Kellogg's Getting K-LEAN

Kellogg (K) presented today at the Deutsche Bank Global Consumer and Food Retail Conference in Paris. Management explained the company’s Manage for Cash operating principle to European institutional investors as well as last week’s announcement about adding fiber to many of Kellogg’s US and Canadian cereals so that by the end of 2010, nearly 80% of Kellogg's of the US cereal portfolio will be a good source of fiber.

CEO Dave Mackay reiterated the company’s goal of achieving $1 billion of annual cost savings by the end of 2011 from various productivity savings initiatives, including K-LEAN, which is a manufacturing project that will drive the largest proportion of the savings.

Through K-LEAN (Kellogg’s - Lean, Efficient, Agile Network), the company will review manufacturing procedures and codify the best practices, which will be driven across the company’s manufacturing network in order to simplify and streamline every aspect of the manufacturing operations. As a result, the company will improve asset utilization and reduce both costs and capital requirements.

In addition, an indirect procurement project will identify and centralize the purchase of certain procurement items in order to leverage purchasing power of the company. These items include IT and areas of logistics, materials, repairs and telecommunications.

Up-front costs of implementing K-LEAN and the other productivity savings initiatives will impact earnings in 2009 by $0.22 per share, and it is expected that a similar amount will impact earnings in 2010. By utilizing conservative accounting procedures, management has decided to account for these up-front costs through the income statement.

Management reiterated guidance for 2009. Internal sales growth (sales growth in local currency) is expected to be in the range of 3% to 4%, which is at the high end of the company’s long-term financial goal of low single-digits. Internal operating profit is expected to increase in the mid-single-digits. Earnings are expected to increase in the high single-digit range on a currency neutral basis. Beginning in 2009, management began giving EPS guidance on a currency neutral basis since the company runs each business in local markets on a local currency basis. In other words, the company makes pricing and local competitive decisions on a local basis, independent of currency fluctuations.

Earnings guidance includes a negative $0.06 per share impact in the first quarter due to peanut-related product recalls and the $0.22 charge related to the cost reduction initiatives. Earnings guidance also includes 4% increase in costs which management believes will be offset by cost savings and pricing.

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