Kellogg Company Earnings Call Insights: Upfront Costs Outlook and Competitive Environment
Upfront Costs Outlook
Matthew Grainger – Morgan Stanley: Could you give us a sense of what level of upfront costs you’re expecting for the full year? And given that you’re coming off the year slightly below average investment there. Should we expect to see an above normal level of upfront costs this year, particularly with the benign inflation outlook you’re guiding us to in the second half?
John A. Bryant – President and CEO: Matthew, our upfront costs are very consistent in 2013 with what we spent in 2012. So, we’re somewhere in the range of 10 to 12 pennies of upfront costs for the year.
Matthew Grainger – Morgan Stanley: And one follow-up on Europe. I believe in the prior year you had a business disruption in the first quarter, which was quickly resolved. And I’d assume that comparison flattered this quarter’s results in Europe to some extent. As we’re revisiting our assumptions for Europe for the balance of the year, can you give us a sense of what underlying trends would have been in Q1 excluding this factor?
John A. Bryant – President and CEO: We feel very good about our performance in Europe in the first quarter. It was actually in line with our expectation. It’s now slightly ahead of what we had expected to deliver in Q1. If you look in the U.K., we actually see some strong growth and see share gains in both cereal and in snacks. The same is true in France. We saw gains in cereal and snacks share. We do have some softness in Spain and Italy continuing. Even though we gained share in Italy, we continue to see weakness in Spain. So if you look at Europe in the first quarter, it was very much in line with our expectations. The operating profit margin is very similar to what we expect to see for the entire year. We’re still tracking to grow sales and profits across 2013, and we’re happy to say the Pringles’ integrations continue to go very well also. So, while I agree it’s a weak comparison, we’re actually tracking (what we’d) thought we’d track and on target for the year.
David Palmer – UBS Investment Research: You portrayed the input cost inflation being a picture of two halves with the second half of ’13 being down, and that seems to mirror the grain’s inflation that we would suspect many food companies will be experiencing. Does that seem to be setting up, barring some sort of major weather shocks come from in this green crop coming up for a down – into ’14 picture, and if so, if this feels a lot like the second half of ’09 where all participants and even the retailers are sensing that this is a rather benign period, how do you see the competitive picture shaping up and do you see participants sort of dialing up the promotions or perhaps people are acting more rational than they did this time in the cycle last time?
Ronald L. Dissinger – SVP and CFO: Matthew, first on the grains. It’s a bit difficult for us to predict into 2000 – or, sorry, David, on the grains, difficult for us to predict on the grains going into 2014. We’ve got to crops that will need to be planted and harvested. We do have good visibility though to 2013. As I mentioned, we’re largely covered across our grains at this point in time, so feel very comfortable with our outlook on input inflation for this year.
John A. Bryant – President and CEO: David, I can’t talk to what the competitive environment might be in the future, but if you look at our results over the last few years, we’ve come under pressure from increasing commodity prices. So, as we go into a more benign environment, we’d hope to see margin improvement as we go forward from here.
David Palmer – UBS Investment Research: And then just one quick question on cereal. I think you mentioned adult cereal being a little bit more sluggish than you would have liked. Is your thinking about that category in the weakness that has seemed to persist? Are you getting any further thinking about why that category may not be as strong as one would have hoped this time in the pricing cycle?
John A. Bryant – President and CEO: Yeah, I think if you look at the cereal category, it is a little softer than what we would like it to be, but you break it apart in different segments. So, kids; we’re actually growing in kids and the category is growing in kids. In all-family, we’re growing, but the category is a little soft, but we feel okay about where all-family is. It’s really adults where the category and us also both down about 5% in the first quarter, and that’s where the opportunity for future growth lies. What is also interesting, David, is if you take the category and you break it out by income, the category is actually growing with low-income consumers, but is actually declining a little bit with high-income consumers. So, you boil it all down to say the big opportunity in the cereal category right now is high-income boomers. And so, what are we doing to address high-income boomers? We have innovation coming out this year around Raisin Bran Omega-3, Heart to Heart Chia, Special K Multi-Grain. So we have a range of innovation targeted at those adult consumers. Plus we think we have a very strong adult portfolio between Special K, Kashi, Bear Naked, and if we can get those brands all driving on all cylinders, I think we can really drive older adult consumption in the category.
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