Kellogg Company (K)

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Kellogg Company (K)

Q2 2009 Earnings Call

July 30, 2009 9:30 am ET


Joel Wittenberg – Vice President, Investor Relations

David Mackay – President and Chief Executive Officer

John Bryant – Chief Operating Officer and Chief Financial Officer

Gary Pilnick – General Counsel


Robert Moskow - Credit Suisse

Terry Bivens - J.P. Morgan

Alexia Howard - Sanford Bernstein

Vincent Andrews - Morgan Stanley

David Driscoll - Citigroup and Investment Research

Edward Aaron - RBC Capital Markets

Jonathan Feeney - Janney Montgomery Scott LLC

David Palmer - UBS

Eric Katzman - Deutsche Bank Securities

Ken Zaslow - BMO Capital Markets

Bryan Spillane - BAS-ML

Chris Growe - Stifel Nicolaus

Andrew Lazar - Barclays Capital



Good morning. Welcome to the Kellogg Company 2009 second quarter earnings call. (Operator Instructions)

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

Joel Wittenberg

Thanks Doug, and good morning everyone. And thank you for joining us for a review of our second quarter results. With me here in Battle Creek are David Mackay, President and CEO, John Bryant, Chief Operating Officer 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, up front costs, impact of the recalls 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 our public SEC filings.

A replay of today’s conference call will be available by phone through Monday evening by dialing 888-632-8973. The pass code is #20808846. The call will also be available by webcast which will be archived for 90 days.

Now let me turn it over to David.

David Mackay

Thanks Joel and good morning everyone. The second quarter was a strong one for Kellogg Company. Our double digit EPS growth was higher than expected, driven by strong operating profit delivery, favorability below the line and offset by higher [inaudible] spending. Furthermore, we enter the second half with even better visibility into the year and even stronger confidence that we’ll deliver another year of sustainable and dependable growth.

There’s no doubt the current economic environments’ difficult. However, our business approach is designed to achieve positive results, even during challenging economic conditions. The second quarter results illustrated the continued resilience and relevance of our focused strategy and business model. Internal net sales, which excludes the impact of foreign exchange, acquisitions and shipping days, grew 3% during the quarter, consistent with our expectation of 3 to 4% sales growth for the full year.

Our categories are performing well during the recession, and cereal is an especially strong category to be in right now as consumers seek to maximize the value received from every food dollar spent. Gross margin exceeded our expectations and we saw solid margin expansion in the quarter. Excellent delivery for our $1 billion challenge enabled us to deliver gross margin expansion. And while commodity costs have fallen as we expected, we’re still seeing, however, cost of goods inflation versus last year.

The double digit internal operating profit growth we posted exceeded our long term annual target of mid single digit growth, as momentum continued behind productivity and cost saving initiatives. We also saw benefit in Q2 from the timely advertising spend, which will be reinvested in the second half and which executed well across categories and regions, gaining share in most of our major markets. We’re on track to achieve our goal of delivering $1 billion in annual savings by year end 2011.

And importantly despite increasing our investments in the second half, we’re also raising our accounts and neutral earnings per share guidance to a range of 8 to 10% growth for full year 2009 from our original guidance of high single digit growth. As you can see, we remain committed to continue to deliver sustainable and dependable growth for our share owners in 2009 and going forward.

And now I’d like to turn it over to John to walk you through the financials.

John Bryant

Thanks David and good morning everyone. The headwinds we discussed during our first quarter call have continued. Despite the challenges of a tough competitive landscape, a weak economy and tough comps, we met or exceeded our long term annual targets of low single digit internal net sales growth, mid single digit operating profit growth and high single digit currency neutral EPS growth.

Reported net sales declined 3% for the quarter, including a negative foreign exchange impact. Internal net sales growth, which excludes the effect of foreign exchange, acquisitions and shipping days was 3%, building on last year’s strong 6% internal sales growth. We continue to project 3 to 4% internal net sales growth for the full year 2009.

Reported operating profit increased by 4% despite year-on-year inflation for the quarter of 4%. Internal operating profit grew by a strong 14%. This result was driven by excellent delivery from our $1 billion challenge and lower advertising expenditures due to timing.

We invested approximately $0.07 of EPS into up front costs this quarter and of last year’s $0.04 per share. Reported earnings per share rose ahead of expectations to $0.92, a 12% increase on a reported basis and a 23% increase on a currency neutral basis. This result was driven by strong operating profit growth and favorability from below the line items such as lower interest expense, lower tax and timing on other income expense.

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