Kellogg Company (K)

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Kellogg (K)

Q1 2011 Earnings Call

May 04, 2011 9:30 am ET


John Bryant - Chief Executive Officer, President and Director

Kathryn Koessel -

Ronald Dissinger - Chief Financial Officer and Senior Vice President


Alexia Howard - Sanford C. Bernstein & Co., Inc.

Andrew Lazar - Barclays Capital

Diane Geissler - Credit Agricole Securities (USA) Inc.

Jason English - Goldman Sachs Group Inc.

Vincent Andrews - Morgan Stanley

Terry Bivens - JP Morgan Chase & Co

Eric Serotta - Wells Fargo Securities, LLC

Eric Katzman - Deutsche Bank AG

Robert Moskow - Crédit Suisse AG

Kenneth Zaslow - BMO Capital Markets U.S.

Bryan Spillane - BofA Merrill Lynch

Edward Aaron - RBC Capital Markets, LLC

David Driscoll - Citigroup Inc

David Palmer - UBS Investment Bank



Good morning. Welcome to the Kellogg Company's First Quarter 2011 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 first quarter 2011 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 are posted on our website at

As you were 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 Monday, May 9. 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 Bryant, Kellogg Company President and CEO.

John Bryant

Good morning, and thank you for joining us today. We are pleased with our first quarter results. Our performance reflects the building of momentum in our business and represents a good start to the year. We delivered strong top line results, both in our North America and International businesses. As Ron will discuss in more detail, operating profit declined for the quarter on a year-over-year basis, as the timing of net price realization lagged input cost inflation during the quarter, and increases in supply chain investments and advertising spending impacted our growth. These results are also on top of the toughest quarterly year-over-year comparison that we faced in 2011.

We remain on track for the year, raising our internal net sales outlook and reaffirming our 2011 internal operating profit and currency-neutral EPS guidance. As we said at CAGNY, regaining momentum is our primary focus in 2011. Our first quarter results set us on the right path to rebuild momentum throughout the year. We are in great categories which respond well to innovation, brand building and nutrition to drive top line growth.

We are focused on exciting consumers with new innovation in every major category to drive top line performance. As we shared with you last quarter and at CAGNY, we plan to launch more than $800 million worth of new products in 2011. Our first quarter results demonstrate the importance of innovation. Within the U.S. Cereal and Snacks categories, we had over 60 share of all innovation dollars in the quarter. We introduced the U.K. cereal brand, Crunchy Nut, into the U.S., where it was immediately embraced by consumers. Our new Special K Oat and Honey cereal is off to a strong start as well. In the Snacks business, we benefited from the early success of Special K Cracker Chips. Additionally, Eggo launched Thick & Fluffy waffles which in my opinion is the best waffle we have ever made.

Overseas, we started off the year with strong innovation as well. In Europe, we introduced Special K Clusters and Krave Milk Chocolate Cereals as well as two varieties of Rice Krispies squares. Our five new varieties of Be Natural cereals continued to gain momentum in Australia. Our focus on innovation continues with a solid pipeline that extends through the second half of 2011 and beyond.

We continue to invest heavily in brand building, as demonstrated by our 10% spending increase during the first quarter. This brand building help support the introduction of our innovation to the market, including programs behind Crunchy Nut Cereal and Special K Cracker Chips. We still expect advertising to grow by low single digits for the year.

As we have discussed, digital media is an important tool for increasing the effectiveness and efficiency of our ad spend. With an ever increasing number of ways to target our consumers through new media platforms, we can often spend less to reach the same and potentially larger audience. Our goal is to engage our consumers, forging stronger relationships with our brands whether through traditional television, print media or online programs such as Special K Resolution.

Let me give you three examples of how we engage consumers and bring our programs to life. An example of a recent integrated promotion is our Share Your Breakfast program, part of our ongoing effort to drive category growth. We are asking consumers to take a picture of their breakfast and post it on For every breakfast shared, we will donate one to a child in need, giving away 1 million breakfasts. We also celebrated National Breakfast Day on March 8 and served cereal to thousands of New Yorkers in Grand Central Station. During this week, we had the highest cereal consumption of the year.

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