MANAGEMENT DISCUSSION SECTION

Transcription

1 Acquisition of Procter & Gamble's Pringles Business by Kellogg Company Call Company Participants Simon Burton John A. Bryant Ronald L. Dissinger Other Participants Christopher R. Growe Bryan D. Spillane Ken Goldman Andrew Lazar Robert Moskow Todd Duvick David S. Palmer Eric R. Katzman Kenneth B. Zaslow Matthew C. Grainger David C. Driscoll Eric Adam Serotta Edward Aaron Alexia Jane Howard MANAGEMENT DISCUSSION SECTION Good morning. Welcome to the Kellogg Company Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [ Instructions] Thank you. At this time, I would like to turn the call over to Mr. Simon Burton, Vice President of Investor Relations for Kellogg Company. Mr. Burton, you may begin your conference. Simon Burton Thank you, Tranitha. Good morning, and thank you for joining us today for a review of our recently announced acquisition of the Pringles Business from Procter & Gamble. I'm joined by John Bryant, our President and CEO, and Ron Dissinger, our Chief Financial Officer. The press release and slides that accompany our remarks this morning are posted on our website, at And as you're aware, certain statements today, such as projections for Kellogg Company's future performance, including earnings per share, net sales, margin, operating profit, interest expense, tax rate, cash flow, brand-building, upfront costs, investments, and inflation, are forward-looking statements. Actual results could be Page 1 of 14

2 materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the second slide of this presentation, as well as to our public SEC filings. As a reminder, a replay of today's conference call will be available by phone through Monday, February 20. The call will also be available via webcast, which will be archived for at least 90 days on our website. I'll now turn it over to John. John A. Bryant Thank you, Simon. And thank you, everyone, for joining us on short notice to discuss this morning's news. We're pleased to announce the acquisition of the Pringles business from Procter & Gamble. We believe this is a great transaction that gives us long-term visibility and increased confidence. As you know, Pringles is a global brand, with almost $1.5 billion in sales, and we're excited about the opportunities and potential it brings to Kellogg Company. Pringles has businesses across the globe, and we think it will be a great addition and a strong new platform upon which we can grow. I'd also like to welcome the approximately 1,700 employees of Pringles to the Kellogg family. We're very excited about this transaction, and we know that, together, we can build a great future for Pringles and the Kellogg Company. If you'll turn to Slide 3, you'll see some detail of the transaction itself. The sale price is $2.695 billion in cash, which represents an EBITDA multiple of approximately 9 times after allowing for tax benefits we expect to realize on the deal and the purchase of working capital. We're funding this with international cash and approximately $2 billion in debt at attractive rates. We believe that Pringles will significantly strengthen our global snacks business. I'll discuss this in more detail later, but we estimate that the inclusion of Pringles will increase our snacks business in North America by more than $500 million and will almost triple the size of our international snacks business. We already have excellent snack businesses, but we're very excited about the opportunities for innovation and expansion that the inclusion of Pringles will bring. We currently anticipate closing by June 30 and having Pringles included in our results for approximately six months this year. Slide 4 details some of the strategic rationale for the transaction. As I mentioned, we believe the addition of Pringles to our portfolio will provide numerous benefits. It is expected to provide additional scale and be highly incremental to our existing businesses. Pringles provides us access to a new category in distribution channels that we know well. It also provides other potential benefits, as it will extend the reach of some of our other brands, not only in the U.S., but in other regions as well. In fact, Pringles are already sold in 140 countries and offer the potential for increased scale in Europe and a good entry point into snacking in Asia and Latin America. So while Pringles operates in many regions, we will look to expand these businesses over time. Of course, in North America and internationally, the brand provides a new platform for innovation, a process we know well and one that we take very seriously. We know that innovation and related brand-building helps drive categories, and we're excited by the possibilities that come from integrating Pringles into our existing businesses. Finally, as you've seen, financially, we believe this is a very attractive deal. It was done at attractive multiples and is immediately accretive before one-time costs and the effect of changes to the share repurchase program. Now let's turn to Slide 5 and some detail on the Pringles business itself. Pringles is a truly iconic global brand, with retail sales of approximately $2.5 billion. The brand is distributed in 140 countries, and as I said earlier, provides us an excellent platform for innovation, not just in the U.S., but in other regions as well. Page 2 of 14

3 Sales are broadly distributed globally and by channel, which we think will fit well with our current structure and provide the opportunity for expansion. The brand is well known and has excellent positioning in-store. And our other main focus, brand-building, should also help drive sales and effectively support innovation. The acquisition also brings us a world-class manufacturing network. Pringles are currently manufactured at four sites, one each in the U.S. and Europe, and two in Asia. And in addition, Pringles has a respected supply chain organization. As we said, Pringles' fiscal 2011 sales were approximately $1.5 billion and EBITDA was $243 million. While there is possibly some disruption in recent months, we are confident in the long-term potential of the business. Slide 6 provides some detail regarding the global savory snacks category. As you can see, growth has been strong in both developed and emerging markets, and these markets are large. In fact, they currently total more than $60 billion, and Pringles has premium positioning and leading brand awareness in key regions, and this is a competitive position which we believe we can expand over time. Pringles is the fourth-largest individual brand globally, and although it has good category sales, there is considerable growth potential. Importantly, savory snacks such as Pringles are relatively easy to tailor to the tastes of individual regions, and the brand has had success with this in the past. Again, though, we think there's more that can be done in this area, and we're excited by the possibilities. Slide 7 details the fit of Pringles with our existing snacks business unit in North America. We currently have a large snacks business of more than $4 billion of annual sales, and we have strong brands in Cheez-It, Special K, Kashi, Keebler, Townhouse, Pop-Tarts, and others, and we anticipate that Pringles will be an excellent addition. This business has been growing at a strong mid-single-digit growth rate on average over the last few years as a result of excellent innovation, good brand-building support, and strong sales execution, and this is exactly the kind of environment that we think will suit Pringles. As you can see on Slide 8, Pringles' global presence complements our existing ready-to-eat cereal and snack businesses. From an international point of view, Pringles almost triples the size of our snack business and provides us a catalyst to accelerate snacks growth on a global scale. In Europe, it almost triples the size of our business, bringing us scale, capability, and a platform to expand into savory snacking. In Asia-Pacific, Pringles offers us a strong entry into snacking and an important step on a journey to accelerate snacks growth in the region. And in Latin America, we are excited by the opportunities to increase our scale locally to build the Pringles brand, as well as the potential to increase our idea pipeline to build our savory snacking portfolio in the region. Slide 9 details the way in which Pringles will change the composition of the Kellogg Company. Before this transaction, cereal accounted for 51% of sales and snacks accounted for less than 40%. After this deal, our snacks and cereal businesses will be of very similar size, so while we have a strong global cereal business and one that we are as committed to as ever, we will also now have a significant international snacks business which will provide us an additional platform from which to grow. Now I'd like turn it over to Ron to discuss the financial aspects of the transaction. Ronald L. Dissinger Thanks, John, and good morning. Slide 10 provides more detail on the financial highlights of the acquisition. This is a financially attractive deal that we believe will improve our long-term visibility for sustainable growth. The deal is at attractive multiples 1.7 times the last 12 months' sales and approximately 9 times EBITDA, including tax benefits and working capital included in the deal. We're funding the acquisition with a combination of international cash and debt. It is important to note that we plan to decrease our share repurchase program while we pay down debt, but we are likely to repurchase shares to the extent of stock option exercise to offset the dilution effect. Page 3 of 14

4 As John mentioned, this business was $1.5 billion in sales and over $240 million of EBITDA in fiscal The business has been in transition, so we may recognize slightly lower contributions to performance as it integrates into Kellogg Company. We expect the one-time costs to be between $160 million and $180 million over the next three years, and we've targeted an annual run rate of synergies between $50 million and $75 million in In 2012, we expect the transaction to be accretive to EPS by $0.08 to $0.10 per share before transaction costs, one-time costs, and the impact of reducing our share repurchase program. Now, this does include some non-cash charges related to purchase accounting. We expect synergies of approximately $10 million and one-time costs of $70 million to $90 million. On a reported basis in 2012, we anticipate the deal will be dilutive to EPS by $0.11 to $0.16, including transaction costs, one-time costs, and the reduction to our share repurchase program. We expect the deal to be between $0.22 and $0.25 accretive in 2013, excluding the impact of our one-time costs and reduced share repurchases. We also expect to maintain a strong investment-grade rating and will be committed to reducing debt levels to rebuild our financial flexibility. And now I'll turn it back over to John for a quick summary. John A. Bryant Thanks Ron. So, finally, let's turn to the summary on Slide 11. We estimate that the new Kellogg Company will generate more than $15 billion in annual sales. We are the number-one global cereal company. We remain excited by the long-term potential of our cereal business. We also have the number-two global biscuit business, and we will now also have the number-two global savory snack business. We have a North American frozen business that's growing strongly. And finally, we will serve consumers in more than 180 countries from an even stronger position. As Ron said, we think this is a great transaction, and we remain confident about the future. We have a strong and growing company, and we now look forward to welcoming the employees of Pringles into the Kellogg family soon. We know that their contributions will better position us for future growth. As one last note, I'd like to point out that we plan to update you further on his transaction next week at the CAGNY conference, and now I'd like to open up for questions. Q&A Thank you. [ Instructions] Our first question is from Chris Growe of Stifel Nicolaus. Your question, please? <Q - Christopher R. Growe>: Hi. Good morning <A - John A. Bryant>: Good morning, Chris. <A - Ronald L. Dissinger>: Good morning. <Q - Christopher R. Growe>: Congratulations on this deal. <Q - Christopher R. Growe>: Sure. I have just two questions for you. I wanted to understand, John, in the U.S., does this business fit into the DSD system? I realize it could be a decision down the road, but would this be the kind of a business you could fit into the DSD system and perhaps help its growth going forward? <A - John A. Bryant>: Yeah, this is a very strong warehouse to other business and the benefit of being in the canister enables us to work through our warehouse. So we're always going to look for how we can improve the system, but we Page 4 of 14

5 would expect it to stay in a warehouse system. <Q - Christopher R. Growe>: Okay. And then the other question just relates to the international component of Pringles, and if I understand correctly, there was sort of a broker system that was in place to help sell the product in these international markets. Would that stay in place, and I guess just curious how Kellogg can absorb that internationally, if you will? <A - John A. Bryant>: Yeah, we're going to work through that market-by-market around the world to determine the best solution. It's our intention, obviously, to bring the strength of the Kellogg organization to help drive this business forward, in combination in some markets with distributors and brokers. So, Chris, it's going to vary very much by market to market. <Q - Christopher R. Growe>: Okay. Thanks so much for your time. Thank you. Our next question is from Bryan Spillane of Bank of America. Your question, please? <Q - Bryan D. Spillane>: Good morning <A - John A. Bryant>: Good morning, Bryan. <Q - Bryan D. Spillane>: Congratulations. This is a great deal. A couple questions; first, amortization step-up, just any sense yet of how great that will be and whether that's factored into some of the guidance you've given. <A - Ronald L. Dissinger>: Bryan, it's Ron; and yes, it is factored into the guidance. I mentioned that in the remarks. There are some purchasing accounting adjustments that are factored into what we've communicated for <Q - Bryan D. Spillane>: Okay, okay. And then the second is just in terms of going forward in the transition, just will there be a period of shared services? And connected to that, there are some markets where Procter wasn't using its own sales force or it had third-party relationships, I think markets like Russia and Japan; just any thoughts, early thoughts yet in terms of how you'll transition some of those markets. <A - John A. Bryant>: There are transition service agreements, so there will be transition service agreements between P&G and the Kellogg Company to help an orderly transition of this business to Kellogg. The nature of those agreements will obviously reflect the work that needs to be done over the next year or so to make that effective. In terms of the in-market execution country-by-country or region-by-region, that's going to vary from one market to the next, and that's still work in progress. <Q - Bryan D. Spillane>: Okay, great. Thank you. Thank you. Our next question is from Ken Goldman of JPMorgan. Your question, please? <Q - Ken Goldman>: Good morning. <A - John A. Bryant>: Good morning, Ken. <A - Ronald L. Dissinger>: Good morning. Page 5 of 14

6 <Q - Ken Goldman>: In your guidance for accretion of $0.08 to $0.10, you're excluding the change to your share repo program. I understand what other or I'm not sure what others are modeling. I'm looking for share buybacks to add about $0.08 this year, so if you exclude that and I think you mentioned this in your slides you're truly not that accretive at all. Why, in your view, should we exclude the absence of a share repo? This kind of reminds me of when Kraft not to pick on them, but funded the acquisition of Cadbury, in part with the sale of its pizza business, but asked the Street to exclude the impact of that sale. If you're going to sell it, you're selling it, and if you're going to stop buying back share, you're going to stop buying back share. So why should we exclude that? <A - Ronald L. Dissinger>: Well, Ken, when we gave you the guidance, we also provided reported guidance of $0.11 to $0.16 of impact on a reported basis. That includes the impact of share repurchases. So the accretion that we talked about is really just due to the deal. [indiscernible] (17:53) <Q - Ken Goldman>: What were you modeling in terms of share repo this year? <A - Ronald L. Dissinger>: Of course there's an impact from share repurchase. <Q - Ken Goldman>: But what was your model for share repo this year? <A - Ronald L. Dissinger>: We would have expected a couple of points of benefit to earnings per share from our share repurchase program. <Q - Ken Goldman>: Okay, and then one other question; I don't see anything on the growth of the Pringles brand in your press release or slide, and it's possible I'm missing it, but can you talk about the growth of the brand in each of its biggest regions right now? It looks like, at least in North America, the Nielsen data had gotten more sluggish lately. And I understand why; there are some issues going on. But can you help us understand the growth lately in Europe and North America and so forth? <A - John A. Bryant>: Ken, I think it's reasonable to expect, given what this business has gone through, that there's been some disruption to the business. As we build our plans going forward here, we recognize that we're going to need to invest back in the business to help it get back on the right track, but we are confident in the long-term growth potential. This is an iconic brand, makes us the number-two global savory snack player in the world, highly incremental to our U.S. business, triples our international snack business, and it's a great deal for the Kellogg Company. <Q - Ken Goldman>: I'm sorry; no, what has the growth been lately in Europe and North America? <A - John A. Bryant>: Ken, we'll talk more about it at CAGNY, if you want, but I'm not going to get into the details of the historical performance. We're looking to the future here and what we can do with this company. Thank you. Our next question is from Andrew Lazar of Barclays Capital. Your question, please? <Q - Andrew Lazar>: Good morning, everyone. <A - John A. Bryant>: Good morning, Andrew. <A - Ronald L. Dissinger>: Good morning. <Q - Andrew Lazar>: And I know this probably came together reasonably quickly, just given the circumstances, but just curious; two things. One, is this an asset or the type of business that you'd been looking around prior, and just opportunities arose where it made more sense now? And then, also, I know that the Pringles business particularly in North America, excluding, let's say, very recent trends that you just talked about, but have actually been quite a bit better over the last two years or so. And I think some of that was shifting over to a brokered sales force and some different pricing algorithms by P&G on some of the key parts of the Pringles business. But, more importantly I guess, Page 6 of 14

7 what have you seen over really the last two years about how the business has performed quite a bit better that gives you obviously some comfort going forward that this business is on a better track that you can add to? <A - John A. Bryant>: Well, Andrew, I think if you look at the foundations of this business, it's a tremendously strong iconic brand, has the highest brand awareness of any savory snack brand in the U.S. It is a heavy brand-building-driven model, very similar to what we're used to running as a company. And we are confident that we can get this business and drive this business into great growth in the future. And to your point, I think it has had some great success, going back a couple years, obviously, but more recent results with the transition being a bit more difficult. But this is a very, very strong brand and one that has great potential for the future. <Q - Andrew Lazar>: Okay. Last thing is just how big a benefit also is having a, now, much larger international footprint around where you can deploy your cash going forward internationally for growth rather than necessarily bringing a lot of it back and getting taxed pretty heavily on that? <A - John A. Bryant>: Yeah, this is a very tax-efficient use of international cash, no question about it. In addition to that, it really does transform our international snack capability. When we bought the Keebler business 10 years ago, it really transformed our U.S. business [ph] and gave us (21:24) a true snacks capability in the U.S. However, it really didn't do a whole lot outside the U.S. This deal gives us the snack capability and platform internationally, that now we can more effectively leverage the idea pipeline from the U.S. and drive a truly global snacks platform around the world. So we do believe there's an efficient use of international cash. It gives us even more additional investment opportunities in the international business going forward and provides us with additional growth opportunities. So if you go to some markets in the world where, say, the cereal category is relatively small, now we have a savory snack business as well, and it gives us another tool to drive that business growth in the future. <Q - Andrew Lazar>: Thanks so much. <A - John A. Bryant>: Thank you, Andrew. Thank you. Our next question is from Rob Moskow of Credit Suisse. Your question, please? <Q - Robert Moskow>: All right, thank you. This is kind of a follow-up to Andrew's question. Yeah, you probably had a chance to take a look at this asset a year ago and I guess you passed up on it. I'm doing some math here. It looks like your net price is probably lower when you take into account maybe $490 million of tax benefits here. That means you're paying maybe $2.2 billion. Diamond was paying $2.35 billion. I guess my question is, was there something about the business a year ago that you didn't think it was the right time a year ago to make the acquisition? <A - John A. Bryant>: Well, to your point, I think it was hard to compete with the Diamond deal. I think also we have an increased focus on our international snacks business today than we had a year-plus ago. And I think the success of brands like Special K Cracker Chips, as well, has given us even more interest in this particular area. <Q - Robert Moskow>: Okay. And then a follow-up; a lot of companies are taking a look at their sales forces, switching to brokered networks. Have you kind of rethought North American snacks at all, or are you committed to DSD for North America? <A - John A. Bryant>: We're committed to DSD. We have a combination of assets to deploy in the U.S. We have a DSD system; we have a warehouse system; and we use brokers, as well, to pass that business in some parts of the country. So we really look at using all of those assets and deploy them in the best combination we can to drive that business. <Q - Robert Moskow>: Okay. Thanks a lot. Page 7 of 14

8 Thank you. Our next question is from Todd Duvick of Banc of America. Your question, please? <Q - Todd Duvick>: Yes, good morning. Two questions, actually. First of all, because it came together so quickly, I wanted to know if you could tell us have you had time to vet the transaction with the rating agencies, or is that something that you'll look to do over the next week or so? <A - Ronald L. Dissinger>: We'll be speaking to the ratings agencies very quickly about the transaction because, yes, it did come together quickly. <Q - Todd Duvick>: Okay. And then with respect to the $2 billion of incremental debt, you do talk about paying down debt over the next couple years, and so the question I have is, in terms of the $2 billion, would you look to term out roughly half of that and keep the other half in short-term debt to pay down over the next couple years? <A - Ronald L. Dissinger>: Yeah, we're trying to match as best as we can our use of international cash with some short-term debt, and then we're looking at long-term as well, so there's a mixture of debt that we'll be placing out in the market. <Q - Todd Duvick>: Okay, very good. Thank you. <A - Ronald L. Dissinger>: You're welcome. Thank you. Our next question is from [indiscernible] (24:49) of Jefferies. Your question, please? <Q>: Good morning. Is your own internal turnaround has that progressed far enough that you have the bandwidth to integrate this business right now? <A - John A. Bryant>: Well, I think if you look at the underlying business last year, the underlying growth in our business was actually quite strong. We had top-line growth again in the 4% to 5% range, as we've guided for this year, and while our operating profit was less than we like to be, it had to do with the integration incentive plan being put back in place, as well as investing in our supply chain. So the underlying growth, if you adjust for those items, was actually quite good. Looking to 2012, we feel good about how we're going in terms of investing back in our business, and we believe this is the right acquisition at the right time to create an even stronger Kellogg Company for the future. <Q>: And maybe if I can add one more, would you have to add any more salty snack brands to make your salty snack business, now with much more global footprint, a more viable business? <A - John A. Bryant>: I think it's a strong business. I think we'll always look to see if there are additional bolt-on acquisitions to make the business even stronger, but I think it's a very strong platform to work from. <Q>: Okay. Thank you. Thank you. Our next question is from David Palmer of UBS. Your question, please? <Q - David S. Palmer>: Thanks. Hey, guys, congrats. This deal would seem to add one to two points EPS growth, just on the cost synergies alone, over the next few years. Does that seem reasonable to you, and do you think it would be reasonable for folks to simply add that growth to whatever they were modeling previously, and how are you thinking about your algorithm? Page 8 of 14

9 <A - John A. Bryant>: I don't know what people are modeling in terms of the expectations for growth. We view this as an element of enabling us to deliver our long-term growth algorithm as a company, to ensure that we're on track with that, so we're very excited about how this plays a part within that approach. <Q - David S. Palmer>: And I guess that gives you a little bit of ability to reinvest, but is there any bit of this gives you ability to navigate what might not be the best core category dynamics you've seen over the long term, like recently, this is for cereal maybe not the best momentum and this gives you an ability to kind of navigate through a soft patch for the category? <A - John A. Bryant>: I think it gives us the ability to reinvest and gives us improved visibility into our long-term guidance outlook. <Q - David S. Palmer>: When it comes to top-line synergies, it seems to be there. Someone touched on I think it was Chris touched on the DSD advantage in the U.S. And maybe you won't plug it into that, but maybe that can help you with your execution in-store, and then perhaps you're also envisioning other expansion opportunities; revenue synergies, is that something maybe you'll get into at CAGNY, and what can you say about that? <A - John A. Bryant>: We have not relied really on revenue synergies, so the synergy estimate we gave you was largely cost-synergy-related. We do believe that there will be great revenue synergies, and we'll work with our new Pringles team and the Kellogg team and we'll put those ideas together and come to market in the future. <Q - David S. Palmer>: Thanks. I'll pass it on. See you next week. Thank you. Our next question is from Eric Katzman of Deutsche Bank. Your question, please? <Q - Eric R. Katzman>: Hi. Good morning, everybody <A - John A. Bryant>: Good morning, Eric. <A - Ronald L. Dissinger>: Good morning. <Q - Eric R. Katzman>: Congrats on embracing your inner snacks. That's a good move. So just a couple of quick detail questions first. I wasn't exactly clear on the amortization expense. How much is the non-cash goodwill expense you expect, roughly? And is that included in the well, like let's say the initial $0.08 like of the $0.08 to $0.10, what's the goodwill noncash expense impact? <A - Ronald L. Dissinger>: Well, without getting into the details, Eric, it is included in that $0.08 to $0.10, so there's a step up in basis and we've got that included in the performance. <Q - Eric R. Katzman>: Okay. So on a cash basis, it's greater accretion is basically what you're saying. <A - Ronald L. Dissinger>: That's absolutely correct. <Q - Eric R. Katzman>: But we don't know that number yet. Okay, we don't know that number yet. <A - Ronald L. Dissinger>: Yeah. <Q - Eric R. Katzman>: Okay. And I'm on the road, so I don't have the release or anything in detail on the slides, but to the $0.08 to $0.10; that doesn't assume suspension of your buyback? <A - Ronald L. Dissinger>: The $0.08 to $0.10 does not assume suspension of the buyback, so when you get to the reported position that we communicated, the $0.11 to $0.16, that's got the suspension of the buyback embedded into it. And remember, as I mentioned to Ken, it's a couple of points of impact to earnings per share, Eric. Page 9 of 14

10 <Q - Eric R. Katzman>: Okay. And then maybe this is a question for CAGNY or what have you, but I think that Kellogg has never gotten the credit for taking these "upfront charges," running them through the P&L. Three-fourths of the industry excludes this stuff. Why not take the opportunity right now to start calling out these upfront charges and excluding it from your guidance, again, like most everybody and maybe you'll actually get some credit for an "operating earnings number"? <A - Ronald L. Dissinger>: We actually did break it out. That's why we gave the accretion piece and then the dilutive impact including - <Q - Eric R. Katzman>: No, no, no; I'm talking no, Ron, I'm talking about the stuff you've been doing, $0.10 to $0.15 a share every year. <A - Ronald L. Dissinger>: We communicate the $0.12 approximately of upfront costs, so we've got it embedded in our profit and loss statement, Eric, so we're very clear and transparent on it. <A - John A. Bryant>: Eric, we see it as an ongoing cost of doing business for the Kellogg Company, so we don't recommend that you take it out of that EPS number. I can't talk to how companies do it, but we're always searching to make our company better and stronger over time. <Q - Eric R. Katzman>: Okay. Last question; then I'll pass it on. The snacks the part of Pringles that made it unique was the fact that it was like a stacked, extruded snack in this can, which allowed it to go warehouse, et cetera. But isn't it fair to say that that's no longer unique, and everybody's got a stacked can product? And so how do you think about that and how does the company kind of bring innovation to that type of product in at least the core markets, as opposed to maybe some in the international? <A - John A. Bryant>: Well, Eric, I think it's an iconic brand. I think that the food is a little different in some of the competitors, just the way it's produced and the production process. So we think it's great food, great brand. We believe that we can continue to grow this business over time. We will continue to see if we can innovate around this platform and look to see if we can take some of the Kellogg brands until we can deal with those brands in some of this space as well. <Q - Eric R. Katzman>: Okay, I'll leave the rest for CAGNY. Thank you. <A - John A. Bryant>: Thanks, Eric. Thank you. Our next question is from Ken Zaslow of BMO Capital Markets. Your question, please? <Q - Kenneth B. Zaslow>: Hi. Good morning, everyone. <A - John A. Bryant>: Good morning <A - Ronald L. Dissinger>: Good morning. <Q - Kenneth B. Zaslow>: Just to understand the difference between the reported EPS and the $0.08 to $0.10; is it just the share repurchases and the upfront costs? Is there anything else that's the difference between those two numbers? <A - Ronald L. Dissinger>: It is the one-time cost and the share repurchases. <Q - Kenneth B. Zaslow>: Okay. The second question I have is, in terms of the international markets, can you talk about which markets you actually expect to try and get the most amount of momentum? I know the market shares outside the U.S is somewhat in that 1% to 4%. Can you talk about what you expect to do in each of some of the markets where you expect to gain the most penetration and which ones maybe you would be less inclined to explore? <A - John A. Bryant>: I think we'd like to that in the future here. Right today, we're just announcing a deal. We're not even closing the deal until another three or four months. So I think once we've closed the deal, we'll be in a better Page 10 of 14

11 position to give you a sense of here's our growth opportunities more specifically for this business. <Q - Kenneth B. Zaslow>: Because of the market shares outside the U.S., is there any concerns that there are somewhat minimal, that they may not be businesses that you'd be more to fully embrace? Like I know China is 1% market share. There seems to be a lot of stragglers in terms of their market shares. Is there any issues at all, or at this point you'd say, hey, look, we're going to look at all the international markets? <A - John A. Bryant>: I think every market is different. We'll obviously go through a process of working with the Pringles team to agree where the best places to invest are, and we'll make that decision and we'll move forward with that in the future. <Q - Kenneth B. Zaslow>: Okay. And then the last question is it's not a very easy question to ask, but look, you guys are going through some challenges on the core business, and then now you're going to be taking on an integration. Can you talk about the allocation of management's time and how you're going to ensure that the two businesses are you setting up a new team for the Pringles? How are you going to delineate the two the recovery that you're looking to do on the core business as well the integration? Can you talk a little bit about conceptually how you're going to divide your time as well as management's time to ensure that this doesn't impede the growth of the core business? <A - John A. Bryant>: Well, I think it's important to remember here that we're buying a capability with this business. We're picking up 1,700 new Kellogg employees that we're excited to have join the Kellogg family, and they're bringing with them a capability to run this business. At the same time, we are re-implementing SAP in the U.S., which actually helps us into the bringing the Pringles business onto the new SAP footprint, and we also have ongoing transition service arrangements with P&G as well. So there's a number of ways here, I think, we're well set up to do this integration. No question, with any integration, it's a lot of work, a lot of effort. We'll have an integration team, as will P&G, and we'll be working to bringing these two organizations together. So we believe it's the right time, the right asset, and we can make this a very successful integration to the Kellogg Company. <Q - Kenneth B. Zaslow>: And what about your core business, to what extent is there going to be any diversion of resources away from that towards this integration? And I guess that's the concern. <A - John A. Bryant>: I think we have a strong core business. Our U.S. snacks business is doing extremely well. Our U.S. frozen business is on fire. Our cereal business, as we said on Q4, we're moving some price points to the market, and U.S. cereal is a little bit soft, but it's a completely different business unit to Pringles in the U.S. snacks organization and Pringles in the international snacks organization. <Q - Kenneth B. Zaslow>: Great. Thank you very much. [ Instructions] Our next question is from Matt Grainger of Morgan Stanley. Your question, please? <Q - Matthew C. Grainger>: Hi, everyone. Thanks for taking my question. <A - John A. Bryant>: Good morning, Matt. <Q - Matthew C. Grainger>: Hi. So if you look at the level of marketing support Pringles has historically received and the efficiency of its current operations, how do you think about the size of the opportunity for leveraging your own expertise in advertising and productivity? <A - John A. Bryant>: Well, I think that Pringles is an iconic brand. It's been built through very strong brand-building over the years, and we expect to continue to do that in the future. Pringles has been very aggressive in some areas, like gaming and so on, that we can learn from, and we have some experience in some other areas that maybe Pringles can learn from. So I think, together, we can build an even stronger brand in the future. Page 11 of 14

12 <Q - Matthew C. Grainger>: Okay. Thanks very much. Thank you. Our next question is from [ph] Alexis Borden (37:30) of Citigroup. Your question, please? <Q - David C. Driscoll>: Good morning. It's David Driscoll calling in. <A - John A. Bryant>: Good morning, David. <Q - David C. Driscoll>: Just to apologies here; I'm on the road as well, as I believe Eric said, when I'm listening to this. So it's $0.08 to $0.10 accretive, and then you give all these caveats about one-time costs and charges and the share repurchase. Excluding the one-time costs and charges but including the changes to the share repurchase program i.e., I just want you to exclude the really one-time items what's the net effect to earnings? <A - Ronald L. Dissinger>: So the share repurchase we said was about two points roughly, and we communicated the one-time cost impact to you, David. <Q - David C. Driscoll>: So it's two points of growth to earnings, and I translate that into EPS. The other thing is $0.08 to $0.10 the Pringles is $0.08 to $0.10 a share, and then we can calculate this, but you can't just say it's $0.03 positive. <A - Ronald L. Dissinger>: David, the one-time costs are $0.13 to $0.17. <Q - David C. Driscoll>: Thank you. <A - Ronald L. Dissinger>: Yep. <Q - David C. Driscoll>: That's what I needed. And then just the final question is then what type of changes to your and this is probably early for this, but do you have any ideas on what kind of reinvestment would need to go into a business like this? I always wonder when it's kind of an orphan, at a company like P&G; does it need significant reinvestment in order to put it into the position where it has the growth characteristics that you want? <A - John A. Bryant>: David, I think we're expecting to do some level of reinvestment. I'm not sure I'd use the word significant, but we intend to invest in this business for the long term. It's a great iconic brand. It makes a huge difference to our international snack business and is a meaningful and a very important addition to our U.S. snack business. So we've set that expectation as we have built up the model going forward. <Q - David C. Driscoll>: Great. I really appreciate it. Thank you. <A - John A. Bryant>: Thanks David. Thank you. Our next question is from Eric Serotta of Wells Fargo. Your question, please? <Q - Eric Adam Serotta>: Good morning and congratulations. <A - John A. Bryant>: Good morning, Eric. <Q - Eric Adam Serotta>: Could you give us an idea as to how much of the transaction is being funded with international cash versus incremental debt? I'm not sure whether you said that. If you could clarify that, I'd appreciate it. Page 12 of 14

13 <A - Ronald L. Dissinger>: Sure. We're going to use about $0.5 billion of international cash to fund the deal, and then we said approximately $2 billion of both short-term and long-term debt that we'll place in the market. <Q - Eric Adam Serotta>: Okay. And do you see any material change in the ongoing tax rate going forward as a result of the geographic mix of businesses and changes in your repatriation of foreign earnings? <A - Ronald L. Dissinger>: Yeah, there are some tax synergies as a result of this deal that will impact our effective tax rate. Yes. <Q - Eric Adam Serotta>: Do you care to quantify what kind of an effective tax rate we should be looking at longer-term? <A - Ronald L. Dissinger>: Not at this point in time; we'll provide more guidance at a future date. <Q - Eric Adam Serotta>: Okay. Thanks. I'll pass it on. Thank you. Our next question is from Ed Aaron of RBC Capital Markets. Your question, please? <Q - Edward Aaron>: Thanks. Good morning, everybody. Just two quick follow-ups; most of my questions have been answered. But first I was wondering, on the share buyback, for 2013, were you also assuming about two points of earnings growth from buyback next year as well? <A - Ronald L. Dissinger>: Yeah, it should be approximately that amount, perhaps a little bit less. So we expect repurchase shares to be equivalent of employee option exercises. <A - John A. Bryant>: So I guess, in general, in our model looking into the future, we would normally expect a couple points of expansion between operating profit and EPS from share buybacks. Obviously, as we pull back to just buying back shares based on options proceeds, that won't be there in <A - Simon Burton>: Okay, we have time for one more question, I think. Thank you. Our final question is from Alexia Howard of Sanford Bernstein. Your question, please? <Q - Alexia Jane Howard>: Good morning, everyone <A - John A. Bryant>: Good morning. <A - Ronald L. Dissinger>: Good morning. <Q - Alexia Jane Howard>: Just a couple of real quick ones. Firstly, what does this do to your percentage of sales in emerging markets? Does that increase it by a couple of percentage points? Where will you be now? <A - John A. Bryant>: It will increase it, and I think it gives us an opportunity, Alexia, in the future to drive that part of our business even harder. <Q - Alexia Jane Howard>: Okay. And then on the cost synergies, they look quite low, I think just 5% of Pringles' sales. I think many other companies have said 7% to 8% of the acquired company's sales. Given the geographic overlap, is it just a bit too early to really dig into that, or where do those cost synergies come from, and is there possibly some more wiggle room there? <A - John A. Bryant>: I think the cost synergies are largely coming from taking this out of the P&G system and plugging it into our infrastructure. So I believe the synergies will come over the first couple of years, and we believe Page 13 of 14

14 there's opportunities for us to look to see if we can do even more. P&G has a world-class supply chain. We're looking forward to learning more about their operations and how we can even improve our operations and vice versa. So I think there is potential for more opportunity, but we're very confident in the $50 million to $75 million run rate that we've given you. <Q - Alexia Jane Howard>: Okay. And then very finally, very quickly, the margin on Pringles looks quite low. The EBITDA margin is about 16%, which I'm presuming means that the EBIT margin is somewhat lower than that. Are there particular regions of the business that are particularly lower-margin, where you would see a margin expansion opportunity beyond the cost synergy side of things? <A - John A. Bryant>: So I think the margin on this business is a little bit lower than Kellogg traditional. I would say that, as a company, we've had great success buying companies over the years and improving their margins. That happened with Keebler, with Kashi, with Morningstar Farms, and so on. And that's something that we'll be looking at in the future. <Q - Alexia Jane Howard>: Great. Thanks very much. I'll see you at CAGNY. <A - John A. Bryant>: Great. Thank you. Simon Burton Well, thanks for joining us, everybody. We'll be available for questions throughout the rest of the day, and we look forward to seeing most of you next week in Florida. Ladies and gentlemen, thank you for your participation. That concludes the presentation. You may disconnect, and have a wonderful day. This transcript may not be 100 percent accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is", without express or implied warranties of any kind. Bloomberg retains all rights to this transcript and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have no liability for errors in this transcript or for lost profits, losses, or direct, indirect, incidental, consequential, special or punitive damages in connection with the furnishing, performance or use of such transcript. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP. COPYRIGHT 2012, BLOOMBERG LP. All rights reserved. Any reproduction, redistribution or retransmission is expressly prohibited. Page 14 of 14