Kellogg Company (K)

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Kellogg Company (K)

Q1 2009 Earnings Call Transcript

April 30, 2009 9:30 am ET


Joel Wittenberg – VP, IR

David Mackay – President and CEO

John Bryant – COO and CFO


Judy Hong – Goldman Sachs

Chris Growe – Stifel Nicolaus

Bryan Spillane – Bank of America/Merrill Lynch

David Palmer – UBS

Eric Katzman – Deutsche Bank

Eric Serotta – Consumer Edge Research

Ed Roesch – Soleil Securities

Alexia Howard – Sanford Bernstein

Jonathan Feeney – Janney Montgomery Scott

Rob Moskow – Credit Suisse

Ken Zaslow – BMO Capital Markets

Terry Bivens – J.P. Morgan

Tim Ramey – D.A. Davidson & Co.

Andrew Lazar – Barclays Capital



Good morning. Welcome to the Kellogg Company 2009 First Quarter 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) Thank you.

At this time, I will turn over the call over Joe Wittenberg, Kellogg Company Vice President of Investor Relations. Mr. Wittenberg, you may begin your conference.

Joel Wittenberg

Thanks Christina and good morning everyone and thank you for joining us for a review of our first quarter results.

With me here in Battle Creek are David MacKay, President and CEO; John Bryant, Chief Operating and Financial Officer, and Gary Pilnick, General Counsel.

We must point out that 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, cost savings, brand building, upfront costs, impact of the recall 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.

A replay of today’s conference call will be available by phone through Monday evening by dialing 888-632-8973 in the US and 201-499-0429 international from international locations. The passcode is #43296486. The call will be also available via webcast which will be archived for 90 days.

Now, let me turn it over to David.

David Mackay

Thanks Joel and good morning everyone. We are pleased to report that our first quarter results were ahead of our expectations, driven by broad based internal sales growth of over 4%. As we discussed previously, the first quarter was expected to be one of our more challenging quarters. But by continuing to execute against our strategy and business model, we performed well despite the tough economic conditions, the peanut related product recalls and the impact of some of challenging European retail negotiations which have now been resolved.

Internal net sales which excludes the impact of foreign exchange, acquisitions and shipping days rose 4% versus last year’s 5% comparable. Internal operating profit rose 7% driven by a solid sales growth as well as relentless focus on cost saving initiatives and efficiency.

In addition, we faced a difficult quarter of commodity cost pressures and absorbed cost related to the recalls. Earnings per share were $0.84, a 4% increase on a reported basis and a 14% increase on a currency neutral basis.

EPS was also significantly above their target. With a solid momentum, we are now even more confident we’ll achieve our most recent full year guidance of 3% to 4% internal sales growth, mid-single digit internal operating profit growth and high-single digit currency neutral earnings per share growth. We will reinvest advertising savings and strive to increase our consumer impressions at a lower cost. In addition, in this difficult economic environment, we are focused on driving a strong value message to consumers.

We now plan to significantly increase our investments at upfront cost saving initiatives. From our original expectation of $0.14 per share to approximately $0.22 per share and we expect this heightened level to continue in 2010.

These investments keep us on track to achieve $1 billion of annual cost savings by the end of 2011. The annual savings which will be achieved over three years combined with our business momentum gives us increased visibility into our future earnings.

Last, we will continue to return cash to shareholders’ during 2009. We have confidence in our long-term business model as evidenced by the Board of Directors decision to increase the dividend by 10% starting in the third quarter. And now I would like to turn it over to John to take you through the financials.

John Bryant

Thanks David and good morning everyone. Slide 4 highlights our financial performance for the first quarter. During our last call, we discussed the significant challenges we faced during the quarter including a tough competitive landscape, the weak economy, the impact of the peanut related recalls and tough comps.

Despite these headwinds we exceeded our long-term targets of low-single digit internal sales growth, mid-single digit operating profit growth and high-single digit currency neutral EPS growth. Reported sales declined by 3% during the first quarter driven by an 8% negative impact from foreign exchange.

Internal sales which excludes the effect of foreign exchange and our recent acquisitions were up 4% building up last year’s 5% growth. While reported operating profit declined by 3% driven by foreign exchange and lapping last year’s strong 9% growth Internal operating profit rose 7%, driven by sales performance and productivity initiatives and offset by cost pressures.

In addition, the recalls reduced operating profit by approximately 5% and reduced earnings per share by about $0.05 per share. Upfront costs during the first quarter were $0.03 roughly in line with last year. Reported earnings per share rose to $0.84, a 4% increase on a reported basis and a 14% increase in a currency neutral basis.

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