Kellogg Co. at Consumer Analyst Group of New York 2006 Conference - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

ANDREW LAZAR, ANALYST, LEHMAN BROTHERS: Good morning, [we] should all take our seats, we'll try and get started. Hope everybody enjoyed the festivities last evening. We kind of had eerie flash backs of the Winston Salem meeting that some of you may recall. A couple things, first just a reminder we want turn off our cell phones, Blackberries and other devices like that. We had a bracelet lost in the breakfast room this morning. Anybody finds that, if you could please turn it in to [Claudette]. We also had a misplaced Blackberry, again if somebody comes across that please turn it in to the [Western] folks right across the hall there. And if everyone one please join me in thanking Kellogg for a wonderful breakfast this morning.

So as many may recall, last year's [inaudible] was a coming out party of sorts for then new Chairman CEO Jim Jenness. There is plenty of nervousness around the consistency of strategy not to mention potential management change. Over the past year, we've not seen much change on either front and the results [road] to many peers have remained quite solid. And the shares [clearly] remain right about where they were a year ago. So, here today I'll turn it over to Chairman and CEO James Jenness to discuss the outlook and strategy for Kellogg going forward. Jim?

JIM JENNESS, CHAIRMAN, CEO, KELLOGG COMPANY: Thanks, Andrew. Hi, good morning everybody. A first a few words from our lawyers. You know Sunday of this week was the actual day Mr. Kellogg started the company back in 1906. And it's just a great time for us in Battle Creek. And just reflecting on it and how the company is doing as we into our 100th year. It is I must say for Jeff and Dave myself, it is a privilege to be here representing the company in its 100th year.

So, I'd like to start with the company has momentum, the company's foundation is solid, our talent around the world is exactly where we wanted to be and very strong. Our shares and our brands, the benefits we're offering are right on target. And the more we work our business model, the more we see visibility and strength in it. But underneath all that is really a legacy of Mr. Kellogg. And his vision and his passion for the brands, for wellness, is in the DNA of this company there is no doubt about it.

And Mr. Kellogg was an amazing entrepreneur, an amazing marketer well ahead of his time for building brand and advertising and sales organization, but he was also a man that would have set values is also in the DNA of the Kellogg company if you know we started the Kellogg foundation about 25 years after the company and the amazing thing about it all is how all of these has remained intact. And for those of you who are investing in the company and hopefully those of you who that will invest in the company I really believe at the strength and underlying asset of our company that you put all the stuff on top of it the legacy of Mr. Kellogg in this company is something that really helps drives us.

So today, the news is we want to reinforce three things. One, and I don't think this is [going] to be a surprise to many of you to tell the truth, first is we're 100% committing to running the company around sustainability and realistic goals. The results, not only 2005 but the result of the last several years and the guidance of 2006 that we provided, in our minds demonstrate the efficacy of our strategy, our operating principles and our execution competency, and as you all know given that particularly difficult times that all the companies that our sector is facing it really shows something good about the efficacy of how we are going about it.

And also what we are going to talk about today is the big time confidence that we have and our visibility and how we will continue to drive and deliver our long time target and we - I had to explain this to Dave, that this is performance [legs], if you are from the south side of Chicago, you understand this, that means you can go forward with it, there is a lot of potential there.

Another little take on sustainability that as we think about the company and how run it and it has to do with -- you know we are not running the company for quarters, so if there is some short term --short term pain of sustainability we view that as being far better than the agony of having our business model break or having a rubber band break. No doubt in our minds it's the right way to run the company for our shareholders, and its just the right way to run the company anyway. So we are totally committed to that.

Now what I want to do is just take you through the fundamentals of our business model right now and basically demonstrate that commitment that we have first is sustainable, dependable performance around realistic goals. If there is one driver for us, one over- arching thought that as we make decisions about the company, allocating resources, everything we do it comes out of our redoing stuff to drive long term shareholder value. Are we building our brands, are we spending the right kind of money, is this money going to help us going forward; this is an over-arching thought that's under everything we do.

The other thing that we are totally committed to our focus strategy, and our focus strategy were narrow in terms of the categories we are in, we dominate in the categories we are in, these are the right categories and Dave is going to build off on this, we are not about and we see no need to go out and do scale acquisition, so our management time is not up to doing that. We are also not looking -- diverse businesses, we are focused on driving these businesses which we have 100 years of accumulated knowledge in, in terms of making them go and winning in these categories.

Now in addition to our focus strategy we turn to our business model or opening principles and the first which will come as no surprising to any of you is volume to value. And this is all about in to driving the right kind of growth sales, and its about growth sales that have strong and expanding gross profit margin to it, it's about the type of gross sales -- excuse me our nets sales that we generate by strong brand building programs the right kind of brand buildings programs is net sales driven by innovation and if there is a renaissance in the company and it's a renaissance that come out of where Mr. Kellogg started the whole thing, it is about to win an innovation.

To win in our categories, you have to win in innovation and as you all know we have been winning in innovation; it's the right kind of innovation, it's the quality of innovation, and you got to be up at the plat swinging all the time with this innovation. And also improving mix. The right kind of innovation helps us improve mix. Portfolio management of our existing brands helps us improve mix, and tonnage growth a brand with the right kind of P&L structures to it, help us drive mix. All of that is our volume to value discipline underneath our company to drive the right kind of the net sales growth.

Our other operating principle is managed for cash, and at the end of the day this is about driving cash flows and driving return on invested capital. And here, we are going to continue and we see visibility and continued improvement and how we're managing core working capital and the amount we need in business. We are going to continue to drive that.

Capital spending and our discipline on capital spending has not changed one iota, however we will invest capital where we have and see demand for products with the right kind of P&L structures to it, if we have to put in a few more waffle irons and Eggo Waffles or another oven to supply Pop-Tarts or convert a cereal line to get us to the type of configuration of a product that we know is going to go in the market place. That's a great return for our money, its s great return for our money, and it's a great way to keep the business going. And we are going to continue as part of this discipline to make the progress in improving our financial discipline.

As you all know we paid down about $2 billion of debt since we acquired Keebler, we are in the spot right now in terms of financial flexibility, where our number priority is having that flexibility to be able to do the kind of bolt on the [close in] acquisition, cocky-like if you will, for the company. We are at that point now. We're also, you can see in our use of cash that we put a dividend back in last year, and we just executed a very efficient two stage stock buyback, and that balance use of cash is where we are [able] to continue to build that flexibility and the way this business drills off cash this is just going to be an improving area for us.

And our third operating principle [underneath] this overall model, so we have this model of sustainability over-arching thought …