Kellogg Company (K)

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Kellogg (K)

Q2 2011 Earnings Call

July 28, 2011 9:30 am ET


John Bryant - Chief Executive Officer, President and Director

Ronald Dissinger - Chief Financial Officer and Senior Vice President


Judy Hong - Goldman Sachs Group Inc.

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

Andrew Lazar - Barclays Capital

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

Eric Larson - Ticonderoga Securities LLC

Scott Mushkin - Jefferies & Company, Inc.

Terry Bivens - JP Morgan Chase & Co

Eric Katzman - Deutsche Bank AG

Eric Serotta - Wells Fargo Securities, LLC

Robert Dickerson - Consumer Edge Research, LLC

Bryan Spillane - BofA Merrill Lynch

Timothy Ramey - D.A. Davidson & Co.

David Driscoll - Citigroup Inc

David Palmer - UBS Investment Bank



Good morning. Welcome to the Kellogg Company Second Quarter 2011 Earnings Call. [Operator Instructions] At this time, I will turn the call over to John Bryant, President and CEO of Kellogg Company. Mr. Bryant, you may begin your conference.

John Bryant

Thank you, Michael. Good morning, and thank you for joining us today, and welcome to the review of our second quarter 2011 results. I am joined by Ron Dissinger, our Chief Financial Officer. Unfortunately, Kathryn Koessel, our Vice President of Investor Relations, could not be with us today due to illness. We all hope she gets better soon.

The press release and the 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 Monday, August 1. The call will also be available via webcast, which will be archived for at least 90 days.

Now let me turn to our second quarter performance. We are pleased to announce solid second quarter results, which demonstrate that we are beginning to rebuild our momentum, following a very difficult 2010. While these results are against relatively soft comparisons in 2010, we delivered strong top line results and internal operating profit, as increasing benefits and price mix helped to offset higher input costs. The highlight of the second quarter was very strong share results across our U.S. business, driven by innovation, brand building and execution. We have also seen improvement in our core categories as broad-based pricing actions have helped to mitigate increased cost pressures. Specifically, we gained 1.7 share points in U.S. cereal in measured channels, with 35.5 share across the quarter. We also gained share in waffles, toaster pastries, crackers and wholesome snacks. Our momentum also improved in our international business, with sales growth across all 3 regions. Based on increased net price realization and our confidence in our innovation, we are raising our internal 2011 net sales outlook and reaffirming our 2011 currency neutral EPS guidance. Ron will speak more to our guidance shortly. We had a solid start to the year and continue to be on track with our 2011 plans. That said, 2011 remains a year of rebuilding in a difficult consumer and retail environment. Turning now to our results, Ron will take you through our financial highlights.

Ronald Dissinger

Thanks, John, and good morning. During the second quarter, we continued to execute against our plan to gain momentum in our business and we are pleased with our results. Our price realization improved in comparison to our first quarter, and we invested in innovation and brand building. We delivered strong top line growth, with reported net sales growth of 11% and internal net sales growth of 6%. And we grew sales across all of our operating segments.

Operating profit increased 12% on a reported basis and 8% on an internal basis, driven primarily by our North America and Latin America businesses. Earnings per share grew 19% on a reported basis and 13% on a currency neutral basis. Earnings per share growth included a benefit from reduced average shares outstanding as a result of our share repurchase program.

Slide 5 shows the components of our net sales growth in the quarter. Our volume increased 0.6 points for the quarter, driven primarily by easy comparisons to the second quarter of 2010. Our volume growth through the first half of the year is in line with our expectations. Price and mix contributed 5.4 points of growth as we recognized the full impact of our first quarter pricing, some select additional pricing in the second quarter and the mix improvements. We expect to see the positive impact of our net price realization increase throughout the remainder of the year. As a result, we are increasing our full year 2011 internal net sales growth guidance to a range of 4% to 5%. Currency contributed 4.6 points of growth for the quarter. Reported gross profit dollars in the quarter were up 11%. Internal gross profit dollars grew 6%, reflecting strong net sales growth. Our price realization and cost savings initiatives covered input cost inflation. This allowed us to manage gross profit margin flat compared with a year ago at 42.6%. Over 90% of our commodities for 2011 are hedged. For the full year, our cost pressures are now expected to be at the high end of our 7% to 8% range. Full year gross margin is still expected to be down approximately 50 basis points.

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