Continued Strong Sales and Earnings Growth for Kellogg

28/07/06 Kellogg Company today reported continued strong sales and earnings growth ahead of expectations for the second quarter of 2006. The Company managed to post these results despite the demanding cost environment facing the entire industry.

Reported net earnings for the quarter were $266.5 million, a 3% increase from last year's $259.0 million. The effect of expensing stock options in the quarter lowered reported net earnings per share by approximately 5%, or $.03. Reported diluted net earnings per share were $.67, an 8% increase from last year's $.62 per share.

"The combination of our focused strategy, good investment decisions and top-line growth remain the key enablers of our strong earnings performance," said Jim Jenness, Kellogg's chairman and chief executive officer. "As we look at the business, our brand equities are strong, our innovation is working, and we continue to invest for the long term health of the business, all of which gives us continued confidence in the year."

Reported net sales in the quarter increased by 7% to $2.77 billion. Internal net sales, which exclude the effect of foreign-currency translation, also grew 7% and built on the very strong 7% internal growth in the second quarter of last year. The internal sales growth rate for the full year is expected to be in the mid single-digits, ahead of the Company's long-term target of low single-digit growth.

Kellogg North America reported second quarter net sales growth of 9% and internal net sales growth of 8%, driven by strong growth in the Retail Cereal, Retail Snacks, and Frozen & Specialty Channels businesses. For the quarter, all major North American retail businesses gained category share in measured channels. Retail Cereal posted internal sales growth of 4%, driven by strong growth in various brands including Kellogg's Frosted Mini Wheats and Kashi brand cereals. This growth came on top of the strong double-digit growth in the second quarter last year. The Retail Snacks segment posted internal sales growth of 11% on top of the 8% growth in the second quarter of last year. This was driven by strong growth in Pop-Tarts, Cheez-It, Kellogg's wholesome snacks and fruit snacks, as well as continued growth in cookies. The North America Frozen and Specialty Channels businesses combined posted internal sales growth of 9% driven by double-digit growth in Eggo and veggie foods, strong retail acceptance of new Kashi Frozen entrees, and strong growth in convenience and drug stores.

Kellogg International reported second quarter net sales growth of 4%, or 5% excluding the effect of currency translation. Latin America posted internal sales growth of 10%, on top of the 8% growth in the second quarter of last year, driven by strong growth in both the cereal and snacks businesses. In Mexico, the Company gained over 2 category share points in cereal during the quarter. The European region reported internal net sales growth of 4%, driven by good growth in the United Kingdom, Ireland, France and Italy. The Asia Pacific region posted an internal net sales decline of less than 1% due, in part, to a difficult comparison with the prior year when internal sales grew 8 percent.

Reported operating profit was $461.2 million in the second quarter, a 2% decline from the second quarter of last year. Internal operating profit, which excludes the impact of foreign exchange and stock option expense, increased 1% in the second quarter and 3% in the year-to-date period, ahead of the Company's expectations. This growth was achieved despite continued investments in brand building and innovation, as well as unprecedented increases in fuel, energy and commodity costs. Up-front costs in the quarter were $.03 per share, the same as the second quarter of last year. The Company continues to forecast up-front cost for the full year to be approximately $.15 per share.

Cash flow, defined as cash from operating activities less capital expenditures, was $339.7 million in the year-to-date period, ahead of Company expectations. The decline from the prior year was primarily the result of an increase in capital expenditures and core working capital. Core working capital, measured as a percentage of rolling twelve-month sales, was 6.9% at the end of the second quarter of 2006, which represented a 20 basis point improvement from the second quarter of last year.