Simon Burton - Director, IR David Mackay - CEO John Bryant - CFO

David Adelman - Morgan Stanley Terry Bivens - Bear Stearns Eric Katzman - Deutsche Bank David Palmer - UBS John McMillin - Prudential Equity Todd Duvick - Banc of America Securities Eric Serotta - Merrill Lynch Pablo Zuanic - J.P. Morgan David Nelson - Credit Suisse Alexia Howard - Sanford Bernstein Jonathan Feeney - Wachovia Securities

Good day everyone, and welcome to today's Full Year 2006 Year-End Earnings Review Conference Call. For opening remarks and introductions, I would like to turn the things over to your host, Mr. Simon Burton. Please go ahead, sir.

Thanks Jason. Good morning everyone, and thank you for joining us for a review of our fourth quarter and full year results and for a discussion regarding our strategy and outlook. With me here in Battle Creek are David Mackay, CEO; John Bryant, CFO; Gary Pilnick, General Counsel. We must point out that certain statements made today such as projections for Kellogg Company's future performance including net sales, operating profit, cash flow, earnings per share, margin, up-front costs, brand building and share repurchases are forward-looking statements. Actual results could be 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 fillings. Beginning with the first quarter of 2006, the company adopted SFAS 123R and began to recognize expense related to employee stock option grants in reported results. To help investors understand comparable performance, we will consequently be using certain non-GAAP measures such as internal operating profit growth to discuss 2006 results. Please refer to the appendix reconciliation to US GAAP results at the end of this presentation. A replay of today's conference call will be available by phone through Monday evening by dialing 888-203-1112 in the US and 719-457-0820 from international locations. The passcode for both numbers is 4244212. The call will also be available via webcast at www.kelloggcompany.com, which will be archived for 90 days. Now, I would like to turn the call over to David.

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Thank you, Simon, and good morning everyone. It's glad to be here and to be able to report such strong results in my first quarter as CEO. We had strong sales momentum whole year and it continued through the fourth quarter. This growth was driven by successful product innovation and brand building programs. The fourth quarter was strong with high single-digit sales growth and strong internal operating profit growth, adjusting for the significantly greater investment and cost reduction initiatives in the quarter. We've posted high single-digit internal revenue growth for the full year. In fact, we are pleased that this is another year of greater than targeted growth. This revenue growth was driven by a positive combination of price mix and volume growth. All of which resulted from the success of our innovation, brand building efforts, and in-store execution. Excluding the effect of expensing stock options, we generated double-digit earnings per share growth, and we also continued to make significant investments in cost reduction initiatives. While these contributed to lower gross and operating profit margin than we would have otherwise realized, investment provides a good return and helps us provide sustainable rates of growth. So, by almost any measure, this was a successful year. We met or in most cases exceeded our long-term target, while investing in the future growth and while facing dramatically increased costs. In fact, it's the excellent execution by our team that will help us navigate through another year of cost inflation and again deliver strong results in 2007. Now let's look at our results in more detail, and if you turn to slide four, it shows a summary of our key financial results. Net sales increased by 7% in 2006 as a result of strong internal growth of 7% and a slightly favorable impact from foreign exchange. Reported net sales growth of 8% in the fourth quarter was also strong, as was internal growth of 6%. Internal operating profit increased by 4% in 2006 and reported operating profit increased by 1%, and the difference stands mainly from the expensing of stock options which began in 2006. Internal operating profit growth was in line with our long-term target and we are very pleased to deliver these results given the dramatically high fuel, energy benefits, and commodity costs we again saw this year. 2006 was a solid year where we met our goal for operating profit growth and it's also the fourth consecutive year that we've faced significant incremental increases in costs. Internal operating profit in the fourth quarter also increased by 4% and included $27 million more in upfront costs than in the fourth quarter of last year. Reported operating profit for the quarter was approximately unchanged. Earnings per share for the full year excluding effect of expensing stock options increased by 11%. This growth resulted from strong sales growth and fewer shares outstanding as a result of our continued share repurchase program. EPS was $0.45 in the fourth quarter and included a small charitable contribution. You'll note that full year EPS of $2.51 exceeded initial guidance for the year of $2.42 to $2.47 per share. In addition, up-front costs for the full year totaled $0.14 per share or $0.01 than our initial guidance. Full year cash flow reached $957 million, inline with our guidance. Slide 5 shows our net sales growth, and for the full year, internal net sales growth was 6.8%. For the fourth quarter, internal sales growth was 6.1%. We are very pleased with these results with both a significantly greater than our long-term target. And as you can see, price mix and tonnage growth were balance contributors to internal sales growth for the full year. Our goal is to drive sustainable rates of profitable revenue growth and we are pleased by tonnage and price mix continues to contribute. In the full year and for the quarter, we benefited from increased demand, mix improvement and the increased pricing that you've seen in measured channel data. The effect of foreign currency translation had a relatively small impact on full year results. Now let's turn to slide six, which provides detail regarding advertising. And as you can see, during the year, we said we are going to undertake a major project to drive cost efficiency and effectiveness in the consumer promotion area and in media buy. We saw major efficiency benefits in consumer promotions in Q4 and we'll see a continued benefit in 2007 due to efficiency gains and optimization. So, while investment in brand building will increase in 2007, investment in advertising will increase significantly. We haven't changed our long-term approach to increase brand building at a rate greater than sales growth, but obviously because of this initiative 2007 will be different. As a result, we'll show you investment and advertising on this chart during 2007. And as you can see, this investment has increased due to rate greater than sales growth, even though sales growth significantly exceeded our long-term target. And as I said, we continue to benefit from a disciplined review of our media planning and buying. As a result, we've increased our presence, developed more targeted communication, and lowered the cost. We established best practices in terms of the global purchasing of premiums and are focusing on fewer, stronger and more effective promotional programs. We continue to leverage our bigger properties across our different businesses as we will in 2007 with Shrek 3 and the games supplier, Electronic Arts. Our commitment to building brands through our advertising and consumer promotion remained absolute. The efficiency gained in Q4 and throughout 2007 in our consumer promotion activities are a great example of our commitment to drive efficiency and effectiveness in all that we do. And now, I'd like to turn it over to John for an overview of our financial performance.

Thanks, David and good morning everyone. Slide seven shows our performance over the past two years. Gross margin was significantly affected by increased up-front costs in the fourth quarter. In fact, without this effect gross margin would have increased by 40 basis points. Increased cost inflation, which began in the second half of 2005, has been a significant headwind in 2006, and we are happy to weather the increases as always we have. The impact of cost inflation from commodities, fuel, energy and benefits decreased gross margin by 150 basis points for the full year and by 160 basis points in the fourth quarter. In fact in 2006, we incurred incremental commodity benefits, fuel and energy inflation equal to approximately $0.28 of EPS. Also, we continue to experience some margin impacts from growth in certain new co-manufactured products this year. These arrangements have allowed us to introduce popular new products without initially committing capital. Partially offsetting inflation was a benefit that came from our cost efficiency project, productivity initiatives and the benefits from pricing actions taken in many of our major businesses in the last 12 months. Given the volatility we see resulting from alternative energy and has impact on grains and fuel in the US, we see even more cost inflation in 2007 than we originally expected. In fact, our estimates for incremental benefit, commodity, fuel, and energy costs is now between $0.18 and $0.22 of EPS, a significant increase from initial estimates of between $0.10 and $0.16. We expect that this will lead to a gross margin decline of up to 50 basis points for the full year. Now let's turn to slide 8 and look at operating profit. This slide shows the growth in the internal operating profit in each of our geographic reporting areas. In North America, full year internal operating profit growth was 7%. This result was driven by strong sales growth and was achieved despite significantly increased input cost inflation, although it benefited from lower up-front costs. In Europe, full year internal operating profit growth increased by 1%, also achieved despite double-digit increases in advertising and increased input costs. Significantly higher up-front costs lowered full year operating profit growth by 8%. So, the growth we saw in Europe for the full year was excellent. In Latin America, full year internal operating profit growth was an outstanding 9%, driven by strong sales growth and despite a double-digit increase in investment in advertising. And in Asia-Pacific, we posted a full year internal operating profit decline of 9%, which resulted from a difficult operating environment in Australia and significant investment in Asia. Consolidated operating profit growth was solid for the full year, inline with our long-term targets. The fourth quarter's results were also inline with our long-term targets, despite a significant increase in investment in up-front costs. And keep in mind that we delivered these results in a period of significant cost inflation and while continuing to invest in our business. Below the operating profit line, interest expense increased for the full year by $7 million and the tax rate for the full year was 31.7%, inline with our previous guidance. Now let's turn to slide nine, which shows the history of our core working capital measured as a percentage of sales. As you can see, our improvement in this important metric continued in 2006 and 12-month rolling core working capital as a percentage of sales is 6.8%, which is industry leading performance. While the rolling 12-months result remained strong, you noticed on the balance sheet at year end 2006 that we saw increases in inventory balances versus year-end 2005. These were due primarily to input cost increases and an increase in the amount of inventories in preparation for new product launches. Despite this, our inventory is also at industry leading levels. Now let's turn to slide ten in a more detailed discussion of cash flow. Our Manage for Cash operating principal has helped drive the improvement in working capital seen on the previous slide. Also it keeps us focused on the generation of cash flow. Cash flow for the full year was $957 million, toward the high-end of our guidance range. Looking forward to 2007, we expect that full year cash flow will be between $950 million and $1.25 billion. Having strong cash flow is one thing, but we've also put this cash to good use as you can see on slide 11. Over the last three years, we repurchased approximately $1.6 billion of our own shares and have paid more than $1.3 billion in dividends. That's almost $3 billion returned to shareholders over the last three years. We remained committed to the balance use of our cash flow. We will continue to assess our dividend, we will continue to repurchase our stock, we will continue to focus on decreasing net debt, and we will continue to invest in future growth initiatives. As you know, our Board of Directors has authorized a share repurchase program of $650 million for 2007. Now let's turn to slide 12, which details our outlook for 2007. This slide is very similar to the one we showed you last quarter. However, we now expect that internal revenue growth could be as high as 4% and that earnings will be between $2.68 to $2.73 per share, an increase of one penny from prior guidance. We continue to expect mid single-digit operating profit growth. Built into this guidance, is our revised estimate, the total incremental fuel, energy, benefits, and commodity costs of between $0.18 and $0.22 per share, which adds to the dramatic incremental increases in each of the last four years. Obviously, this is a considerable headwind. So, we are pleased to still be able to provide earnings guidance inline with our long-term targets despite these additional costs. We have budgeted for cost saving projects in 2007 of $0.14, which will approximately equal the amount invested in 2006. These projects are a very important part of our approach to business, and contribute to gross and operating profit margins, and help provide the flexibility needed in recent years to overcome cost pressures. And we also continue to expect some leverage below the operating profit line. While we expect high interest expense for the year, we expect that all of this will be offset by high interest income. And finally, we expect the tax rate to be around 31%, inline with recent guidance. This should all lead to high single-digit EPS growth for the year, despite the pressure faced by the entire industry. Our approach to business and the flexibility provided by our operating principles make it possible for us to expect to meet our long-term targets again in 2007. Finally, while we don't give guidance on a quarterly basis, I would like to say a word on the first quarter. Gross margin will be down more than our full year target in the quarter, due to the timing of commodity cost increases. And as we told you in October, we're expecting operating profit to be down in Q1, as a result of the continued commodity inflation, significantly increased investment in advertising, and extremely difficult costs. Importantly though, the key is that we continue to expect that full year operating profit will increase in line with our long-term target of mid single-digit growth. And with that, I'll turn it back over to David for a review of our operations.

Thanks, John. If you could turn now to slide 13, which shows internal growth posted by each of our North American businesses in 2006 and for the fourth quarter. We posted good rates of growth despite the difficult comparison set in 2005. And if we look at our North American business in more detail, slide 14 shows North American retail cereal growth for the fourth quarter and full year. Full year growth was 3%, which builds on 8% growth from 2005, the fourth quarter sales declined by 2% on an 8% comp, even though end-market consumption grew roughly 3% across all channels in Q4. This all channel consumption growth was in line with full year growth and the difference between shipments and consumption in the fourth quarter is a result of a decrease in inventory levels at some of their retail partners in the fourth quarter. In addition, we had difficult comps and faced very competitive activity in the category during the quarter. Our base sales, those not on promotion, grew 4% and our price per pound increased 5% in measured channel data. Sales growth for the full year was driven by strong results from Special K, Mini-Wheats, Smart Start and All-Bran. Specifically, new products such as Mini-Wheats Strawberry Delight and Special K Fruit & Yogurt contributed, and our Rice Krispies brand also posted a good year as a result of innovation. As you might imagine, we recently introduced some great new products including Special K Chocolate, Rice Krispies with Strawberries, Smart Start Cinnamon Raisin and new version of Cocoa Krispies. Kashi posted strong fourth quarter and full year results, also as the result of innovation and successful advertising support. GOLEAN Honey Almond Flax, [Wheats], and Organic Promise all posted strong growth and with more new products come in 2007. And finally, in Canada, we posted low single-digit sales growth in the fourth quarter and the full year. We launched All-Bran Guardian in Q4, and while its early acceptance has been good, and the brand is doing well. In addition, we've got some great promotions planned and new products being introduced including Mini-Wheats Strawberry Delight and Special K Chocolate. You can see on slide 15, the increase we have posted in the US measured channel ready-to-eat cereal category shares since 2000. The chart shows 52-week comparable data and we gained category share again in 2006. This was driven by excellent innovation and brand building programs throughout the year. Even in Q4, with significant tactical activity in the category, our measured channel category share declined only 10 basis points for the latest 13-week period. Let's now turn to slide 16 and our North American Snacks business. Snacks posted strong 12% growth in the fourth quarter. These results again, were considerably greater than our long-term targets and built on strong comparisons in 2005. Full year growth was 11% and we saw a strong growth across the businesses and in-store execution was excellent. And you can see more detail on slide 17, which shows our Toaster Pastries business posted another year of share gain for the full year with some good innovation in 2006 and some new 2007 innovations for each of the categories is shown on the slide. Our Cracker business also posted excellent growth for the full year and in the fourth quarter. We posted strong growth in both our Townhouse and Club brands in 2006. Cheez-It also had a strong year as did portion control pack such as Cracker Packs, Caddy Packs and Grips. We've got some great new innovation coming including Cheez-It Sticks and All-Bran Crackers. We saw good growth in the Cookies business and also gained share for the full year and fourth quarter. Chips Deluxe, Fudge Shoppe, Murray Sugar Free all posted strong full year sales growth. And recent innovation includes new variations of our 100-calorie pack Right Bites. The Wholesome Snack business also gained share and posted very strong double-digit sales growth in both the fourth quarter and full year. Great new innovations include Nutri-Grain Fruit & Nut Bars, new Special K Honey Nut Bars and various new fruit snacks. And in Canada, we saw a good sales growth and in the fourth quarter our Canadian business is introducing two versions of Sweet & Salty Bars, similar to the ones that are available in the US and two versions of All-Bran Bite Size snacks. Slide 18 shows that our Frozen and Specialty channels businesses posted very strong internal sales growth of 8% in the fourth quarter and for the full year. Again, our two main frozen brands Eggo and Morningstar and the Specialty channels businesses all posted very good results. The Eggo business performed very well, as innovation such as Choco, new Waffles and Pancakes drove results. Our Morningstar and Kashi entrees businesses also posted strong results behind successful new products including Meal Starters and Meal Solutions, Veggie Bites and the Kashi entrees we told you about last year. Our specialty channels businesses posted high single-digit internal net sales growth in the fourth quarter and for the full year. Both food service, and vending, and convenience and drug contributed to this growth. Pricing and innovation contributed to sales growth and we are very pleased with the performance of all of these businesses this year. Slide 19 shows the internal sales growth posted by our international businesses over the past couple of years. This growth while strong all year, actually increased in the fourth quarter. We are very pleased with 6% internal growth in the fourth quarter and excellent 5% growth for the whole year. Now, if you will turn to slide 20, you will see internal growth highlighted by area. In Europe, we posted full year internal sales growth of 5% as a result of strong growth in most of the countries in the region. This is the strongest internal growth we've posted in region since early 1990s, and we are very pleased to achieve this result in the current difficult environment in Western Europe. We executed some very strong innovation and brand building programs across the region, which led to excellent levels of growth in both cereal and snacks. In the UK, our largest business in the region, we posted mid single-digit sales growth in both cereal and snacks and gained share in both categories. We introduced new versions of All-Bran, Special K Bliss and Crackle! Pop! cereals, which all contributed to the growth, as did Nutri-Grain, Special K Bars and Rice Krispies Squares, and with more to come including Crunchy Nut Sweet & Salty Bars in the first quarter. Our business is in the rest of Europe also did very well in the year and fourth quarter, we saw strong full year cereal and snacks growth in France, Benelux, Spain, Italy, The Mediterranean South Africa and Ireland. In Latin America, we again posted high single-digit growth in both our cereal and snacks businesses. In Mexico, where we gained major channel cereal category share, we launched Special K with Chocolate and a multigrain cereal version of our new NutriDía brand. Across the rest of the region, we saw strong growth in most of the businesses for the full year. This extended across both the cereal and snacks category. Our Venezuelan business where All-Bran continuous to do very well, saw exceptional growth, as did Columbia as a result of the strength in -- at All-Bran and our introduction of Wholesome Snacks during 2006. Finally, in our Asia Pacific business, we saw a solid sales growth in our cereal businesses in the fourth quarter. Kellogg Australia posted on target cereal sales growth in Q4 driven by Just Right Corn Flakes, Sultana Bran, Special K and Mini-Wheats. The snacks category continues to be challenging, but we expect this to shake out overtime. Sales growth in Korea was driven by Frosties and Chips, and in Japan, our Wholesome Snacks business appears to have started well and the category continues to grow. So in summary, we are pleased to report another strong quarter and another excellent year. We faced significant cost inflation and difficult operating conditions in many of our businesses during the year. The volatility in commodity costs continues and will remain a challenge for the foreseeable future. Despite all these pressures, which affected the entire industry, we managed to meet or in many cases to beat our long-term targets in 2006. We delivered above target internal revenue growth and excluding the impact of expensing stock options, we delivered another year of double-digit earnings per share growth. And we did it all without sacrificing the integrity of that business plan. In fact, we continue to significantly increase investment and the future growth though advertising and R&D, price mix and volume increased as a result of our successful new products, and brand building support. We generated significant cash flow through a continued focus on Manage for Cash and we returned an increased amount to shareholder through major share repurchases and an increased dividend. Our continued focus on our operating principle is unchanged and as you have seen, we have strong innovation, advertising and promotional programs plan for this year. With the right people in place across the Kellogg World, strong plans in place, and with the ability of our employees to continue to execute with excellence, we look forward with confidence to another year of growth in 2007. And with that, I'd like to open it up for questions.

Thank you everyone. (Operator Instructions). We'll go first to David Adelman with Morgan Stanley. David Adelman - Morgan Stanley: Good morning everyone.

Good morning, David. David Adelman - Morgan Stanley: David, I wanted to ask you if you could put the inventory reduction among your customers in the US ready-to-eat cereal business into context. Was that simply working out some of the inventory build at the end of Q3? Are they leveled now at the trade below where they were entering '05 and so forth?

Yes, sure David. I think the key as we looked at Q4 was consumption in our cereal business across all channels was up around 3%, which was consistent for the year. Shipments were down due to trade inventories. We flagged it Q3. To be honest, it was slightly greater than we though when we flagged in Q3. And the great thing is we took the right actions. We finished the year with an inventory position at the end of Q4 '06 slightly below where it was at the end of Q4 '05. So, we did the right thing. And the great thing also, I think when you look at cereal, because that was a big difference between consumption and shipments was our best performance in the quarter was very strong up for, price per pound was up 5%. So, it was a very good performance I though, and we basically put that inventory issue behind us now. David Adelman - Morgan Stanley: And as a follow-up David, are you surprised by the level of overall competitive activity in the category in the second half of '06 in light of the input cost inflation that obviously all of your competitors are observing as well?

Yeah, I guess we did see heightened tactical activity, principally in Q4, but the key from our perspective is we are going to continue to play our game. I think brand building and innovation are really what drives the category and drives long-term share performance and growth. And Q4 was quite strong and we'll just keep doing what we need to do and I think everyday will take care of itself, David. David Adelman - Morgan Stanley: Okay. Thank you. Good luck.

(Operator Instructions). We'll move to Terry Bivens with Bear Stearns. Terry Bivens - Bear Stearns: Good Morning everyone

Good morning Terry. Terry Bivens - Bear Stearns: And by the way, I think this is the first, all Aussie conference call that certainly I couldn't recall. So, congrats on that. Just on the commodity side, pretty significant revision there. Could you touch on what elements in particular caused you to raise your estimate of the input inflation for '07?

Yeah, I think the biggest driver, Terry, was what's happening in grains and edible oil. So, I think everyone seen corn driven by ethanol. It's impacted on all grains. I mean, wheat is currently very high due to drought and the global finishing stocks on wheat are quite low. Rice is up significantly. And ultimately, it will affect barley and oats and everything because a lot of these grains are interchangeable when you look at various segments in the market. And the grain prices in the high volatility, in our view, are unlikely to change in the foreseeable future. So from our perspective, we are pleased that we've absorbed much of our costs and yet we can still hit our long-term targets. Terry Bivens - Bear Stearns: Was there any element in there, perhaps some of your hedges rolling off that maybe a less than propitious time?

We don't really get into a great level of detail on hedges. There were some areas that we hedged in '06 that I suspect you believe we hadn’t hedged. So, some of the benefit I think people thought maybe coming through in '07, we didn't really have that as a cost in '06. And the other area which is on energy, which you look at what's happened to the price per barrel of oil, it's down about 20% to 25% from $70 to $50, $55. The price of diesel is actually down about 10%. So you've seen a dis-aggregation in the price of oil and the price of diesel. So, diesel is effectively up nearly 15% relative to the price of oil. So, those two things have drifted apart which also is a factor in what's going on in energy costs. Terry Bivens - Bear Stearns: Okay. Thank you very much.

Thanks Terry.

We'll move next to Eric Katzman with Deutsche Bank. Eric Katzman - Deutsche Bank: Hi, good morning everybody.

Good morning Eric. Eric Katzman - Deutsche Bank: Congratulations…

Thank you. Eric Katzman - Deutsche Bank: On your new titles. I guess my first question, what should we make, Dave, of the fact that your tonnage in the fourth quarter was only up 0.7%, and based on my records, that's the slowest rate of growth since the third quarter of '04?

Well, I think looking at the overall performance, price mix was up, the volume was up a little bit. So, I don't think it was a bad performance. You are talking across the business, Eric? Eric Katzman - Deutsche Bank: Yeah, on the consolidated basis. I mean coming out of the Keebler deal right, it was a lot of volume to value, so we saw the price mix component move up and then volume started to accelerate, as you kind of I guess got down with some of the SKU cuts. So, I was a little bit surprised to see -- I mean, I guess my point is just that in the last few years the price mix versus tonnage balance has been much more equal?

Yeah. Eric Katzman - Deutsche Bank: Whereas in this quarter, it was very, very skewed to price mix and I'm just kind of wondering how we should think about that?

Yeah, I think if you look at the full year it's where we think it should be, very balanced. You may remember we did take a fair amount of cereal inventory out in Q4, which would have had an impact on it. So, I haven't actually calculated what that would be, so I can't tell you, but it would have had an impact. But, I think the full year is more the trend we would expect going forward. Eric Katzman - Deutsche Bank: Okay. And then, what were the components of corporate expense that was up so much versus a year ago?

Eric, the corporate expenses up is primarily the stock option expenses going through the central line there. Eric Katzman - Deutsche Bank: Yeah. But it seems like it just accelerated a bit in the fourth quarter versus kind of the comps that you've had for the rest of the year?

I think it got about $65 million in the full year and about $19 million in the fourth quarter. There is also some timing of incentive programs in that fourth quarter balance as well. Eric Katzman - Deutsche Bank: Okay. And then lastly, I guess I am -- you've been fairly conservative in your outlook for the last -- for most of this decade actually, and then exceeded the forecast overtime, but like how should we put in context like currency going into '07? What have you kind of assumed there, because that should be a tailwind? And kind of what happens if we get a decoupling of, let's say, corn versus wheat, because, I think the subsoil moisture levels are quite good, maybe we get a better crop out of the Eastern Europe. So, may be we could see wheat rollover versus corn that kind of is subject to tone dynamics and related to energy?

Okay. Well, let me take the easy currency question, I will turn it over to David to forecast future grain prices and answer the guidance question. But on currency, Eric, what we are looking at for 2007 is similar to what we saw for 2006 full year. Again, we saw about 40 basis points in improvement on net sales from currency and a little bit of benefit on the bottom line. So, we would see that again in 2007. Eric Katzman - Deutsche Bank: Okay.

I think on grains, Eric, our view would be that wheat should come down. I mean it's basically drought related. The actual correlation between corn and wheat historically has been quite strong, but given how far corn has run up, I think that correlation should disaggregate as we go forward. But our view is that wheat will come down as the new crop goes in and as the global picture actually looks better. That's why we've got a range in our inflation of $0.18 to $0.22, because at this point who knows. We do know that I think grains are going to remain more volatile and at the high-end of the ranges from our view going forward. So, we have got a fair degree of hedging for 2007. On the things we can't hedge, we are about 70% plus covered. So, we have taken probably a more conservative view on that given the volatility and that will be our approach going forward. Eric Katzman - Deutsche Bank: Okay. Thank you. See you at CAGNY.

Thanks, Eric.

(Operator Instructions). We'll move next to David Palmer with UBS. David Palmer - UBS: Hey guys.

Hi, David. David Palmer - UBS: Congrats as well. You said during the call that you are going to talk more exclusively about the advertising portion of your overall brand building as you previously described it. And from that it sounds like some other areas of brand building spending, again, away from advertising are not going to grow as fast. Could you perhaps give some more detail about perhaps your -- the evolution in your thinking about brand building dollars, the return on investment of different types and why there may be shift here?

Yeah. I think we started flagging this at CAGNY last year that on the consumer promotions aspect of our brand building, we were going to do a global analysis to see how we drive efficiency and effectiveness on the inserts and the promotional programs we use. That program is being completed very successfully. We saw a benefit in Q4. We are going to see an ongoing benefit through 2007, but once we have got that benefit then going forward it won't alter much. And that's really just ask going, okay, our level of brand building has been high, we have gone back both on consumer promotions where we've seen the greatest efficiency gain. But even on maybe last year we pitched -- maybe buying in many markets around the world and we've actually gained significant efficiencies. So, with advertising going up at the high single-digits brand building is still increasing. But given the benefits we've got in driving efficiency in consumer promotion, we just wanted to flag it, that's it. It isn't really a change in what we do. It's not a change in approach. And I think during the call, I tried to give as much clarity on that because it is something we've been talking about for over a year. Does that help or is there something more specific you'd like? David Palmer - UBS: I guess that helps a bit. I mean, you just can't help it. I think that there -- that you've done some things that you identified some low hanging fruits may be three or four years ago on the consumer marketing and that's reaching kind of end of the roads so to speak on longer term basis in terms of the ROI or from your perspective.

Yeah, I think personally in every aspect of our business including advertising and consumer promotion trade cogs, we are always looking at continuous improvement and how we can get efficiency gains in everything we do. Impressions importantly as far as media impressions we'll be up year-on-year significantly versus 2006. So, there is nothing negative in this from our prospective. We see it is absolutely a net positive. David Palmer - UBS: I don't know how far, but could you just may be give a couple insights on your extensions on that Special K brand. What categories are showing the most promise as you get into the weight management areas and what might eventually be in sourced that is being outsourced today? Thanks.

Yeah, on the Special K and you're talking about the meal replacement bars and the protein beverage. While that been in the market for a while the marketing launch actually started in mid January. So, it's very early to really understand how consumers, how they will respond. It's looking promising, but would be probably a little foolish to give any predictions. What those products do is actually enable consumers to more holistically through the day, manage their diet, so that they can control weight. And we think as the advertising program continues through Jan-Feb, probably by March-April, we'll have a pretty good read on that, but it's certainly started well, David. David Palmer - UBS: Thanks, very much.

Thanks.

(Operator Instructions). We'll go to John McMillin with Prudential Equity. John McMillin - Prudential Equity: Good morning. Welcome back John.

Good morning, John.

Good morning, John. John McMillin - Prudential Equity: Congratulations on these numbers. The North American retail snacks numbers are just incredibly good. I am just trying to get to -- I don't know if callers would be happy to see you give a 4% sales growth target because you had low single-digit printed on its head. Why the change, is it just reflecting confidence that you want to be more specific than that or pricing that you are putting through or getting through or just the significance of some changing that to a 4% number?

As we said in the call, we've changed it for this year. Our long-term targets will remain low single-digit, and it's a combination of all of those factors you mentioned actually. John McMillin - Prudential Equity: Okay. And just when you flag trade inventories, and I must admit when I look in the super market, I always look at the top of your boxes, and I still see stuff that's only a couple months old. When you flag it what kind of inventory -- what kind of month levels are you looking at your inventory to -- how do you flag it? How do you know when it's too high, how many months old?

John, we have what's called vendor managed inventory with the bulk of our retail partners in the US. So, we track with them and on their behalf our inventory levels, so we can ensure if they go up above what we have agreed is a reasonable level then we jointly work on how we manage those back down. And we saw that happening towards the end of Q3. We actually had a price increase at the end Q3, so it probably exacerbated. So, that was a pretty significant pull down, but the great thing from our perspective was consumption for the quarter was consistent with the year and we've put that issue behind us. John McMillin - Prudential Equity: And if I could just ask one Asia Pacific question, because the -- you talked about the challenging conditions, am I right to assume the major challenges are just in the snacks area or the CPW had an impact in Australia cereal or if you can just kind of give us a little color in terms of these Asia Pacific challenges and the lack of growth?

Yeah, John, talking specifically Australia, our cereal business did grew low single-digit in the fourth quarter. It was really our snacks business and this is something we've seen in snacks categories around the world. When you get a couple of the bigger confectionary players come into the snacks category, it tends to have somewhat of a destabilizing effect on the snacks category, which typically by default a more wholesome in nature. And you go though probably 12 to 18 months it's been our experience where the category can swing up and down, and typically goes sideways or slightly backwards. Cereal, we're doing pretty well. The category is growing quiet nicely down there. John McMillin - Prudential Equity: Great. Thank you.

Moving on we'll take the question from Todd Duvick with Banc of America Securities. Todd Duvick - Banc of America Securities: Yes, good morning.

Good morning, Todd.

Good morning, Todd. Todd Duvick - Banc of America Securities: I wanted to ask a quick question on the fixed income side if I may.

Sure. Todd Duvick - Banc of America Securities: You definitely have solid cash flow and you've been using that for dividends and share repurchases as you've said. But I am just trying to reconcile that with your reduction in net debt which you have actually done. If you had a €550 million note that comes to you sometime in the middle of the year in May, is it fair to assume that you are going to refinance at least a portion of that in the capital markets sometime between now and then?

We are still working through exactly how we are going to roll full and specific refinancing, but before we are going to have some sort of -- might look at something like a commercial paper program in Europe and then maybe turn down some debt in the US, something along those sorts of lines. Todd Duvick - Banc of America Securities: Okay. And would that be for the full amount or for a portion of it or have you not yet decided?

We haven't yet decided on that. Todd Duvick - Banc of America Securities: Okay. And as it pertains to I guess your long-term target, you had obviously the Keebler acquisition a number of years ago, and since then it seems like you've really been focused on organic growth and obviously doing a good job with that. How do you view acquisition opportunities and how do you think about that with respect to your long-term credit rating?

I guess the answer to question at a macro level, I'm very comfortable with the level of debt that we have today. I believe that enables us to do small bolt-on acquisitions. In terms of the question around the credit rating, as such, we are not targeting a particular credit rating. I feel very good about the level of debts that were paid down since Keebler and how much the business is growing. So I'm very comfortable with the position we are in. Todd Duvick - Banc of America Securities: Okay. Fair enough. Thank you very much.

Thank you.

Now, we'll take a question from Eric Serotta with Merrill Lynch. Eric Serotta - Merrill Lynch: Good morning.

Good morning, Eric.

Good morning, Eric. Eric Serotta - Merrill Lynch: Just wanted to touch base on the issue of up-front costs. This was in my recollection about the third or fourth year of running in the $0.11 to $0.15 per year range for '07. Just wondering, are you looking at diminishing returns or lower IRRs on the projects that you've planned for '07 then on the projects you've had planned for the past few years, as you may be gotten at the low-hanging fruit. And I realized that you are still seeing a build from the previous year's spending, but do you see the IRRs on the spending for '06, '07 and perhaps '08 being lower within what they were in the previous years, or are you finding more savings potential, as you pill away layers of the onion?

Yeah, Eric, I think when we look at one-time cost, we're really in this [hairy] part of their business and that will be ongoing, and we'd expect to get good returns on the projects that we do going forward. John, do you have anything to add?

No, I think that we're not seeing a case of diminishing returns, we're always looking for new projects and the projects that we enter into always have a return in excess say of current return on invested capital. So, we feel very good about the projects we're pursuing. Eric Serotta - Merrill Lynch: Okay. And then, if you disclose specifically what some of those projects are for '07 yet, I know there is also always sensitivity with communications to employees and the likes, but have you disclosed any of those specific areas?

Some carryovers from last year, so I think they're in the public domain. Many are yet to be communicated. Eric Serotta - Merrill Lynch: Okay. And then lastly, on cash flow, you had very nice growth from '05 to '06, part of that was from lower pension funding. Just wondering what your outlook is for pension funding for '07?

Eric, certainly we are looking at pension funding probably more in line with '06 and '05. So, we are not looking at a big pension contribution in '07. Eric Serotta - Merrill Lynch: Okay. Great, thanks a lot.

Thank you.

Thank you.

Moving on we'll take a question from Pablo Zuanic with J.P. Morgan. Pablo Zuanic - J.P. Morgan: Good morning everyone.

Hi, Pablo.

Good morning, Pablo. Pablo Zuanic - J.P. Morgan: I guess I have question for John Bryant on international front. John, can you just give us some color in terms what you achieved there in the last two years? What's been your imprint, I mean you are still in-charge of that division? From outside I always thought that there is a lot of potential there and although growth has been good, it's been pretty much inline with North America. So, the question is long-term, should we assume that international will grow faster than North America? And number two, what were the big changes that you implemented internationally in the last two years?

Pablo, I think my boss agrees with to you completely in terms of growth opportunity internationally. It's probably a scenario where we are accelerating growth. It's a scenario where we see very good category growth in cereal, and in snacks, good category expansion. As you -- if you look at Latin America, you see very strong growth for the many years now. Europe, strongest growth in -- since the early 90s and we've an opportunity I think to accelerate our position in Asia Pacific. So, I feel very good about the direction we are heading in international. We've ramped up our rate of innovation and still driving forward and a lot of opportunity ahead of us. Pablo Zuanic - J.P. Morgan: John, for example, I mean appointing Jeff Boromisa in the Asian unit, it seems that you are putting a lot of hope in that piece of the international division. Can you give us a bit more color there? And what's happening with mix improvement overseas, if you can just expand on that?

I think, Jeff's role in Asia Pacific is an indication that for us to make the progress we would like to make not only in Asia Pacific but in Eastern Europe, we’ve got to dedicate some high-level resources. Jeff has just started on that journey and we are very hopeful that we will come up with some great ideas to expand and grow our business. But, we are going to find the right way to do that, Pablo Pablo Zuanic - J.P. Morgan: All right. Now, just moving on to the domestic front, David, I mean, I look at, obviously, very strong performance in snacks, I would argue that cereal is decelerating, that you are a facing a tougher competition. Snacks you said three very good years of growth, but I assume that graph is going to become more aggressive in cookies and crackers. Then I look at the frozen side, waffles, Pop-Tarts, how much growth can you really get there? Why should I expect snacks and the frozen side of business to continue to do so well in the environment I have just described and related to that, isn’t there a need for Kellogg -- while keeping the focus maybe try to expand into new categories, making use of the breakfast category, for example, in a broader sense, leverage in the Kellogg name. Can you comment on that?

Yeah, Pablo, I think, firstly, our forecast for 2007 indicate that we'll going for 4% growth across the business. I think your comment on cereal -- if you look over time, we grew 3% consumption for 2006 and for the full year and we are up against very tough and much stronger growth in 2005. So that was part of it. And we continue to believe we’ll continue grow our cereal business, as we go forward. Snacks, the rate of growth was very strong, but our expectation isn't -- we'll do that again at that level in '07 because 2006 was an exceptionally strong year. So, I think you are right. I think that’s what’s you are hearing in our forecast and projections for ’07. We feel very comfortable with them. And our plan is to continue to drive the right things to sustain the performance of the business in ’07 and beyond. We are trying to be realistic, especially, when you think about some of these cost pressures we have got, they will be impacting everyone not just us. Pablo Zuanic - J.P. Morgan: John, one last one if I may, in terms of Kids Cereal category, going over numbers that's a category has been decelerating, the growth has been mostly on the adult side. We are hearing General Mills coming out with some interesting innovation in that segment. Can you expand in terms of what you see that you are doing in terms of Kids Cereal, and am I right in saying that, that piece has been decelerating?

I think the kid component of the cereal category in North America is more competitive than the adult, from a pricing perspective, which has had an impact on the overall growth levels. It’s always been that way, Pablo, so it isn’t actually that different. And I think given where we are with our portfolio, we are fairly comfortable that we are well positioned to continue our performance. Pablo Zuanic - J.P. Morgan: Okay, thank you very much.

Thanks, Pablo.

The next question will come from David Nelson with Credit Suisse. David Nelson - Credit Suisse: Good morning. Congratulations.

Thanks, David.

Good morning. David Nelson - Credit Suisse: I guess at this point just one last question from me. You had launched the Kashi into frozen dinners and entrees and organic versions of some of your cereal icons. Could you give us a little more info and what you are seeing with those new product launches please?

On frozen or… David Nelson - Credit Suisse: The Kashi into frozen dinners and entrees?

Yeah it’s -- well, it’s early, but I mean if you look at the sub-segment of the meals category, which was more than natural. There is one other major branded competitor there. Currently, well it’s early, we have I think six of the top-ten selling meals in that natural sub-segment. So, well it’s early and distribution is still building, we are very pleased that we have more products coming in 2007. So, it started pretty well, David. David Nelson - Credit Suisse: Okay. And then organic versions in cereal?

For Kellogg or Kashi? David Nelson - Credit Suisse: Kellogg, sorry.

I mean I think they are doing okay. They are certainly doing pretty well in the natural channel. In the mainstream, it varies account-to-account, and we will see how it does over time. I mean they are hanging in there with a number of accounts and they are not doing so well with others, so mixed bag. David Nelson - Credit Suisse: Okay. Thank you very much.

Thanks, David.

And moving on, we take our question from Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford Bernstein: Hello there.

Hi, Alexia

Hello. Alexia Howard - Sanford Bernstein: Hi, couple of quick questions. Price mix growth has obviously been very strong recently, particularly this last quarter, but over the last year as well. Could you talk about going forward, how you expect that to play out and whether you expect it to soften a bit and maybe volume growth brings up? And I am thinking specifically about the three drivers of price mix growth, in terms of innovation, are we expecting that momentum to continue to drive mix improvements over time. Secondly, I guess we got, on the positive side, commodity cost inflation maybe allowing you to keep the pricing fairly positive. And then on the flipside, we got perhaps increasing rates of competition, particularly in the retail cereal segment in the US. How do you expect that to play out during the course of the 2007 and are we likely to see a bit of a moderation in price mix growth going forward?

I think our expectation is that price mix going forward will be not that similar to what it’s been in the past, may be a little bit strong, may be a little bit similar, I would say. When you talk about innovation now, our aim is always to see if we can have innovation that drives mix. As far as commodities and the impact on price, we would have been relatively aggressive on price globally and in many of the segments in the US. And in cereal in the US, it's always been a fairly competitive category, so I wouldn't wait too much. We are not waiting too much into Q4. We are just getting on with playing our game, which is to drive innovation and brand building. Alexia Howard - Sanford Bernstein: Fine, and then, one quick follow-up on Europe, it seems that we are hearing from a number of companies now that the environments in Europe after several years have been quite painful. It's getting a little better now. Could you elaborate on that a little bit further? I mean as a particular country, where it's getting better, perhaps Germany, where the hard discount was easing up. And is it, you think private label perhaps easing up a little bit, and again it is volume versus price mix that's really giving you the boost there?

Yeah. I think across Europe, you’re probably seeing hard discount is still growing, but not quite at the rates that we are growing, historically. I think many retailers are finding that equilibrium and balance between what they want out of their private label and what they know they need from their branded suppliers. So, I think net-net, it's marginally more positive. It's always a little volatile Europe, so we had a great year in 2006, the best year of a top-line we’ve had for more than 10 years, but I think that was because of the strength of the innovation and brand building. So, there is probably a little bit more in price mix and volume coming in Europe that relatively balanced. Alexia Howard - Sanford Bernstein: Okay, great. Thank you very much.

Thanks, Alexia.

Hey, Jason, if we could take one more question, that will be great.

Thank you. The last question will come from Jonathan Feeney with Wachovia Securities. Jonathan Feeney - Wachovia Securities: Great, thanks for getting me in guys. Yeah, just one quick one, on North American Retail Snacks, that's one heck of an acceleration at 12%. I mean what role did -- maybe disorganized and maybe less effective competitive landscape play in that? And specifically, what drivers of the business, is it shelf share, is it new products are driving that huge acceleration?

When we report snacks, Jonathan, we've got everything in there. We've got what's going on from a DSD perspective. We've got fruit snacks. We’ve got Pop-Tarts. We've got the Kashi snacks. So, I mean DSD had a great year across cookies, crackers, and wholesome snacks. We did incredibly well with Kashi snacks. Pop-Tarts continue to grow and fruit snacks had a very good year. So, I don't think there was any slackening off from a competitive side, in fact I think if you look at 2006, both are the major competitors in the cookie, cracker side, innovated quite positively and well. It’s a very balanced year and some of the categories, actually crackers in particularly, showed very strong growth for all of us. So, I think that all goes well as we go forward. So, we'll let growth rate moderate a little, as we go forward. That would be our expectation and that's what we've got built into our forecast. Jonathan Feeney - Wachovia Securities: A great year, but even given that, it accelerated pretty nicely third and the fourth, is it just more of the same or is there anything specific going on?

It was very strong --, innovation was very strong. I mean in Crackers, at Club and Townhouse, Eggo, Cheez-It continues to do well. The Portion-Control Packs, not only in crackers, but also in cookies, the 100-calorie packs are doing well, as they are for our competitors, so it was really quite balanced. In-store execution remains exceptional. The level of insolubles has come down year-on-year very, very strongly, so, I mean that's always a good indication of how effectively the DSD organization is working when they can drive -- improved on solubles year-on-year, while growth is growing at that level. It's a great performance. Jonathan Feeney - Wachovia Securities: Okay. Thank you very much.

Thank you.

Okay, Jason, that'll end the call for today.

Thank you very much. Do you have any final or concluding comments?

No. Thank you very much for your time.

Once again everyone that will conclude today's program and we thank you all for joining us.

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