Kellogg Company (K)

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Kellogg (K)

Q3 2012 Earnings Call

November 01, 2012 9:30 am ET

Executives

Simon Burton - Executive Officer of Snacks business unit

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

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

Analysts

John J. Baumgartner - Wells Fargo Securities, LLC, Research Division

David Driscoll - Citigroup Inc, Research Division

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

Matthew C. Grainger - Morgan Stanley, Research Division

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

Eric R. Katzman - Deutsche Bank AG, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Andrew Lazar - Barclays Capital, Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

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

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

Presentation

Operator

Good morning. Welcome to the Kellogg Company Third Quarter 2012 Earnings Call. [Operator Instructions] At this time, I'll turn the call over to Simon Burton, Kellogg Company Vice President of Investor Relations. Mr. Burton, you may begin your conference.

Simon Burton

Thank you, Sean. Good morning and thank you for joining us today for a review of our third quarter 2012 results. I'm joined by John Bryant, our President and CEO; Ron Dissinger, our Chief Financial Officer; and David Denholm, President of our U.S. Morning Foods business. Intention is to highlight different business units periodically and David is here to discuss our U.S. Cereal and Pop-Tarts businesses in a little more detail.

Also, I just wanted to mention, for those of you don't know, they will be hosting a day of presentations for analysts and investors in Chicago on November 8. Please contact us if you'd like to attend and haven't yet registered.

The press release and slides to support our remarks this morning are posted on our website at www.kelloggscompany.com. As you're aware, certain statements made today, such as projections for Kellogg company's future performance, including earnings per share, sales, profit, cash flow, brand building, cost, investments and the integration of Pringles, are all 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, November 5. The call will also be available via webcast, which will be archived for at least 90 days. Now, I'll turn it over to John.

John A. Bryant

Thanks, Simon, and thanks to everyone for joining us today. I know the recent storm has had an impact on many of you. I hope that you and your families are safe.

Turning to our third quarter results. We're pleased that our underlying performance in the third quarter was broadly in line with expectations and reflects continued progress. Internal net sales growth was almost 3%, the high end of our guidance for the full year. As expected, our top line growth has been improving sequentially as we've progressed through the year. Consolidated internal operating profit would have also increased in the quarter were it not for the impact of the Mini-Wheats recall, which I'll discuss in more detail in a minute. And as with sales growth, we've seen some sequential improvement in underlying operating profit during the year, particularly in North America.

Underlying operating results in North America were very strong as we saw a significant improvement in the Cereal business. We continue to see strong performance from Pop-Tarts, Specialty Channels and the Frozen Foods business.

We also saw some additional improvement in the European business. In the U.K., we've seen benefits from better commercial programs and strong innovation. As a consequence, we've posted sales growth in both Cereal and Snacks in the quarter in the U.K. As we've discussed before, the Continental European business continues to be under pressure due to economic conditions where we've taken actions and have seen some early signs that they're having an effect. Underlying sales growth was strong in both Asia Pacific and Latin America and, as we mentioned on our last call, we increased our investment in brand building to double-digit rate in both regions.

Now, I'd like to address the Mini-Wheats recall of a few weeks ago. Obviously, we never want to have a recall. But as you know, these things do happen periodically in our industry. We reacted quickly and effectively to the situation. I remain confident that we have turned the corner in our supply chain over the last 2 years, that we have proactively identified and addressed the challenges. This places us in a much stronger position to avoid and mitigate these issues in the future.

Let's turn to Slide 4 in a brief update regarding Pringles. As you know, we have seen better operating performance from Pringles than we expected. In fact, Pringles in North America posted organic sales growth of 10% in the third quarter. This a testament to the strength of the brand and the team that's running the business. We're very pleased that we've been able to attract many of the Pringles employees to Kellogg. They're excited to become part of a large food company and we're pleased to be gaining such energized and knowledgeable people.

And finally, the integration continues to go well. The teams running the integration are doing a great job. They've executed well in North America and have already seen some benefit and we're currently in the middle of the integration in Europe. So we're excited about the potential of this iconic global brand and as you might imagine, we'll give you more detail in next week's Investor Day.

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