Kellogg Company
Q4 2010 Earnings Call Transcript

Published: 3 Feb 2011

[Operator:]

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 www.kelloggcompany.com. As you are aware, certain statements 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 assumed 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've 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 are taking 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

[Ronald Dissinger:]

Thanks, John, and good morning, everyone. As John mentioned, our results were in line with the guidance that we communicated on the third quarter conference call. Net sales for the full year 2010 declined 1% on both a reported and internal basis. For the fourth quarter, reported net sales declined 1%, and internal net sales were flat, due primarily to performance in our core cereal markets. Reported operating profit was down 1% for the year, while internal operating profit was flat as expected. For the fourth quarter, reported operating profit was down 7%. Internal operating profit was down 5% and included an impairment charge for our business in China. I'll discuss the impact of this charge later. Earnings per share grew 4% on a reported basis and 6% on a currency neutral basis for the year. Earnings per share benefited from lapping the costs associated with the bond tender in the fourth quarter of 2009, as well as share repurchases in 2010. Now let me discuss the key components of our financial performance. Slide 10 shows components of our net sales growth for the quarter and the year. Our volume declined by 2.1 points for the year, driven by U.S. cereal, including the impact of the mid-year recall, the supply disruption in Eggo and the ongoing transition from bulk to packaged products in our Snacks business in Russia. Partially offsetting the volume decline was improvement in price and mix for both the quarter and the year. Price and mix contributed 0.8 of a point of growth for the year and 0.6 of a point of growth for the quarter. Currency adversely impacted net sales by 0.1 of a point for the year and 0.9 of a point for the quarter. Slide 11 recaps our gross profit and gross margin performance. Gross profit declined by 2% for the year to $5.3 billion due to lower sales volume, increased commodity costs and a competitive pricing environment. In addition, the cereal recall adversely impacted gross profit. Internal gross margin contracted by 20 basis points for the year to 42.7%. As planned, we increased our advertising investment in the quarter, ending the full year up mid-single digits. We continue to improve the effectiveness and efficiency of our media investment by engaging consumers through digital and TV media. The North America business drove most of the investment in the fourth quarter as reflected in its operating profit. Now let me turn to Slide 13 to review internal operating profit in more detail across the regions. Internal operating profit was flat for the year, in line with our expectations. In the fourth quarter, operating profit declined 5% on an internal basis, including the impairment of our business in China. Without the impairment, internal operating profit would have been up 1% for the year and up 4% for the fourth quarter. North America internal operating profit declined 2% for the year. Lower sales volume in our U.S. Cereal business due to the recall and competitive activity were the primary drivers of the decline in profit. These were partially offset by lower incentive compensation costs and lower upfront costs. Internal operating profit declined 10% in the quarter, due primarily to timing of advertising investment. Europe delivered 8% internal operating profit growth against strong operating profit growth of 7% in 2009. Lower input costs and lower upfront costs were key contributors to profit performance. Internal operating profit increased 36% in the quarter, primarily as a result of timing of advertising costs and lower upfront costs. In Latin America, internal operating profit declined 2% for the year. Commodity costs increased significantly throughout the year. In addition, we experienced a supply disruption in Brazil earlier in the year. For the fourth quarter, internal operating profit increased 46% due to sales growth and a lower upfront costs, which were partially offset by higher input costs. Internal operating profit declined 30% for the year in Asia-Pacific, including the impairment charge for our China business. Without the impairment, Asia-Pacific internal operating profit would have increased approximately 2% for the year. Lower profit in our China business, combined with increased advertising across the region, also impacted our performance for the year. Slide 14 provides a recap of our cash flow for the year. We delivered 2010 cash flow of approximately $1 billion before a voluntary contribution to the company's pension and post-retirement benefit plans. In the fourth quarter, we issued $1 billion of 10-year bonds. This issuance provided us with the flexibility to contribute $467 million net of tax to the company's plans with the intent to keep our funding levels at approximately 90% and reduce funding requirements for the next several years. Including the contribution, cash flow for the full year 2010 was $534 million. Capital expenditures were $474 million, in line with our expectations. We purchased just slightly over $1 billion in shares in 2010, the first year of our three-year $2.5 billion share repurchase authorization. We plan to continue to repurchase shares under this authorization with approximately $800 million in 2011 and the balance in 2012. Now let's turn to Slide 15 to review our outlook for 2011. We are updating our guidance for 2011. Since our third quarter call, our outlook on commodity cost inflation for 2011 has increased. As a result, we expect more net price realization, and we have already announced price increases in many of our businesses. Volume is still expected to be flat to down slightly. And as John said, we do anticipate mix improvements. We now expect internal net sales growth of 3% to 4%. Internal operating profit is still expected to be flat to down 2%. However, as I said on our last call, this includes a six-point headwind from the impact of re-establishing the incentive compensation plans. We now expect cost pressures as a percentage of cost of goods sold to be approximately 7% and cost savings to be about 4%. We are approximately 80% hedged on commodities for 2011. Our gross margin is expected to be down slightly for the year and we have included $0.12 of upfront costs in our plan. We expect both brand building and our internal advertising to grow low single digits as we invest behind our brands. More efficient and effective investment, combined with the gradual shift in media mix, allows us to maintain good pressure. Below operating profit, interest expense is anticipated to be in the range of $235 million to $245 million, and the full year tax rate is forecasted to be approximately 30%. Average shares outstanding are still expected to decline by 4% year-over-year as a result of our 2010 and 2011 purchase activity. We continue to expect earnings per share to grow low single digits on a currency neutral basis. In terms of foreign currency impact, the latest spot rates, as shown in our appendix, are estimated to benefit full year 2011 earnings per share by $0.06. Note that this estimate is based on January 31 rates. Currency rates will move around as we progress through the year, so we'll update you each quarter. During the first quarter, we are launching more innovation, but we are also investing to regain our momentum. Also, remember that we had strong earnings per share growth of 27% on a currency neutral basis in the first quarter of 2010. As a result, we expect earnings per share to be down in the first quarter. We expect cash flow to be $1.1 billion to $1.2 billion in 2011, and we expect capital spending to be approximately 4% of net sales. 2011 will continue to be a challenging operating environment, but we believe we are establishing a solid foundation to regain our momentum, deliver our 2011 goals and position the company for long-term growth. With that, let me turn it back to John.

[John Bryant:]

Thanks, Ron. In conclusion, we are excited about the year ahead. 2011 will be a year focused on regaining our momentum and returning to a path of sustainable growth. We are confident that successful execution of our key initiatives, driving innovation, brand building and improving the supply chain will enable Kellogg to deliver value to our shareholders and excite both consumers and our retail partners. We recognize that this process will take time, focus and effort, and we are committed to the task ahead. This is a great company, and I'm excited about the future. We have the right people, resources and strategy in place to deliver on Kellogg's long-term, sustainable growth model. I'd now like to open up for questions.

[Operator:]

[Operator Instructions] Our first question comes from Chris Growe of Stifel, Nicolaus.

[Christopher Growe:]

First to start off on U.S. cereal. John, can you talk about kind of the -- how much of a list price increase you've taken sort of a cross in portfolio? It seems like it's been quite different across brands. Can you give a rough approximation of what sort of the actual price component in U.S. cereal could be this year?

[John Bryant:]

I don't want to get into the pricing mechanism by category. What we've said is -- in the third quarter call, we said we're going to go around 200, 300 basis points of price mix. As we come into 2011, we now think that's closer to 300 to 400 basis points. And obviously, the higher cost inflation is driving that. That's across all categories globally, different amounts in different categories, different amounts in different countries. I really don't want to get into the specifics of any one category in any one market.

[Christopher Growe:]

My other question just was regarding the U.S. cereal category, and you have some good IRI data today, I just had a chance to get a quick glance at it. But I guess the question being, do you think the category sort of developing the right way? Are you seeing competitive activity reduce from a promotional standpoint? Are you seeing pricing go in place? Just trying to get an assessment of how you see the category at present starting to kind of developing in 2011?

[John Bryant:]

One of the great things, Chris, about the cereal category is it really response to innovation and brand building and ideas. I think what we're seeing here it's early days in January, but we're seeing some good innovation hit the marketplace. We're seeing the consumer respond to that and the categories doing better. It's too early to say how things will evolve as we go through the year, but I think the early signs are very positive.

[Christopher Growe:]

And you've indicated that you expect cereal category growth in the U.S.? Maybe it's gone a bit too far. Do you expect that there will be volume growth as well this year in the cereal category?

[John Bryant:]

Yes. I think volume is hard to predict, Chris. I think there will be cereal category growth behind the innovation and behind the pricing. I wouldn't want to give you a volume-level forecast for a category.

[Operator:]

And our next question comes from Eric Katzman from Deutsche Bank.

[Eric Katzman:]

I guess just kind of the detailed question on the impairment charge with regard to China. And so, is that a wipeout of goodwill or is it cash or non-cash? And given the difficulties that you've also had in Russia, although that sounds like that's turning around, was there any consideration of a need for a charge there on that acquisition?

[John Bryant:]

I'll let Ron handle the specifics on the China impairment.

[Ronald Dissinger:]

Yes, Eric, in terms of the China impairment, it was non-cash. It was a combination of both goodwill, as well as impairment against some fixed assets. I think it's important to note as well, we quantified it from an operating profit perspective. In terms of earnings per share, it's $0.07 of earnings per share. So there's really very little or essentially no tax offset to that charge that we've taken.

[John Bryant:]

And Eric, if you step back from this, and you think about China, it's a relatively small business. It's more of a price-based cookie company in Northeast China, and it really hasn't met our expectations. Having said that, we remain very excited about China as a market long term, particularly in the area of cereal. And we're looking at strategic alternatives for how we continue to progress in a successful way in the Chinese market. If I go to Russia and sort of compare that to Russia, Russia, the business there is a much larger business. It's across three categories. It's a leading company in crackers, strong position in cookies. And a third of that business broadly speaking is cereal, growing at around 20% to 30%. In the Russia case, you've got a much larger business, much more of scale and much more of a Cereal business. And even though it's exposed to bulk biscuits -- we are making less money in Russia than we would've liked, I think the business had much better long-term potential. Just like China, we do an impairment test in Russia at the end of each year. And obviously at the end of last year, it passed that impairment test.

[Eric Katzman:]

I don't know what the final number was, maybe call it $0.10, $0.11, $0.12 on the recall cost in 2010. But I didn't hear any mention of the expected insurance proceeds in your guidance in 2011. Could you give an update us to how that claim is going?

[John Bryant:]

That is still ongoing, but it's going to take a very long period of time to sort out, Eric. So we have no amount in our guidance for 2011 from that insurance claim.

[Eric Katzman:]

And then last thing, the pricing -- I guess you didn't want to comment on the cereal stuff, but I think it's probably fair to say that on the green based products, you've taken pricing. Have you seen -- I mean, we know that most of the cereal companies, if not all of them, have followed, but have you seen a follow-up pricing on the Green Bay snacks and stuff?

[John Bryant:]

Again, I don't want to talk about other company's pricing. I think from our perspective, we're seeing that broad based grain inflation. We've taken broad based pricing to help offset that, and we're seeing that work its way through the marketplace.

[Operator:]

And our next question comes from David Palmer from UBS.

[Unidentified Analyst:]

This is actually Meani Secan [ph] filling in for Dave. It appears that many of the end aisle displays of new Kellogg's cereal seem to be featuring aggressive price points. And we're just wondering, are you being extra careful to price new products correctly to drive new product trial?

[John Bryant:]

I think you were looking in January, I assume you're referring to it, we've had some very good quality merchandising support from retailers. It's important to note that actually from the data we're looking at that our price per pound is actually up in January. What's going on there is a couple of things. One is, we have strong innovation, and retailers are excited by that innovation, and they're giving us excellent quality merchandising. And the second is that we also have the resolution period in January. And as you know, resolutions are a big deal for Special K. I'll give you one example, we moved the Special K price point from $2.49 to $2.99 in January this year on deal, and the business is responding extremely well. In fact, we hit over a 10 share in the early weeks of January on Special K alone. So I wouldn't confuse good retail support with the price discounting. I think we're seeing very strong retail support based on strong ideas and good consumer uptake from that.

[Operator:]

Our next question comes from Jonathan Feeney from Janney Montgomery Scott.

[Jonathan Feeney:]

I wanted to talk about the kind of systems and management incentives and what not you put in place around quality. I mean when I think about -- you had some good IRI numbers, I think this is a little better than expected quarter, but I think the big question is going to be were these two kind of quality events we had in the past, 18 months, so atypical for Kellogg, were these outlier events or did we misunderstand what Kellogg is and always has been? I kind of -- what have you done? Have you done thinking? Have you been communicating about sort of preventing kind of high-profile letdowns in the supply chain again? And what confidence can you give us that those were kind of outliers and if the extent there weren't -- the right steps have been put in place that that's ancient history?

[John Bryant:]

Jonathan, it's a great question, and we have, as you say a long history as a company of great food quality, food safety heritage. And we've been disappointed by some of the events over the last 18 months or so. And we've gone back into our system and really looked from the top down and bottom up at what else can we do to improve the food quality programs in the company. That's resulted in us putting more resources in place in areas like supply audits, doing more raw material testing and so on. If you look at some of the issues that we've had as a company, they've generally come from the supply base, from outside of the Kellogg facilities themselves. Having said that, I personally have been to just about every Kellogg facility in the Kellogg world over the last six months or so. And there's a tremendous focus in the company to make sure that we are an industry leader in the whole area of food safety. Having said that, there's always risk out there, and we're always looking to mitigate those risks as best as we can.

[Operator:]

Our next question comes from Eric Serotta from Wells Fargo.

[Eric Serotta:]

I wanted to circle back on the question on the issue of innovation. You've talked about a 25% increase in innovation for 2011 versus 2009 and 2010 and sort of getting back to 2008 levels of innovation. I'm wondering, what's changed in the innovation process as -- it seems that -- what's changed in the innovation process that gives you confidence in this innovation is sticking and really moving the needle in terms of your overall business, given that the '08 innovation was followed by the SKU rationalization in 2009 and some disappointing or lack of stickiness of some of that innovation?

[John Bryant:]

Eric, a couple of ways of looking at that. One is the increase in innovation in 2011 is getting us back to those '08 levels, which was in line with '07, '06 and '05. So in some respects, '09 and '10 were the anomaly, in that we had less innovation out there. That's because we moved more of our resources towards renovating our foods, reducing sugar, reducing salt, adding fiber and so on. And that was all great renovation and set us up for the long term, but it had a short-term impact in terms of less innovation in the marketplace. As we look at the innovations coming out in 2011, we think that's high-quality innovation, and we've done a few things to improve the likelihood of success of that innovation. One is, we looked at the consumer segmentation in our various markets. Looked at where our portfolio fits on top of that segmentation, looked at the gaps in our portfolio and filled those gaps in. So for example, in the U.S., we don't have that many adult taste-oriented offerings and we're also the little nut-based foods in our cereal portfolio, so Crunchy Nut works. In addition to that, we've been even more aggressive at leveraging great ideas from around the world and great ideas to travel. So Crunchy Nut, the number two brand in the U.K. meant that we had not just a food offering that works but brand positioning that we could pick up and apply to the U.S. market. Same with Mini-Wheats food in the middle. So a combination of, one, you go back and look at five years ago, where we had high levels of innovation that was successfully driving our top line. Second, a far more rigorous review of portfolio and where the gaps are; and third, more aggressive showing of international ideas that work gives us more confidence in the 2011 innovation pipeline.

[Operator:]

Our next question comes from Terry Bivens from JPMorgan.

[Terry Bivens:]

Two things. You and Dave talked about some of the difficulties you were having in the "non-measured channels." I know that's a bit of a euphemism for a certain retailer. Our understanding is things have gotten worse there, that stockouts are pretty bad, I understand it was to the point where they refused some DSD shipments late in the month of January. How has your business faired there recently?

[John Bryant:]

Terry, I think if you look at the non-measured channels, it's actually been a great source of growth for the company over the last 10 years. The issue that we had in 2010 was partially specific to our company in that we had very strong support in 2009, and we had to lap that very strong support. I think in addition to our specific issues as a company, there have been some broader issues in some of those retailers in that there's been some SKU reductions, some reduction in merchandising space. I think as we go into 2011, we feel better about those non-measured channels. We're seeing some SKUs come back. We're seeing some more merchandizing opportunities. It's hard to look in December, January and take too much away from some specific stock issues. There's been some big snow events even over the last few days have impacted the ability of various companies to ship, so I wouldn't want to extrapolate too far from a few isolated events.

[Terry Bivens:]

I know the number three player in the industry has from time to time kind of roiled the category. Any repercussions you see to Kellogg? It seems like Post took a heck of a lot of price and got pounded on volume. Does that worry you at all as you look the health of the category going forward?

[John Bryant:]

To come back again to what joined us in category is brand building and innovation, and if you have great brand building innovation programs I think that really excites the consumer, can drive the category, go forward from there. I think on the Post business specifically, you have to ask them about their business.

[Operator:]

Our next question comes from Vincent Andrews from Morgan Stanley.

[Vincent Andrews:]

I just wanted to make sure I understood, do you have all of your pricing in place for 2011 right now at retail or is it being staged and there's more to come?

[John Bryant:]

We've taken the vast majority of our pricing, it's been accepted by retailers, and it's in place.

[Vincent Andrews:]

And then secondly, you put out a number, a 7% cost inflation for 2011. I assume that is inclusive of the 80% hedging that you have on. Would you be willing to give us what a total cash unhedged level of inflation would be for 2011?

[Ronald Dissinger:]

There's still some open positions obviously from a hedging perspective. We are 80% hedged at this point in time, slightly above where we were at this point in time last year. Is there any risk that still sits out there from a commodity perspective? Yes, there is, but we expect we'd be able to manage that within the context of our guidance.

[Vincent Andrews:]

What I was really trying to get at is, let's assume you weren't hedged at all and let's assume that current prices were status quo for the balance of the year, and you never hedged at all, would you expect inflation to be 10%, 12%, 15%, something along those lines?

[Ronald Dissinger:]

It would be higher.

[Vincent Andrews:]

It would be higher than the 10%, 12%, or 15% or it would be higher than the 7%?

[John Bryant:]

It would be higher than the 7%, our hedges are in the money, but we're not going to quantify by how much.

[Operator:]

Our next question comes from Andrew Lazar from Barclays Capital.

[Andrew Lazar:]

John, if I look at, let's call if you're able to get through the 400 basis points of pricing or price mix, and you end up with 7% COGS inflation, that about offsets each or more or less sort of dollar for dollar and that allows your productivity and everything to fund all the other things you're doing. And I'm sorry I can't recall, is that similar to how it played out in '08? I think it is, where pricing basically offset your input costs, and then productivity was extra. And do you think that the consumer environment, the retail environment, sort of this time around, openly allows you to do the same thing or was there any discussion of taking a little less pricing and having some productivity fund some of the input cost pressure? How do those discussions get sort of turned around internally?

[John Bryant:]

Yes, I don't think we quite think about pricing that way, Andrew, in that we say, hey, we're going to price to offset inflation. I think the way we work through it is we drive productivity to help offset inflation and then we price accordingly. So when we say 300 to 400 basis points of price mix, that includes an element of mix. So it's not 300 to 400 basis points of pricing as such.

[Andrew Lazar:]

You see what I'm getting at, just around the consumer environment obviously being potentially different this time around.

[John Bryant:]

I think just on the consumer environment, Andrew, I think it is a difficult environment with unemployment as high as it is. The situation we have though is with grain-based pricing for grain-based inflation. All of the food industry is going to be going up, including meat and poultry and so on as well. So there's not a lot of places for consumer to go for cheaper food than say a bowl of cereal with milk at $0.50 a serve. So it's a relatively cheap serve. So I think we're well positioned from that perspective. And secondly, we're seeing some return at the high end with consumers that we're seeing Special K get some growth back again. Bear Naked and cashew are both up mid-single digits in the fourth quarter. So there's some opportunity there.

[Andrew Lazar:]

One last one would be, your guidance for 2011, what earnings base is that off of? I assume that's off of the base that you reported, the $0.51 in the fourth quarter, as opposed to, excluding that $0.07 impairment?

[Ronald Dissinger:]

It is off of the earnings per share that we reported. So the $3.30 for the year.

[Andrew Lazar:]

So if that doesn't -- obviously it's not expected to repeat this year. Does that just give you that much more flexibility in the model for this year?

[Ronald Dissinger:]

There are a number of things that came into our performance and profit and loss statement as we progress through the past couple of months, including, as we've referenced, the increase in input inflation. So we look at the China impairment and basically have included that in the guidance at this point in time.

[Operator:]

Our next question comes from David Driscoll from Citigroup.

[David Driscoll:]

John, my first question just really details here. Following up on some other folks' questions, data analysis on the U.S. cereal category really does suggest to us at least that the pricing is trending better, such that the category looks like it might be getting more rational. This is not through today's data, I haven't had a chance to review that fully. Do you just fundamentally agree that we are seeing rationality come back into the category? And how would you categorize it at this point taking into account commodities?

[John Bryant:]

I would probably take away it a little bit differently and say that broad-based grain inflation is driving similar response amongst the players in the category that we're all being forced to price to effect that higher cost of goods.

[David Driscoll:]

I've noticed that Malt-O-Meal is actually selling at prices below that of private label. How disruptive is this to the cereal category?

[John Bryant:]

Malt-O-Meal is being very aggressive out there, and it seems to be coming at the expense of private label. And if you look in the fourth quarter, private label share was down 40 basis points and down 50 basis points for the full year. So I think there's an issue there really between what we call the price-led segment when we think about Malt-O-Meal and private label together.

[David Driscoll:]

Moving to the U.K., you mentioned a few comments in your prepared remarks about this. But have you really begun to see anything positive in terms of trends? When I just look at the sales number in the fourth quarter for Europe overall, maybe perhaps it actually makes me a little nervous. Can you give us a little more color on the U.K. cereal market?

[John Bryant:]

The U.K. has gone through similar dynamics to the U.S. in that the category in 2009 was up 5% to 6%, and then the category in 2010 was down about 3%. We broadly held share in that category, but it's a difficult environment. As we go into 2011, we have taken pricing to offset inflation, and there is significant inflation in Europe particularly around sugar. And so, we've taken that pricing. We've got strong brand building, strong innovation in Special K clusters and milk chocolate Krave in the U.K. Having said that, the first quarter is a tough comp for the Q1 for the U.K. And we've had better trends for the back part of the year. But Europe is going to continue probably be the most difficult operating environment for the Kellogg Company around the world.

[David Driscoll:]

Final question for Ron, was China always in your fourth quarter guidance?

[Ronald Dissinger:]

No, it was not in our fourth quarter guidance when we communicated that in the third quarter call. We went through the fourth quarter. We did our normal impairment testing that we do for goodwill across all of our businesses, and it became clear, we obviously did an evaluation of the business performance as well and it became clear that we needed to take that impairment charge.

[David Driscoll:]

So then you would agree with us that adding the $0.07 back versus your prior guidance would suggest that this quarter did come out considerably better than you had originally expected, is that fair?

[Ronald Dissinger:]

The underlying growth or performance of the business did come out better than expected. Yes, that is true.

[Operator:]

Our next question comes from Alexia Howard from Sanford Bernstein.

[Alexia Howard:]

The supply chain investment, you did a really nice job of quantifying a lot of the puts and takes for 2011 here. But I don't know that you actually gave us a number for how much you're investing or spending on the supply chain focusing this year?

[Ronald Dissinger:]

I don't think we've ever quantified that. A lot of the supply chain investment actually occurred in 2010. That would be permanent investment that we'll just carry forward with us. There's a little bit more going into 2011. It's not that significant. Again, most of it is behind us in '10.

[Operator:]

Our next question comes from Robert Moskow from Credit Suisse.

[Robert Moskow:]

I hate to nitpick with the language, but you said that fourth quarter fundamentally came in better than you thought, but sales were flat. North America cereal, I think down 3%. What was fundamentally better than you thought?

[John Bryant:]

I think as we look at the fourth quarter, we're not saying that we're happy with our fourth quarter performance. We think we need to do better as a company than we did in the fourth quarter and in 2010. I think what we're saying there was against the guidance that we gave at the end of the third quarter, the business did a little bit better than what we guided to. So we obviously have some work ahead of us. We're working on that, we've been through the issues that set us back in 2010, and we recognize that we need to do better in '11 and '12 and beyond.

[Robert Moskow:]

Another thing about the guidance for '11 is that you have a lot of reinvestment to do in '11. But quantitatively, brand building, advertising is only up, I think you said, mid-single digits, and your upfront costs are only $0.12 a share. Can you give us a sense of what other investment is going on in 2011 besides those two things?

[John Bryant:]

I think when you look at the company, and you question if we should be spending, say, another $100 million in brand building or something to get the business going, we have over $1 billion, in fact, $1.1 billion to $1.2 billion of advertising spend as a company. And then, we have $300 million to $400 million of additional consumer promotion spend in addition to that. That total brand building spend is about $1.5 billion and that's sort of ballpark. And we're going to grow that by somewhere around $30 million in 2011, ballpark again. As you look at the amount of sheer spend that we have, we spend about twice the average food company on advertising. We have these strong consumer promotion programs. We have a lot of the investment that we need. I think we demonstrated that 2001 through 2009, where we had great performance from innovation, brand building and execution. And that's what we need to get back to. I don't think it's a case of underinvesting in the business. I think we had some other issues in 2010, and we really need to get back to that long-term growth. And we have the fire power in the business to achieve that.

[Robert Moskow:]

So the idea is to spend smarter, not necessarily more, but spend smarter and innovate more?

[John Bryant:]

It's about ideas. If you have great ideas, you can drive the business. That's what it comes down to.

[Operator:]

Our next question comes from Judy Hong from Goldman Sachs.

[Judy Hong:]

Just a follow-up question on sales guidance for 2011. It seems like obviously the delta between what you've given us in the third quarter is mostly price and mix driven and I'm just trying to understand the delta as it relates to what gives you the confidence in that higher sales guidance at this point. Is it more just because of the grain inflation that you think everyone will be more rational from a price perspective? Is it that you feel better about some of the price increases that you've taken already or just from a buying perspective you feel that the elasticity will be better? I guess I'm just trying to understand the delta between where you were three months ago and today.

[Ronald Dissinger:]

Judy, the grain inflation was certainly a factor. I would say the change in our sales guidance is as much price as it is mix driven as well. So price went up a little bit. The fact that commodities have gone up gives us a bit more confidence in that position. The other thing that gives us confidence is the receptivity of our innovation as we put it out into the marketplace and what we've seen from a pricing perspective from other competition within our categories already on the street. So that gives us a bit more confidence in raising our sales guidance at this point in time. And you'll note that from a volume perspective, we're still expecting our volume guidance to be very consistent with what we've communicated before.

[Judy Hong:]

And then just going back to the comment about the non-measure channel, you've talked about the company's specific issues in 2010 or just the lapping of the strong support in 2009 that negatively impacted the 2010 performance for you guys. Does that mean in 2011, we really shouldn't be expecting a very strong snapback in that channel that you wouldn't see the drive but not necessarily a snapback because you've had basically the lapping of the '09 support that dragged your 2010 performance?

[John Bryant:]

I think that's fair. I think the issue here is 2009. As we go into 2011, we think we're building off a strong base in 2010 as opposed to a deflated base in 2010.

[Judy Hong:]

And then just finally on the commodities and sort of the price realization going forward, obviously, if the grain prices continue to move up, I'd assume that that continues to pose some challenges in terms of the industry's need to take more pricing. And typically, you see a lag between pricing and commodities just given how I guess the retails and everyone else is expecting that inflation pressure? Is this time around that the industry can really be much more nimble and quicker in terms of getting all those price increases through?

[John Bryant:]

I can't talk for the industry. I think that comes down to a series of independent decisions that are hard to predict. But our perspective, or my perspective, is that we're looking at long-term commodity inflation. So this is not a 2011 issue. This is going to continue for quite a few years. In fact, in some respects, the recession broke a cycle that was already underway before the recession occurred. And the reason that I say that is, if you look at what's going on right now, supply has come down a little bit. Demand continues to be strong for these grains. Closing stocks are very low. There is something like 40% of the corn crop going into ethanol, and the ethanol supplies are still making money. So this is an ongoing pressure on grain prices, and we think that we're going to be in this environment for several years to come.

[Operator:]

Our last question will come from Bryan Spillane from Bank of America.

[Bryan Spillane:]

First, in terms of pricing. I just want to make sure I understand. Did you have to go back to some customers and go for a second round of price increases? Or did you just sort of alter what you thought you were going to present relative to what you thought -- might have thought in the fall?

[John Bryant:]

I don't want to get into the exact dynamic of how we did it, but we have had to increase our price expectations between the third quarter call and today. And we've done that in a couple of different ways.

[Bryan Spillane:]

And then in terms of just the volume expectation for 2011. In 2010, there were still some trade inventory level issues or inventory level issues that sort of bounced volumes around in a couple of areas, at least quarter-to-quarter. So you sort of get into -- as we think about 2011, are trade inventory levels generally where they should be or are you going to be shipping below consumption in certain markets?

[John Bryant:]

We did end 2009 with inventories higher than we wanted them to be. I'm happy to say we ended 2010 right where we wanted them to be. So I think we're in a much better shape as we come into '11 on the inventory position.

[Bryan Spillane:]

And then just a final one, John. Now that you've taken your new role, have you had the time yet or are you in the process of -- are there going to be any organizational changes or personnel changes? Any changes to the organization that are pending or have happened?

[John Bryant:]

Well, there have been organizational changes. Quite frankly they were probably going to occur irrespective of my change in role. But we are looking for a new head of supply chain as a company. We have some internal and external candidates as we go down that path. We haven't fill that role yet. Tim Mosby retired from being the area President of Europe. He'd been in that role for 10 years, did a fantastic job for us. And we're very fortunate to have Steve Twaddell who was right in place and ready to step into that role. The Morning Foods role here in the U.S., which includes cereal, we've got David Denholm stepping into that role. David was running our Asia Pacific business. And when you step back from it, I think we have a great team at the Kellogg Company. We're committed to winning. I feel very good about where we are.

[Kathryn Koessel:]

Thank you, all, for joining us today. Please feel free to call me if you have any questions, and we'll see you at CAGNY on February 23.

[Operator:]

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.