration with Pringles, because it was Pringles' single-largest business; and also, as a percentage of the Kellogg business, it's having a dramatic impact.

We are also re-organizing our Kellogg organization.

In fact, I should say we have re-organized our Kellogg organization.

We have a relatively new leadership team.

We are confident about the future, but there's been a tremendous amount of change in there.

We do feel confident in top- and bottom-line growth.

There are synergies coming out of the Pringles deals that's a little bit higher in Europe than you see elsewhere around the world.

It gives us some of that confidence, but it does remain a difficult region.

Okay, and if I could add on to that, or ask a question about Pringles overall.

Have you said -- and if you did, I missed it, I'm sorry -- but the amount of Pringles accretion you expect in 2013, and I thought I'd ask along with that the amount of synergies you still have left to achieve that you outlined when you first bought the business?

Sure, Chris.

Let me comment on that.

Let me take a step back and talk about 2012, as well.

We performed very well on the business as we came through the balance of the year.

Our business actually did better than we had even expected as we came through the fourth quarter.

Our accretion from Pringles was about $0.05 better than the original $0.11 to $0.13 pennies we were discussing.

Now this is a gross accretion before integration costs.

We talked about that at the third quarter, and that helped to take us to the high end of our earnings-per-share range.

For accretion in '12, we had about $0.17.

As we move to 2013 for Pringles, we're expecting something in the range of $0.30 to $0.32 of gross accretion from the business.

Then we talked about the $0.12 to $0.14 pennies offsetting integration costs.

In terms of synergies, we landed 2012 in the range of $15 million to $20 million, very consistent with our expectations.

As we look to 2013, remember, we've always talked about a range of $50 million to $75 million.

We'll be towards the low end of that range in 2013, then obviously stepping up as we move into 2014.

Okay.

To be clear, the $0.30 to $0.32, does that include the $0.12 to $0.14 of integration costs?

It does not.

Does not, okay.

That's very helpful.

Thank you.

Next, there is a question from David Driscoll of Citi Research.

Great.

Thanks a lot.

Maybe I just follow on just a point here on the Pringles, when you guys originally gave that gross accretion guidance, you also indicated at the time the cessation of the share re-purchase program.

Correct me if I'm wrong, Ron, but I thought the way to think about it was you take that $0.17 of gross accretion and you net it against the lack of the share re-purchase program, so then on a net basis, it was something like, we call it $0.10.

Is that correct for 2012?

That is absolutely correct, David, yes.

Then we would look for an additional $0.07 to kind of head wind because, again, no accretion -- no share re-purchase expected in '13, so you take another $0.07 off the $0.30 to $0.32.

Yes, it would probably be around $0.05 or $0.06.

But relatively in that ball park, David, that is correct.

Okay.

One more detail, and then hopefully a good question that's more thoughtful.

What's -- how long are you hedged for in 2013?

In terms of commodity hedging, David?

At this point in time, we're approximately 75% covered for 2013.

Just for reference, compared to this time last year we were about 70% covered.

We've got a little bit more coverage as we're moving into 2013.

That's really helpful.

My final question, John, is really going to China and this really interesting business venture, joint venture you've entered into with Wilmar.

In your '13 plan that you've outlined, what's the impact from this joint venture?

When do we start to see real sales activities?

What's the -- can you give us some of the meat as to what we should be expecting from Wilmar?

It seems to be pretty exciting, but I don't think you really commented today?

David, we are excited about the long-term potential of the joint venture in China.

I think in the near term, it's going to have a very limited impact.

Remember, the joint venture includes both cereal and Pringles.

So we do have a Pringles opportunity that's probably nearer in.

Cereal's going to take more time.

You'll see some beginning of shipments in sales and advertising and selling in 2013 from the joint venture, but it will pick up speed over time.

I would not expect it to have a material impact to our results in the next two or three years.

Thank you very much.

Thank you.

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

Hi, thank you for the question.

In your comments, I think you said that the US cereal business had a strong inventory build in fourth quarter, ahead of the Resolution program.

Just to be clear, does that mean that shipments will be necessarily a little bit lower in first quarter because of that, or is that really just in anticipation of a good program?

Then a follow-up, please.

Well, we did ship a little bit more than we consumed in Q4.

There's a gap between the two numbers.

That does reflect both the new innovation going in, as well as the strong promotional merchandising that we have in the first quarter.

If you remember last year with Resolution, which is a big program behind Special K, we really made the snacks business the hero of that event.

In the first quarter of this year, we made cereal the hero of that event.

As a result, we saw a little bit more cereal inventory go in, in advance of those events.

While it's early days on the consumption data, we are seeing about 3.5% increase in units consumption behind Kellogg cereals in the first part of the year, so we do expect that to flow through.

We're not giving guidance cereal sales growth in the first quarter.

I will say that we continue to get good orders from retailers in January.

We continue to ship well.

I'm not seeing anything that gives me too much concern.

I'm glad you said that, John, because one of my concerns was your number one competitor normally launches products in the summer and fall.

It looks like they are pushing that out more towards January, February.

Have you seen any more intensity in terms of competition, in terms of new products?

Could that actually help the category rather than hurt your market share?

I think it's, if more players drive innovation harder and the brand-building harder, I think the category will respond and grow.

It's always an intensely competitive category.

I don't think it's any more competitive than what it has been historically.

Great, thank you.

Thank you.

And the next question is from Jonathan Feeney of Janney Capital Markets.

I wanted to dig in just on a detail on the cost inflation outlook; because it seems -- it would seem that in the fourth quarter, you got -- and even some in the third quarter got -- some significantly favorable moves in your apparent cost basket.

I wanted to know, does this inflation forecast -- are you -- could you give us some more detail about it, and how your confidence in that inflation forecast might have changed, and whether that forecast has moved in the past six months?

Specifically, would you say you're more or less than average hedged at this point, given your behavior the last six months?

Thank you.

Yes.

Couple of things on that, Jonathan.

First of all, you may recall at the Investor Day, I talked about approximately 6% cost inflation and now we're seeing 5%, so we have seen a little bit of movement down.

I mentioned just a little while ago that we're about 75% covered at this point in time for 2013, whereas at this time last year, we were about 70% covered for 2012.

I think the other thing that people don't always recognize is we have our domestic business, but also our international business.

We are seeing inflation in the international business, as well as the domestic business.

One last thing to keep in mind is we have hedge positions that roll off as we enter a year, so sometimes we see inflation as a result of those more favorable positions rolling off, and the new cost trend rolling into our business.

Okay.

Thanks very much.

You're welcome.

And the next question is from Matthew Granger of Morgan Stanley.

On international and Latin America, Asia in particular, can you just -- I just wanted to get your updated thoughts on how far along into the process of ramping up investment spend in these regions we ar -- on the base business, not necessarily on Pringles -- after the double-digit growth that you had in brand building this year.

Perhaps just what are your investment priorities in those regions for 2013, and should we start to see a bit more operating leverage or stabilization in margins there?

Well as you look at Latin American and Asia-Pacific, they both represent strong growth potential regions for the Company.

They're in areas we think about our brand-building investment where we're likely to push a little bit more versus other parts of the Company.

I say both of them, we'd expect to see brand-building growing at or above the rate of sales growth.

Within Latin America, we have made a fairly significant investment in Brazil, and we see us continuing to do that.

That's one part of Latin America that we believe has more potential for us as a Company.

Then in Asia-Pacific, we've spoken before about India and South Africa and even some markets in Southeast Asia now that we believe have tremendous potential.

I think the goal for both of those regions is to accelerate their top-line growth.

That will give us the operating leverage to invest disproportionately back in brand building and still make the economics work and continue to drive profit in both regions over time.

Laura, I think we have time for maybe one more question.

Certainly.

We have a question from John Baumgartner of Wells Fargo.

Thanks, good morning.

John or Michael, wondering if you can speak a bit to the evolution of the frozen foods case going forward.

I think first off, I guess you're seeing more momentum there in terms of shelf space increases for the breakfast day part, breakfast snacking.

Secondly, thinking about 2013, innovation with flat breads, Eggo coming through again.

Can you talk a little bit about how retailers are managing the category going forward in terms of breakfast versus snacking and other day parts?

Yes, John, it's Michael.

Thanks for the question.

As we look at our business, we have, as we talked about, very strong categories in which we compete, and really good heritage, not only in Eggo brand, and then when you look at the veggie business, just really on trend category.

Of course, retailers are always going to look at productivity of segments, and we think we're positioned in two very productive segments, so we anticipate continued strong performance.

Ron, any thoughts on the potential for devaluation there in Venezuela, and how that may impact the P&L this year?

Yes.

Keep in mind, Venezuela's a relatively small part of our business, from a revenue standpoint, somewhere between 1% and 2% of our total revenues.

Of course, we trade in a number of currencies around the world.

We do have within our estimates a reasonable weakening of the currency in Venezuela.

It's included in our guidance.

Obviously, we'll discuss if there is a devaluation and if it is materially different versus our estimates.

Thank you.

Okay, everyone.

Thanks very much for joining us today.

We're available, obviously, for follow-ups, as always.

Please give us a call with any other questions.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.