Kellogg Reports Strong 2007

04/02/08 Kellogg Company has reported strong 2007 earnings. Fourth quarter earnings were $0.44 per share. Annual earnings were $2.76 per share, representing the sixth consecutive year that the Company has met or exceeded its long-term EPS targets.

Reported net earnings for full-year 2007 were $1,103 million, a 10% increase over last year's $1,004 million. Earnings were $2.76 per diluted share, an increase of 10% from $2.51 per share in 2006. Reported net earnings in the fourth quarter of 2007 were $176 million, or $0.44 per diluted share, compared to $182 million, or $0.45 per share, in the fourth quarter of 2006. This result included a double-digit increase in advertising investment, significantly higher commodity, fuel, energy, and benefit cost inflation and up-front investment charges of $0.03 per share versus $0.08 per share in 2006. For the full year, upfront investment charges were $0.18 per share versus $0.14 per share in 2006. In addition, Kellogg recently announced acquisitions relating to Bear Naked, Inc.; and the Gardenburger brand in the U.S.; as well as the January 2008 acquisition of The United Bakers Group in Russia.

"Despite significant additional cost pressures in 2007, our Company posted another year of strong growth," said David Mackay, chief executive officer, Kellogg Company. "And for the first time, we generated more than $1 billion of cash flow. We also continued to invest cash back into the Company's growth through higher up-front costs, a double-digit increase in advertising and several recent acquisitions."

Reported net sales in 2007 increased by 8% to $11.8 billion; fourth quarter sales were $2,794 million, representing 8% growth from the fourth quarter of 2006. Internal net sales growth, which excludes the effect of foreign-currency translation and acquisitions, was 5% for the full year as well as 5% for the fourth quarter.

Kellogg North America reported net sales growth of 6% in 2007, and 6% in the fourth quarter. Internal sales growth was 5% in 2007, building on growth of 8% in 2006. Internal sales growth in the fourth quarter of 5% also built on 6% growth in the fourth quarter of 2006. The Company once again had measured share gains in the U.S. ready-to-eat cereal category in 2007 driven by the North America Retail Cereal business posting internal sales growth of 3% for the full year after posting 3% growth in 2006. North America Retail Cereal internal sales rose by 8% in the fourth quarter versus a decrease of 2% in the fourth quarter of 2006. North America Retail Snacks posted full-year internal sales growth of 7% in 2007, building on 11% growth in 2006. In the fourth quarter, Retail Snacks' internal sales increased by 2% versus 12% growth posted in the fourth quarter of 2006. Fourth quarter snacks sales were adversely affected by the transition of Kashi Snacks and Kellogg's Fruit Snacks from warehouse to the DSD distribution system. The Frozen and Specialty Channels businesses posted internal growth of 6% for the full year and 6% for the fourth quarter. The Frozen foods business posted high single-digit sales growth in 2007 and the Specialty Channels businesses posted mid single-digit internal sales growth for the full year.

Kellogg International reported net sales growth of 12% in 2007 and 12% in the fourth quarter. Internal sales growth was 5% for the full year, building on 5% growth in 2006. Internal sales growth in the fourth quarter was 4%, building on growth of 6% in the fourth quarter of 2006. The Latin American business posted internal sales growth of 9% in 2007, lapping 9% growth in 2006. Internal growth in the fourth quarter was 6%, building on 7% growth in the fourth quarGross margin for full-year 2007 was 44.0%, approximately 30 basis points lower than in 2006. Incremental increases in fuel, energy, commodity, and benefit costs adversely impacted earnings by 32 cents per share. Gross margin in the fourth quarter was 42.8%, down 50 basis points from the fourth quarter of 2006. Operating profit for the full year was $1.9 billion, an increase of 6% from 2006. Operating profit rose 4% in the fourth quarter to $359 million, versus $345 million in the fourth quarter of 2006. Internal operating profit, which excludes the effect of foreign-currency translation, increased by 3% for the full year and 2% in the fourth quarter. The Company achieved operating profit growth for the full year despite significant cost inflation and higher investment in up-front costs. In addition, the Company increased advertising investments to more than $1 billion for the first time.

In 2007, cash flow, defined as cash from operating activities less capital expenditures, was $1,031 million. The Company repurchased $650 million of its stock in 2007 and repurchased almost $2 billion over the course of the last three years.

The Company expects full-year 2008 earnings will be within a range of $2.92 - 2.97 per share. This projection includes estimates for significant commodity and energy cost inflation at unprecedented levels and continued investment in advertising as well as innovation. The Company also continues to anticipate that investment in up-front costs in 2008 will be approximately 14 cents per share, similar to the historical levels of investment. In addition, the Company expects full-year internal sales growth will be in the mid single-digits, slightly greater than its long-term targets.

Mr. Mackay concluded, "We remain confident in our business model and operating principles. Our significant investments back into the business provide us with momentum going into 2008. To partially offset the continued cost inflation, we have increased prices and pursued various productivity initiatives. Looking ahead, our focused strategy, business model and superior execution give us confidence in our ability to deliver sustainable, dependable growth in 2008 and beyond."