Joel Wittenberg – Vice President, Investor Relations David Mackay – President and Chief Executive Officer John Bryant – Chief Operating Officer and Financial Officer

David Palmer – UBS Judy Hong – Goldman Sachs Andrew Lazar – Barclays Capital David Driscoll – Citi Investment Research Chris Growe – Stifel Nicolaus Ken Zaslow – BMO Capital Markets Eric Katzman – Deutsche Bank Bryan Spillane – Banc of America Securities Terry Bivens – JP Morgan Alexia Howard – Sanford Bernstein Vincent Andrews – Morgan Stanley

Good morning and welcome to the Kellogg Company 2008 third quarter earnings call. (Operator Instructions) At this time, I will turn the call over to Mr. Joel Wittenberg, Kellogg Company’s Vice President of Investor Relations. Mr. Wittenberg, you may begin your conference.

Good morning everyone. Thank you for joining us for a review of our third quarter results and for some discussion regarding our strategy and outlook. With me here in Battle Creek are David Mackay, President and CEO; John Bryant, Chief Operating and Financial Officer; and Gary Pilnick, General Counsel. We must point out that certain statements made today such as projections for Kellogg Company's future performance including earnings per share, net sales, margin, operating profit, interest expense, liquidity, foreign exchange, cash flow, brand building, upfront costs, and inflation are forwardlooking 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 filings. A replay of today's conference call will be available by phone through Monday evening by dialing 8009644463 for both U.S. and international locations. The passcode is #5355644. The call will also be available by webcast, which will be archived for 90 days. Now, let me turn it over to David.

Thanks, Joel. Good morning everyone. We're pleased to report another strong performance for the third quarter. We achieved 9% reported sales growth and 7% growth on an internal basis, the highest quarterly internal growth rate in more than two years. Our success was driven by price realization, effective advertising, and continued business momentum. Our growth was broadbased, despite some weakness in several international markets. Earnings per share grew 17% to $0.89 versus last year's $0.76 due to our operating performance, lower upfront costs, and fewer shares outstanding. We achieved these solid Q3 results, which are above our longterm targets, despite the economic slowdown, commodity inflation, and a higher tax rate. Our continued momentum adds to our confidence that we will achieve another year of sustainable and attainable growth and demonstrates our ability to manage through volatile cost inflation. With our strong operating performance, we now anticipate fullyear earnings per share at the high end of the $2.95 to $3.00 range. Now, I'd like to turn it over the John to discussion the financials.

Thanks, David, and good morning everyone. Slide 4 highlights our financial performance. As you can see, we exceeded our targets of midsingledigit internal sales and midsingledigit operating profit growth as well as high singledigit earnings per share growth. Reported sales increased by 9% in the third quarter, lapping last year's strong 6% growth. Internal sales growth, which excludes the effect of foreign exchange and our recent acquisitions, was 7%, building on last year's 4% growth. Both reported and internal operating profit rose 9%, driven by our sales performance and this year's lower upfront cost investments, offset by the highest quarterly inflation experienced in our history. Our third quarter earnings per share rose 17% to $0.89 compared to last year's $0.76 due to our strong operating performance, lower upfront costs, and fewer shares outstanding, partially offset by a higher tax rate. Let's turn to slide 5 to discuss our third quarter net sales growth components. Reported sales increased by 9.5% in the third quarter, lapping last year's 6% growth. Internal sales growth, which excludes the effect of foreign exchange and our recent acquisitions, were 6.9%, building on last year's 3.8% growth. This represents our highest quarterly internal sales growth since the second quarter of 2006. Tonnage contributed 2.3% of sales growth, while our price and mix initiatives continued to flow through with solid 4.6% growth. Throughout 2008, we have demonstrated our ability to price to offset inflation pressures. For Q3, the price component contributed approximately 3 points of net sales, which is ahead of last year's 1.5 points. Foreign exchange had less than a 1% impact on sales, and our recent acquisitions added 2 points in sales growth in the third quarter. Overall, we are very pleased with this year's sales performance. On a yeartodate basis, reported sales increased more than 10% and internal sales grew more than 6%. Let's turn to slide 6 to discuss our gross profit performance. Our gross profit for the quarter was $1.4 billion, a 5% increase on a reported basis over the third quarter of last year. As you know, our focus is on gross profit dollars as this is what allows us to continue to reinvest in our business. On a yeartodate basis, gross profit was $4.2 billion, a 6% increase over 2007. Yeartodate gross profit margin declined by about 170 basis points to 42.6%, consistent with our expectations. About half of the decline is due to our recent acquisitions and higher upfront investments in cost of goods. While the remaining decline is driven by commodity inflation, partially offset by additional pricing. Now let's turn to slide 7 to discuss profit growth. Internal operating profit rose 9%, driven by 7% internal sales growth, cost savings, and lower upfront costs, offset by significantly higher commodity costs. Our North American business reported internal operating profit growth of 15% with lower upfront costs having a 9% impact. We are very pleased with this performance, which was driven by solid 9% sales growth and offset by significant cost inflation. Our European internal operating profit rose 3% versus last year, as higher upfront costs reduced operating profit growth by more than 1%. In addition, higher commodity inflation had a negative impact on performance. In Latin America, the combination of softness in our top line, higher commodity costs, and cost increases caused by Venezuelan import restrictions resulted in a 10% decline in internal operating profit. In AsiaPacific, internal operating profit increased by 55%, driven by 10% sales growth and a very strong performance in Australia, partially helped by an advertising shift from Q3 to Q4. Below the operating profit line, we benefited from fewer shares outstanding, and our tax rate was about 28% due to several discrete items in the quarter. We now expect the fullyear tax rate to be approximately 30%. In addition, other income and expense resulted in income of $13 million; and Q3 interest expense declined to $71 million. Let's turn to slide 8 to review our advertising spending. At close to 9% sales, our advertising investment remains significantly higher than the food group average of about 5%. Our commitment to advertising investment is a key component of our strategy, and our disciplined execution gives us the confidence that we will continue to achieve our goals. As previously discussed, we are also driving a series of initiatives across brand building to further improve the efficiency and effectiveness of these investments in the new media environment. We began to see the benefits of these initiatives during the third quarter. While spending declined slightly against last year's doubledigit comparable growth, effectiveness increased as evidenced by our strong sales performance. This slight decline in spend was driven by three items: first, the tough comparable; second, timing in Australia as mentioned earlier; and finally, some initial efficiency gains. As we move forward, we will keep you updated on the progress of our efficiency and effectiveness initiatives. Let's turn to slide 9 to discuss cash flow. The third quarter's cash flow was $383 million, about even with last year's $392 million. Yeartodate cash flow was $893 million versus last year's $961 million. We continue to improve our core working capital for the quarter. In fact, our cash conversion cycle improved by three days over last year to an impressive 22 days. For the full year, we still expect cash flow of $1 billion to $1,075,000,000. Given the recent volatility in the financial markets, I also want to update you on our liquidity. We currently have about $1.5 billion of outstanding commercial paper, which is offset by approximately $700 million of cash on the balance sheet and backed by $2 billion of bank lines that mature in 2011. We have maintained good access to the commercial paper markets throughout the recent market disruptions, and our next term debt maturity is not until another two and a half years. Now, I would like to turn it back over to David for the business review.

Thanks, John. Continuing with slide 10, you can see our North American sales growth was a very strong 9% versus last year's 3% comparable. This growth was broadbased across all of our business units. If we turn to slide 11, we can discuss each business unit in more detail. If we look at our North American cereal, internal sales growth was 7% during the third quarter, which included strong growth in nonmeasured channels. We're obviously very pleased with the strength of the category and our performance this quarter despite a high level of competitive trade activity. We achieved strong price realization once again in Q3, and our price per pound in measured channels rose by midsingle digits during the quarter in line with the category. Our solid performance came from innovations like MiniWheats Blueberry Muffin. And we saw good performance from Special K Cinnamon Pecan, Raisin Bran Crunch, and Corn Pops. For the quarter, Kashi sales rose double digits, driven by GOLEAN Crunch Honey Almond Flax and Organic Promise. Our Canadian business continues to perform well despite competitive conditions similar to the U.S. During Q3, we achieved solid growth from Kashi innovations, MiniWheat Cinnamon, and the Guitar Hero promotion. We are pleased to have achieved the strong third quarter, although it was against a relatively weak comp. Conversely, in the fourth quarter, we face a tough 8% comparable; and we expect shipments to be relatively flat versus last year. Let's turn to slide 12 to discuss the North American snacks performance. As you can see, our snacks business posted a very strong quarter with 10% sales growth versus last year's 5% comparable. Our success was driven by innovation, a second round of price increases, and robust category growth. Let's turn to slide 13 to look at more detail on the quarter. Our PopTarts business posted a solid quarter with high singledigit sales growth driven by higher blue box sales and price realization. This year's strong cracker performance resulted in IRI market share gains, and we delivered doubledigit growth in Q3 driven by innovations like CheezIt Duoz and Town House Flipsides. In addition, we continue to see good growth from both cracker and cookie portion control packs. Our cookie innovation remains strong as we achieved low singledigit sales growth and gained IRI market share during the quarter. Wholesome snack sales grew midsingle digits during Q3, and we achieved solid sales from NutriGrain as well as innovations like Kashi TLC Chewy Granola Bars and Special K Bliss bars. We turn now to slide 14 to discuss our frozen and specialty channel performance. Frozen and specialty channels had another great quarter with sales rising 11% versus last year's 5% comparable. Third quarter sales included the slight trade inventory benefit due to the frozen foods price increase taken late in Q3. We achieved doubledigit frozen food sales growth due to the trend toward inhome food consumption as well as strong innovation and advertising. Eggo sales grew in double digits, driven by strong price realization and innovations like Bake Shop Swirlz and Bake Shop MiniMuffin Tops. These successes resulted in more than a one point of IRI market share gain. Our Morningstar Farms Veggie burgers and Veggie poultry products posted strong sales for the grilling season, as well as our new Asian Veggie Patties, which are exceeding expectations. Our frozen Kashi meals once again grew at double digits, driven by rising distribution of Kashi frozen entrees and pizzas. Given the difficult awayfromhome environment, we're particularly pleased with our food service business, which achieved high singledigit sales growth. You can see on slide 15 that our international sales grew 3% during the quarter versus last year's 5% growth. During Q3, the economic environment had a greater impact on the international business than on our North American business. As we turn to slide 16, we can discuss this in further detail. In Europe, we posted 3% internal sales growth for the quarter. While we are pleased with our Q3 performance, the economic conditions across continental Europe in particular have become more challenging. Our strong UK growth was driven by pricing, innovation, and category growth. In France, a trade inventory reduction resulted in Q3 shipment weakness; however, this year's in market consumption has grown faster than the category resulting in market share gain in both cereal and snacks. European brands like Extra, Cocoa Pops, and Tresor performed well. Our European snacks business posted doubledigit growth during the quarter with solid performance from Special K Mini Breaks and Rice Krispies Squares. We achieved solid growth in Germany, Austria, Switzerland, the Nordics, and [inaudible]. In Latin America, internal sales declined slightly this quarter versus last year's very strong 12% growth. Sales in Mexico declined primarily due to the weaker economy and aggressive pricing by our largest competitor. Sales growth was strong in Brazil, Ecuador, Venezuela, Argentina, and Central America. Due to the weaker economic environment, we anticipate 2009 sales growth at closer to midsingle digits in Latin America. In AsiaPacific, internal sales grew 10%. Our Australian readytoeat cereal business grew midsingle digits, driven by strong category growth and our focus on core brands. In addition, our recent Special K Advantage and Cocoa Chex innovations performed well. We also achieved doubledigit internal sales growth in South Korea, India, and South Africa. Before I turn it back over to John to review 2008 and 2009 preliminary guidance, I would like to say a few words on slide 17 about the year ahead and how we plan to adjust to the tough consumer environment and the slowing global economy. Clearly, there remains a high degree of uncertainty about what lies ahead in this turbulent economy. It's important to continue to manage costs to help offset inflation and fund reinvestment in the business. We're doing so through aggressive costsaving initiatives across three areas: supply chain, overhead, and brand building. First, we have a major new program focused on our manufacturing facilities under the banner of Kellogg LEAN, which stands for lean, efficient, agile network. This program will insure we're optimizing our manufacturing utilization, reducing waste, and developing best practices across many of our global facilities. You will hear more about Kellogg LEAN as we progress through 2009, and we anticipate it will be our largest upfront cost savings initiatives for the year. Secondly, we will continue to keep our overhead as low as possible. Finally, as mentioned earlier, our efforts to optimize our advertising and promotion efficiency and effectiveness are starting to bear fruit and should be near full implementation during the first half of next year. Insuring we continue to build our brand recognitions for quality and added value is particularly critical in these tough economic times when private label is likely to grow. Not only will we continue our drive for greater brand building efficiency, we also expect our advertising spending will grow in line with sales for 2009. Now I would like to turn it back to John and slide 18 to discuss our fullyear 2008 and 2009 outlooks.

Thanks, David. For the current year, we continue to expect midsingledigit revenue growth driven by both strong execution and continued price realization. Operating profit is still expected to grow at midsingle digits including cost of goods cost pressure of 9%, as well as upfront cost savings investments of $0.14 per share. In addition, we anticipate a foreign exchange headwind starting in Q4, which will be largely mitigated by translational hedges in the fourth quarter. Despite a difficult trading environment, we are maintaining our fullyear earnings guidance of $2.95 to $3 per share. We now have additional confidence that earnings will be at the high end of this range. Last, we want to update you on a few housekeeping items. First, we have now finalized how we will use our fourth quarter's 53rd week's profits. We plan to use these profits to largely reinvest back into our recent acquisitions in Russia, China, Australia, and the U.S. Second, we expect our fullyear net interest expense to be unchanged from 2007. Third, our fullyear tax rate is now expected to be approximately 30% versus our earlier expectation of approximately 31%. Finally, we do not plan to repurchase any shares during the fourth quarter. To summarize, we expect to continue to achieve our goals, deliver our targets, and reinvest in the business despite high inflation. Let's turn to slide 19 to discuss our outlook for inflation. This slide highlights the high level of inflation we have experienced in recent years. Based on recent market declines in many commodity prices, some of you may be anticipating a decline in our costs. Thanks to our aggressive hedging program in 2008, we avoided the full impact of commodity cost increases. Without these hedges, our inflation rate would have been even higher than the 9% shown on this chart. As hedges roll off in 2009, we anticipate another step up of cost pressure inflation at approximately 5% of cost of goods. The commodities component of this inflation is skewed to Europe and Latin America for 2009. We have recently announced or executed pricing actions to cover this additional inflation. We have demonstrated an ability to manage our way through both high inflation and volatility. We expect to do this in 2009 through expanded savings programs as David mentioned earlier. Let's turn to slide 20 for our 2009 outlook. We expect 2009 will be another year of sustainable and dependable performance. We will enter the year with momentum fueled by our business model and strategy. We have invested in our longterm growth through innovation, advertising, cost savings initiatives, and acquisitions. Our forecast calls for internal sales to increase by midsingle digits. As we discussed, cost pressures will remain significant but will moderate from 2008 levels to about 5% of cost of goods. We expect inflation to have a proportionally larger impact in Europe and Latin America. Overall, we expect gross profit margin to be about flat, resulting in midsingledigit internal gross profit and midsingledigit internal operating profit growth year on year. We are realistic about the headwinds we face in 2009, including additional inflation and a weaker economy. While the unprecedented strengthening of the U.S. dollar is also likely to impact reported earnings per share, we are confident in our ability to deliver high singledigit EPS growth on a currency neutral basis next year. The recent volatility of the foreign exchange markets, however, makes it difficult to forecast recorded earnings per share. We plan to update you regarding foreign exchange on future calls. Our guidance includes an assumed tax rate of approximately 30% to 31% and fewer shares outstanding. A key driver of our confidence in our sustainable and dependable growth is an intensified focus on delivering cost savings from productivity and efficiency initiatives. In addition, we will invest back into the business with upfront cost saving investments. Consistent with prior years, our 2009 forecast includes upfront costs of $0.14 per share. Our largest upfront investment for the year will be the Kellogg LEAN manufacturing program. Along with that continued focus on overhead cost control, these initiatives will help offset the headwinds we face in 2009. Despite these challenges, our business model and strategy continue to give us the confidence that we will once again deliver another year of sustainable and dependable performance. Now I will turn it over to David.

Thanks, John. As we move into 2009, the pressure of the weak global economy on consumers and the additional volatility from an unprecedented appreciation of the U.S. dollar are adding up to another challenging year. We'll stick to our business model and strategy, reinvesting back into the business for future growth. This gives us continued confidence in our ability to deliver another year of sustainable and dependable growth. We will continue to aggressively manage risk by stepping up our focus on costsaving initiatives, productivity gains, and SG&A optimization. In particular, our focus on the Kellogg LEAN manufacturing initiative will provide savings in our manufacturing costs and processes. This project just kicked off and will run through 2009. We'll continue to invest in great innovation and effective advertising programs to keep consumers engaged and aware of our brands and their benefits. In addition, we will drive our advertising programs across the globe to lower costs while delivering even more effective consumer brand building. All of these moves, making the right investments, achieving price realization, focusing on cost saving initiatives, and investing in future growth provide us with the confidence that 2009 will be another year of sustainable and dependable performance. As we move into the new year, we will continue to address the issues we face and give you another update in our Q4 call. Now, I would like to open it up for questions.

(Operator Instructions) Our first question is from David Palmer with UBS. Please proceed with your question.

One simple question, and that is about currency and the interconnection with commodities. I think this is the first time you are giving a constant currency guidance. But I am wondering how we should think about how that connects, I would assume, with commodities and the outlook for that. In other words, a stronger dollar would coincide with yearoveryear declines or a more benign outlook for commodities than perhaps you would assume if we had a weaker dollar environment. How should we think about that? On the face I would assume that you would choose to have a firm dollar and less inflation, but perhaps there's some other timing things going on here where you haven't done certain hedges on currency but you have on commodities that might be shaping your outlook for 2009.

I will let John take the FX and then I will come back and talk a little bit about commodities.

Just to clarify on foreign exchange, if we step back and look at our business, certainly the internal mid-single-digit sales growth and profit growth forecasts we gave gives you a sense that our business is doing well. But to your point, David, there’s been some unprecedented moves in foreign exchange. If we think about those in two buckets, there's a transactional and a translational impact of foreign exchange. Transactional, just to use an example of we export products from the U.S. to Canada, the Canadian dollar is devalued by 20%. Obviously, a product going to Canada will cost more. That sort of impact of foreign exchange we can price away in the marketplace. The translational impact, though, of the profits in Canada now are translated at 20% less than U.S. dollars. That's something we can't price away. If you think about the size of the translational issue that we have, if you look at the operating profit from our international business plus Canada, it's 40% to 45% of the company's total operating profit and, quite frankly, we have a lower tax rate outside the U.S. than inside the U.S. So it's more in the ballpark of 50% of net income. If we had a 10% to 20% move in foreign exchange, then you can see a 5 to 10 point impact on the EPS. So the size and magnitude of the movement is quite substantial.

Before I tackle commodities, something else on FX. If FX were currently 1% to 2% EPS impact, we wouldn't be having this conversation. We would simply absorb it into our guidance. But it's clear the volatility in FX is unprecedented. To be quite frank, we've got no clue what the impact will be come January 2009. Just yesterday, in one day, the U.S. dollar weakened roughly 3% against most of the global currencies. We remain confident in our business model ability to deliver sustainable and dependable results and we will keep you updated on this with another review in January and February. On the commodities side, to answer your question there, as you are aware, when you look at COGS inflation and cost inflation it's very complex, a lot of puts and takes. We've said that next year we expect our cost of goods to rise 5%. Of that, roughly half is factory expense, wages, and benefits. That's relatively consistent with what we've had over the last 5 or 10 years. The balance is the combination of packaging, energy, and commodity inflation. As we said on the call, we had some positive 2008 hedges that roll off in 2009. While stock prices are down in some commodities, if you look at stock prices of things like sugar and rice, 2009 versus 2008, they're up in aggregate of between 40% and 50%. You got packaging inflation, which is highly energy sensitive, it tends to lag the market by anything up to six months. So we will not see the benefits of reduced energy input costs there for probably six months until the second half. As we've told you in the past, Kellogg's, like most other FMCG companies, tends to lag our pricing versus inflation so, to an extent, we're still catching up to the outlaid cost. Netnet costs will be up year on year in 2009 when you look across the entire basket.

I will stop there, thank you.

Our next question comes from Judy Hong of Goldman Sachs.

John, just to follow up on currency, you said the fourth quarter you had translational hedges in place that's not impacting the fourth quarter outlook. Do you have any hedges in place for 2009 at this point?

The problem we have with translational hedging is we don't get hedge accounting for that. We actually have to mark that to market each month. You might notice in our third quarter results that our other income expense is about $13 million of other income. The reason for that, one of the reasons for that, is within the third quarter we had to marktomarket our fourth quarter translational hedges. There’s actually two pennies of good news sitting in Q3 because of those hedges that will actually mean that we won’t get those benefits in Q4. If we were to hedge out to 2009, we would just be bringing even more volatility into our 2008 P&L. That's on translational. Obviously on transactional, we do have hedging in place to different degrees in different markets around the world already into 2009.

David, as we think about your reference to optimize your marketing spend efficiency, I am just trying to get a better perspective on your confidence level in maintaining your sales or share momentum. We have seen some of your competitors taking advertising up. As you think about your total marketing spending bucket and as you optimize the level of spending, just in terms of how you think about that in an absolute basis and then as you think about optimizing that relative to your competitors that may be taking it up on an absolute basis.

Let’s make sure you’re not confused. We are still planning to take the number of impressions that we have against our brands up year on year for 2009. We have said that next year we will be taking our spend up midsingle digit. And remember, if we drive these efficiency gains, then we will be getting more impressions for lower cost. But yet we're taking our investment up midsingle digit for 2009. Anyone who makes the wrong assumption that we're trimming our brand building support is not getting the message. The message is pretty clear. We are one of the highest spenders on advertising and promotions in the food category, at around 9% of net sales. We think that gives us a strategic advantage versus our competitors who are trying to catch up. But it also is important for us as a company to recognize broadly a billion dollars in spend there that there are opportunities to improve the efficiencies and effectiveness of that spend to make sure that our brands remain vital and strong. That's exactly what we intend to do going forward.

Our next question comes from Andrew Lazar with Barclays Capital.

Quick one. It's a little out of scope, I guess, under the quarter itself. I guess we’ve heard that perhaps I guess Kellogg is sort of leading a charge to change sort of the core cereal box size and configuration to change packaging and shipping and such, maybe a shorter, squatter box. I guess like the compaction in laundry detergents. I am just curious as if this is accurate. If it is, is it meant to put Kellogg at a competitive advantage or by changing the price per ounce or unit in profit metrics? Or does all that stay the same and it's more about obviously the efficiency side? Does the consumer's perception of value change if the box size configuration sort of changes?

What you are poking at there is something that we're playing around very much as part of our environmental sustainability drive. As a company, we've also had a strong history of trying to leave a positive footprint wherever we compete. We think we need to step that up. We have a number of initiatives going on looking at how we can make positive changes in what we do to improve our footprint and to drive efficiency and effectiveness. It's too early to say any more than that. Hopefully, once we have more consumer learning, we will see where that takes us.

Then is pricing that you got to take more overseas now, given that's where the inflation is coming from, is that a tougher charge than we have seen in the U.S. where it's obviously gone through quite successfully for you and for the industry?

I think to the credit of our retail partners, they always like to understand this pricing that we're taking justified. And we work very closely with them both in North America and internationally to explain what's going on because, quite often, they don't necessarily have as clear a picture as we would like them to have. As we do that, clearly they understand. I think in this tough economic times, no doubt, people would rather there wasn't any inflation, but unfortunately, even though it seems to have moderated if you look at some of the commodities out there coming down. As we've said in the call, our COGS for next year is going to be up 5%. So on pricing we're taking the actions we need. We think our brands are strong enough and we think it's necessary to offset the inflation that we have.

Our next question comes from David Driscoll with Citi Investment Research.

Two items on my mind here. First one is back on the commodity side. John or David, can you guys comment on how your competitors and/or private label, maybe most importantly, is positioned historically within the commodities? What I am really trying to drive at a lot of folks are looking at these commodity prices and expecting them to be down. If you guys were benefiting in 2008 from lower than spot price numbers because of good hedging that you put on in 2007, then the question is is that a benefit in 2008, but of course it turns out to be a negative in 2009 as inflation catches up with you and hedges roll off. Does the competitive position of Kellogg, is it at a disadvantage in 2009 because you have competitors who are on a spot basis?

It's virtually impossible for us to comment on what our competitors are doing. I think it's probably very much a mixed bag. As we look at 2009 and we look at our 2009 hedges, we believe we're currently slightly favorable to the current spot prices. As we have talked about hedges to investors, there's always good news and bad news. You don't want too much of either because it can have a dramatic impact year to year. I think we're pretty well placed. As I said, our hedges, we believe, are currently slightly favorable to current spot prices as we look at 2009.

My final question is, what comment can you make to us about the effects of WalMart's efforts to increase private label penetration? How significant is this for Kellogg's in 2009? Certainly in light of the fact that nonmeasured channels have been such a strong component of the growth here in 2008.

I think the first thing to remember when you're thinking about private label is that, from a Kellogg's perspective, we're in categories and we have products that represent great value. Private label typically has lower relative shares because of the strength of our brands and the value proposition that we demonstrate. Across the world, for categories in which we compete are growing and growing strongly. Our position at number one or number two also helps us there. We remain very positive about our ability to grow the business going forward. If you look at Q3, I think it's a solid example of that with 7% internal growth. Our best defense against private label is to play our game, strong innovation and brand building. Now if you're being pragmatic as we sit on the call, private label growth in a recessionary environment is likely as some consumers are going to have little choice but to trade down. Again, our categories are growing, we feel our brands are strong, and we will keep playing our game. As you might have seen, we had a campaign starting in October that tried to help the consumer understand the great value that readytoeat cereal represents on a perserving basis.

Our next question comes from Chris Growe with Stifel Nicolaus.

I have a question in relation to your price increase you mentioned in Europe and Latin America being two areas taking pricing. This is one of the rare quarters where Latin America is been a little weaker, and there's a competitive dynamic there that maybe challenged you a little bit. So, is the price increase out of sync with the category in Latin America? Is that going to be a more challenging environment for you in 2009? You mentioned mid-single-digit sales growth for the year.

I think when you look at Q3 for Latin America and we mentioned Mexico was actually down. We did have a very tough comp across all of Latin America of plus 12. That was true for Mexico as well. We are seeing the Mexican economy slowing a little. But the key issue for us in Q3 on the top line was a very aggressive competitive activity that caught us a little off guard. As we look at Q4, we would expect to be back around midsingle digits. And we did reflect that for 2009 with more pressure across a number of Latin American markets that our forecast would be that sales would be around midsingle digits, when they have been historically a little higher. That's just a pragmatic view reflecting that some consumers across those markets will be under a little pressure.

Then I had just one more question. It's in relation to, we're seeing significant growth in alternate channels, obviously in IRIs becoming less predictive of your business. I wonder if you could comment on your success in the quarter and alternate channels. Related to that, are there any trade inventory reductions that you are seeing or feeling or you're concerned about in the fourth quarter given the environment we're in here today.

On alternate channels, I think it's true. You are seeing strong growth there across the whole retail category. Our categories are growing. If you look at our IRI share performance, it probably does understate how we're doing if you look at all channels. Because in all channels we probably grew 3 or 4%. The category for cereal, for example, grew probably 5% or 6%. We did lose about a few tenths of share. But the category is growing strongly. I think you are seeing a number of the old channels actually do well, but I don't think you're seeing a significant degradation in the normal retail business. The second part of the question, sorry?

Trade inventory declines, is there any concern with that in the environment we're in today?

I think as we've looked at our trade inventories, relatively consistent year on year. We did mention in the call that we took a price increase on frozen late Q3. So our anticipation would be that we got some incremental shipments in Q3 that will come out in Q4 as inventories readjust. I think retailers are being very cautious on inventory levels. But we will still have vendor-managed inventory with well over 50% of our customers. We've been working very closely to keep our inventories relatively tight. While it could be a little bit of an issue, I don't see it's being significant.

Our next question comes from Ken Zaslow with BMO Capital Markets.

Would you say that the overarching environment for packaged food and for Kellogg is better or worse than it would be last year?

I think it's not changed dramatically. The only issue is the one I mentioned earlier. If you take a pragmatic view on where we are from a economic strength/weakness perspective, there will be some consumers who, by default, may have no choice but to trade down. That's the view as we look at 2009. As we take that view, we're also looking at what programs and steps we can make to keep our brands front and center and to make sure that we're demonstrating the value of everything we do. The great news is, if you look at Q3, as I believe the U.S. economy has been weak through the bulk of Q3, we have very strong growth, our categories were strong, we did pretty well in most of those categories, some very well, some not so well but still well. I don't actually think that the dynamic is changed. The one benefit I think all of us will get, if we don't have a massive food service business dependent on main meals, is that outofhome consumption is declining, has declined through I think the last three or four months. Our anticipation would be that we will see a continuation of that through 2009. You've got some slight negatives with the negative impact on consumer and their ability to buy all branded goods. And you have some slight positives with a probably greater propensity for inhome consumption, which will certainly help our business. Netnet, we see the two sort of balancing off, so we don't see a massive change.

If commodities were to fall off, would you be able to keep whatever price increases you have passed through or did you price ahead or behind? I am assuming you priced behind inflation, not ahead. It should be pretty sticky, is that fair? I will let it go.

As we have said consistently, and I think we are not the only company, we typically lag inflation in our pricing and especially when it's volatile as it's been. You make a forecast, you price to try and cover that. We've been wrong for the last 18 plus months. Even as we look at 2009, our COGS inflation is forecast to be around 5%. Albeit that half of that is really pension, wages, factory expense, which is really consistent. So the other half is a mismatch of commodities and energy and packaging and various inflation hitting us at different levels around the world. We did say in the call that in Europe and Latin America, we are seeing a disproportionately large percentage of our commodity inflation coming in those two areas for a variety of reasons.

So we shouldn't expect to see lower cookie or cereal or cracker prices at my home grocery?

I would think not on an ongoing basis, though I am sure we will find a way to entice you to buy.

Our next question comes from Eric Katzman from Deutsche Bank.

I guess I have a question on why inflation and inputs lag in the EU and Latin America? Seems at this time with the information moving so quickly, I don't understand why there would be such a lag there. Then, doesn't that put your forecast more at risk that you're taking pricing in those markets because of that lag into what appears to be a much weaker consumer in the EU and, I suppose, Latin America as well.

I think that's why we've called our 2009 view on Europe as low single digit and Latin America net sales around midsingle digits. We are anticipating a little bit of a tightening there. You do you have some situations, for example, rice is up dramatically yearonyear. In the EU in particular, there always has been a lag effect. Given the volatility and what's been going on in the commodity markets, some of that is still flowing through in Europe in particular.

As you look at the forecast, obviously, we all understand how much stuff is moving around because we're experiencing that every day, too. Is that the greatest, in terms of your view, risk to your forecast in terms of how the consumer behave in EU and Latin America visavis this price move?

We hope we have reflected it in the way we've given guidance for 2009. As we have said, if our view changes as we get into JanuaryFebruary and do Q4, we will give you an update. At this point, we think we've taken a pragmatic view that across continental Europe in particular things will slow a little bit just because of what's going on in markets like Spain and Italy. The same in Latin America. If we get any greater intelligence that we currently have, we will update our forecast and give you better visibility. As we look at it going forward, that's our current view.

Our next question comes from Bryan Spillane with Banc of America.

Just a quick clarification in the outlook for 2009, you mentioned fewer shares outstanding. Is that predicated on starting share repurchases again in 2009? Or is that just based on what's within done in the past?

That's a great question. If you step back and look at our potential uses of cash in 2009, obviously we're going through a fairly volatile period right now in the financial markets. We want to be quite flexible in how we think about this. There's a couple different options for us. One is that we can continue to pay down debt and, as I said in the prepared remarks, we have about a $1.5 billion commercial paper program, $700 million in cash, backed up by $2 billion credit facility. We feel good about our liquidity, but if the situation does improve, that's always an option for us. Another thing we need to keep looking at is our pension status. We've historically been very well funded against the pension as you would expect our assets have a pretty good equity allocation. And those assets will come down this year. While I don't see any mandatory funding requirements for 2009, we would certainly historically have gotten ahead of this with voluntary contributions. That's something else that we will look at. Having said all that, our longterm intent is to return cash to shareholders as we've done over the last three or four years. That will be our longterm plan going forward, as we've constructed our outlook for 2009. We still have that $500 million share buyback occurring in the first half of 2009, that's what is getting us that lower shares outstanding. Having said all that, again, we will step back from the 2009 use of cash and just flag that we will see how the markets develop over the next two or three months. We may come back in January and provide more specific guidance in this area. Clearly, with the current volatility, we just need to stay very flexible.

Our next question comes from Terry Bivens with JP Morgan.

You know, obviously, you guys are doing pretty well at WalMart. We heard the same thing from Kraft this morning. Kind of a shaggy dog question here, we've seen some prime time ads that basically say if you buy your Kellogg's cereal at WalMart, you save, I forget the exact amount, but it was quite a bit of money on a yearly basis. I am wondering about those. What kind of role those play in your results at WalMart? Maybe it's too early there, but also are those classified, would you classify such ads as trade promotion or would that go under advertising?

Just to clear that up, we ran a Kellogg campaign in October demonstrating the value of Kellogg's cereals at 50¢ a bowl and milk. We paid for that Kellogg advertising. WalMart has been constantly pushing their angle as being the retailer that gives the best value. They paid for the advertising that I think featured an array of Kellogg products and suggested that consumers could save $900 plus a year.

That's the one I'm thinking about, Dave.

That's an ad that they ran. We didn't pay for it. No doubt, WalMart is helping our business. We would hope so. I am sure they would, too. The campaign we ran was stressing the value of cereal at 50¢ a bowl with milk.

With regard to WalMart, would you do anything in terms of trade promotion in connection with those ads, or is that strictly them?

That's them. We try and deal with all of our trading partners on an equal basis. They're a big, important customer. We value everything we do together. But that was an initiative that WalMart chose to run, and we thank them for the support.

Just one quick one. What did you say the U.S. cereal category was growing at?

If you look at all channels, our view is 5% to 6%. If you looked at IRI for the quarter, it's showing 3.4%. But typically we would add 2% to 3%, so we're saying 5% to 6% all channels for the category.

Our next question comes from Alexia Howard with Sanford Bernstein.

Just a real quick one. You mentioned that the commodity pressures were at their peak this quarter. I know that last time around we spoke and you mentioned in the last earnings call that I think there were $0.24 in the second quarter, $0.15 in the first quarter. Can you give a number as to how much it was this quarter? Are you still expecting $0.90 for the full year?

We're still in the ballpark with $0.90 for the full year. We still have about 30% of that coming through in the third quarter. So around the $0.27, $0.30 for the quarter.

Your last question comes from Vincent Andrews with Morgan Stanley.

Just a quick one. Dave, you have referenced a couple of times a high level of competitive trade activity. I think you might have even mentioned several geographies. Could you just characterize that a little more for us and tell us whether you see it continuing into the fourth quarter?

There was two references. One was Mexico, which I think was just a quarterly phenomenon, and the other was U.S. cereal. I think, again, we had a major competitor who a year ago had gone through a major change in their box size, so they had weak comps when you look at this year. They chose the opportunity to support their business strongly. We don't believe that's something that they will do on an ongoing basis. That's clearly, entirely up to them. It certainly did have an impact if you look at the amount sold on deal in the quarter. Again, having said that, we still did pretty well and the category did very well. Not a major issue, just a variable in our results for the quarter.

Sounds like the U.S. issuance was very much like it was last quarter. Then I will just leave it there.

I would like to turn the call back over the Mr. Joel Wittenberg for closing comments.

Thanks very much. We want to thank you for participating in today's call and for your continued interest in Kellogg. Have a good day.

This concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation.