Kellogg Company (K)

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Kellogg (K)

Q4 2010 Earnings Call

February 03, 2011 9:30 am ET


John Bryant - Chief Executive Officer, President and Director

Kathryn Koessel -

Ronald Dissinger - Chief Financial Officer and Senior Vice President


Judy Hong - Goldman Sachs Group Inc.

Alexia Howard - Bernstein Research

Andrew Lazar - Barclays Capital

Vincent Andrews - Morgan Stanley

Jonathan Feeney - Janney Montgomery Scott LLC

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Terry Bivens - JP Morgan Chase & Co

Eric Serotta - Wells Fargo Securities, LLC

Eric Katzman - Deutsche Bank AG

Robert Moskow - Crédit Suisse AG

Bryan Spillane - BofA Merrill Lynch

David Driscoll - Citigroup Inc



Good morning. Welcome to the Kellogg Company's Fourth Quarter and Full Year 2010 Earnings Call. [Operator Instructions] At this time, I will turn the call over to Kathryn Koessel, Kellogg Company Vice President of Investor Relations. Ms. Koessel, you may begin your conference.

Kathryn Koessel

Thank you, James. Good morning, and thank you for joining us today, and welcome to the review of our 2010 fourth quarter results. Joining me are John Bryant, our President and CEO; and Ron Dissinger, our Chief Financial Officer. The press release and slides that support our remarks this morning are posted on our website at

As you are aware, certain statements today, such as projections for Kellogg Company's future performance, including earnings per share, net sales, margin, operating profit, interest expense, tax rate, cash flow, brand building, upfront costs 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 11. The call will also be available via webcast, which will be archived for at least 90 days. Now let me turn it over to John, who assume the role of President and CEO at the beginning of the year.

John Bryant

Thanks, Kathryn, and good morning, everyone. Thank you for joining us today to discuss our results for the fourth quarter and full year 2010.

As this is my first earnings call since my appointment as CEO in January, I wanted to begin by saying that I am honored to step into this role. Kellogg has over a 100-year heritage and some of the most beloved brands in the industry. I am excited about the opportunities we have here at Kellogg as we focus on strategic priorities to deliver long-term growth with the support of our employees around the world.

I'd also like to express my appreciation to David MacKay for his nearly 20 years of dedicated service to Kellogg. We worked closely together since I joined the company 13 years ago, and I appreciate the support he has provided me along the way. I hope you'll all join me in wishing David all the best in his retirement.

Before I discuss our results, I'd like to address at a high level what we saw in 2010 and the actions we have taken today to position Kellogg for the future. Then Ron will discuss our financial results in greater detail.

As you know, 2010 had its challenges. On our third quarter conference call in November, we discussed four major issues that affected our results: decreased innovation, supply chain disruptions, tough comparisons in our core Cereal business and non-measured channels and deflationary pressures. We are well aware of our opportunities and challenges and have already begun to take the necessary steps to position the company for improved and long-term success.

First, our categories respond to innovation and brand building. For 2011, we have a stronger innovation pipeline and commercial plans to drive top line growth. We expect an approximate 25% increase in innovation compared to 2009, 2010. We are already receiving positive feedback from our retail partners, who are excited by our innovation pipeline. We look forward to discussing our plans with you in greater detail at CAGNY on February 23.

Second, we have increased investment in our supply chain to mitigate potential risks. For example, we have significantly increased our resources to order our suppliers and further increased independent testing of raw materials. We have also invested in additional capacity for Eggo waffles to provide further capacity for ongoing growth.

And finally, we expect to move out of a deflationary cycle. In late 2010, we announced price increases on many products across our categories around the world to help offset the impact of rising input costs. We expect net price realization and positive mix to drive top line growth in 2011.

As we look forward, we remain confident about the long-term growth prospects for our business. We believe cereal and snacks are great categories to be in, and the Frozen Foods business provides further opportunities for long-term growth. With that, I'd like to turn to our results, which were in line with our revised full year guidance as provided on our third quarter call.

2010 internal net sales growth was down 1%, and internal operating profit was flat. Currency-neutral 2010 earnings per share increased by 6% year-over-year.

Our fourth quarter results also include impairment charges on our China acquisition. We have struggled with our business in China since making a small acquisition of a Biscuit business in the country in 2008. Our current business model in China has not proven to be the right entry vehicle. However, we still believe the country is attractive and recognize its importance for future growth.

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