Kellogg Company (K)

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Kellogg (K)

Q4 2011 Earnings Call

February 02, 2012 9:30 am ET


Simon Burton - Executive Officer of Snacks business unit

John A. Bryant - Chief Executive Officer, President and Director

Ronald L. Dissinger - Chief Financial Officer and Senior Vice President


Kenneth Goldman - JP Morgan Chase & Co, Research Division

Scott Andrew Mushkin - Jefferies & Company, Inc., Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Andrew Lazar - Barclays Capital, Research Division

David Driscoll - Citigroup Inc, Research Division

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

Kenneth B. Zaslow - BMO Capital Markets U.S.

Timothy S. Ramey - D.A. Davidson & Co., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Eric Serotta - Wells Fargo Securities, LLC, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

David Palmer - UBS Investment Bank, Research Division



Good morning. Welcome to the Kellogg Company Fourth Quarter and Full Year 2011 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to Simon Burton, Vice President of Investor Relations. Mr. Burton, you may begin your conference.

Simon Burton

Thank you, Tyrone. Good morning, everyone, and thank you for joining us today for a review of our full year and fourth quarter 2011 results. I'm joined by 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, investments 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, February 6. The call will also be available via webcast, which will be archived for 90 days. Now I'll turn it over to John.

John A. Bryant

Thank you, Simon. The fourth quarter was a strong finish to a difficult year. We delivered continued strong top line growth in the quarter and the full year. In fact, fourth quarter growth was 6% and we ended the year with full year growth of 4.5%, above our long-term targets and in line with guidance. And the growth was broad-based across most geographies and categories. In addition, our categories continue to perform well and we gained share in many of them around the world. However, the results below net sales, while in line with recent guidance, were below our initial expectations and our long-term targets. As you all know, we increased the scope of our existing supply chain investment in the third quarter. This had a significant impact on the fourth quarter and full year results as expected. In addition, increased investment and reinstated incentive compensation costs also had an impact on full year results.

We view 2011 and 2012 as transition years, given investment in our supply chain and incremental support of our brands in 2012. While we don't want to be in the position of lowering guidance, we recognized during the year that we had issues in our supply chain that needed to be addressed and we know that addressing those issues as quickly as we can is the right thing to do. We look forward to 2012 and beyond with optimism as we continue this investment, make significant additional investments in future growth and focus on the long-term drivers of our sustainable growth operating principle.

Now let's turn to Slide 4, which details these drivers. Our sustainable growth operating principle, the actions we took in 2011 and the things we are doing in 2012 are all designed to get us back on the path to sustainable growth. This is a familiar slide to many, but not all of you. As you can see, on an ongoing basis, we constantly focus on the consumer and the strength of our brands. And as we said on the third quarter conference call, we expect an increase in the investment we will make in brand building in 2012 and we expect significant sales from innovation during the year. That's on top of posting approximately $800 million in incremental sales from innovation in 2011. In addition, we have a disciplined approach to overhead and have done a good job with this over the years, and 2012 will be no exception. Innovation, building on a foundation of consistent brand building will help improve price and mix, which has an impact on sales and should increase gross profit dollars, and in a year of normalized inflation, should also increase gross profit margin. While gross margin in 2012 is likely to be down slightly because of our expectations for another year of unusually high inflation, we believe that this sustainable growth model is the right way to run our business over the long term and we recognize that we have to invest this year to help next year and beyond.

And now I'll turn it over to Ron for a review of our financial performance.

Ronald L. Dissinger

Thanks, John, and good morning, everyone. If you'll turn to Slide 5, you'll see, as John mentioned, that we delivered strong internal top line growth of 6% in the fourth quarter and 4.5% for the full year. Both results are above our long-term targets and we're pleased with the company's continued top line momentum. Internal operating profit growth was 20.5% in the fourth quarter, driven primarily by our sales growth. For the full year, internal operating profit declined by 2.9%. These results were in line with our guidance. As we said on our third quarter earnings call, full year operating profit was significantly impacted by our supply chain investments, commodity inflation and the reinstatement of our incentive compensation costs. In fact, for the full year, the incentive compensation costs lowered operating profit by approximately 5 points and the supply chain investments also impacted operating profit by a similar amount. So underlying operating profit growth would have been in line with our long-term targets without the impact of these discrete items and lapping the cereal recall from 2010. Both reported and currency neutral earnings per share increased by 25% in the fourth quarter. For the full year, reported earnings per share were up 2.4% and currency neutral earnings per share were flat, in line with our guidance.

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