Kellogg Company Earnings Call Insights: Comparable Operating Profit and Cereal Category Dynamics
Comparable Operating Profit
Ken Goldman – JPMorgan: I have a quick one and then, longer one. First, when you say 1Q comparable, EBIT and EPS maybe down year-on-year, would you mind clarifying what exact EBIT and EPS base numbers you’re referring to?
Ronald L. Dissinger – CFO: Ken, this is Ron. In terms of the comparables, it’s based on the restated information that we provided to you for 2012 and then going forward including the pension accounting change. So, our comparable operating profit as we said we expect to be down slightly and then earnings per share is impacted by this one-time benefit that we’ve recognized in the first quarter of 2012. It’s about $0.05 related to the interest rate hedges on Pringles. Remember that did reverse out in the second quarter, but we’re lapping that benefit in the first quarter.
Ken Goldman – JPMorgan: I’ll follow-up on that. Then as you look at your model getting to that EPS growth next year it seems like there was a number of non-recurring issues going away next year, guidance seems a bit conservative to me so I realized there are some headwinds too, like you have stock compensation that should increase but I guess I’m curious if your model turns out to be light where do you think you’re being most conservative what are the key I guess pivot points there as you look at it?
Ronald L. Dissinger – CFO: Look, Ken we believe we’re providing realistic guidance for 2013 it’s very consistent with what we communicated at the Investor Day. It includes accretion in both our Pringles business and operating profit growth within our base business as well. So, we’re comfortable with the guidance.
John A. Bryant – President and CEO: Ken as I look at the 2013 guidance clearly we have a strong performance from Pringles in there we go right back to the date of the acquisitions we gave you some guidance on Pringles. We did a little bit better than that in 2012 some of that accretion is helping us in 2013 as well. If you kind of go back to the underlying Kellogg guidance of simplicity within that we have internal sales growth of around 3% the low-end of our long term guidance we have some internal operating profit growth to make those numbers work as well. So, I think what you’re seeing is us getting back on our model of reinvesting in that business of increasing our advertising overt time. Our gross margin is down a little bit year-on-year but that’s largely due to Pringles integration and we’d love to see that gross margin set to track in the right direction, improving over time. So, I think you’re seeing an underlying improvement in our results.
Cereal Category Dynamics
Alexia Howard – Sanford Bernstein: Can I ask about Cereal category dynamics. You yourselves are clearly doing very well on the back of very strong innovation but the category still looks pretty weak from a volume perspective and I think two of the key competitors have taken their net pricing down quite a bit. So, I’m just curious about how you see, I guess, your share gains evolving through the year. Are you planning on maintaining that momentum? Then specifically, can you maybe comment on how Kashi is doing? It looks as though in the last quarter or so, it’s really taken a bit of downturn and I’m wondering if that’s just a temporary slowdown in an innovation or whether there’s something else going on?
John A. Bryant – President and CEO: Let me take the cereal category trends, first. So, we are seeing improving volume trends in the cereal category over time. Although, I must admit that, in total on dollars the category’s relatively flattish. Within that across the back half of 2012, we gained about 70 basis points of share and that’s even with a slight disruption to our Mini-Wheats business. What we’re seeing in our business is, it’s really driven by innovation and by brand building and we’re seeing the business respond to that. So, I am confident that if the category in totality drives more brand building and more innovation I think the category will respond to that. So, it’s a great brand. It is relatively rational. I mean pricing is still up year-on-year in the category, price rate actually lost 20 basis points of share and to get the price rate we add private label multi-mill together as one group. Talking about Kashi specifically, I mean Kashi is a great brand. It’s had tremendous growth over the years and it’s still growing where we’ve extended in areas like frozen and wholesome snacks. However, in cereal, we do have a couple of challenges around our Kashi business. Some of the innovation in recent years has not been as strong as our core Kashi SKUs and so we’ve lost some core SKUs that we think would have done better than the innovation. Some of the brand building has moved away from the core benefit of Kashi, so we have an opportunity to sharpen our focus a little bit more and some of the shelf presence in some of our smaller SKUs on shelf is not what we needed to be. So, we’re not happy with the performance of our Kashi business. We think it’s more tactical in nature. The next six months, we’re going to work to fix and improve that business and get it back in the right direction, but we’ll obviously have some more to do that.
A Closer Look: Kellogg Earnings Cheat Sheet>>