John Bryant - Chief Executive Officer, President and Director Ronald Dissinger - Chief Financial Officer and Senior Vice President

Judy Hong - Goldman Sachs Group Inc. Alexia Howard - Sanford C. Bernstein & Co., Inc. Andrew Lazar - Barclays Capital Christopher Growe - Stifel, Nicolaus & Co., Inc. Eric Larson - Ticonderoga Securities LLC Scott Mushkin - Jefferies & Company, Inc. Terry Bivens - JP Morgan Chase & Co Eric Katzman - Deutsche Bank AG Eric Serotta - Wells Fargo Securities, LLC Robert Dickerson - Consumer Edge Research, LLC Bryan Spillane - BofA Merrill Lynch Timothy Ramey - D.A. Davidson & Co. David Driscoll - Citigroup Inc David Palmer - UBS Investment Bank

Good morning. Welcome to the Kellogg Company Second Quarter 2011 Earnings Call. [Operator Instructions] At this time, I will turn the call over to John Bryant, President and CEO of Kellogg Company. Mr. Bryant, you may begin your conference.

Thank you, Michael. Good morning, and thank you for joining us today, and welcome to the review of our second quarter 2011 results. I am joined by Ron Dissinger, our Chief Financial Officer. Unfortunately, Kathryn Koessel, our Vice President of Investor Relations, could not be with us today due to illness. We all hope she gets better soon. The press release and the slides that support our remarks this morning are posted on our website at www.kelloggcompany.com. As you are aware, certain statements today, such as projections for Kellogg Company's future performance, including earnings per share, net sales, margin, operating profit, interest expense, tax rate, cash flow, brand building, upfront costs and inflation 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 filings. As a reminder, a replay of today's conference call will be available by phone through Monday, August 1. The call will also be available via webcast, which will be archived for at least 90 days. Now let me turn to our second quarter performance. We are pleased to announce solid second quarter results, which demonstrate that we are beginning to rebuild our momentum, following a very difficult 2010. While these results are against relatively soft comparisons in 2010, we delivered strong top line results and internal operating profit, as increasing benefits and price mix helped to offset higher input costs. The highlight of the second quarter was very strong share results across our U.S. business, driven by innovation, brand building and execution. We have also seen improvement in our core categories as broad-based pricing actions have helped to mitigate increased cost pressures. Specifically, we gained 1.7 share points in U.S. cereal in measured channels, with 35.5 share across the quarter. We also gained share in waffles, toaster pastries, crackers and wholesome snacks. Our momentum also improved in our international business, with sales growth across all 3 regions. Based on increased net price realization and our confidence in our innovation, we are raising our internal 2011 net sales outlook and reaffirming our 2011 currency neutral EPS guidance. Ron will speak more to our guidance shortly. We had a solid start to the year and continue to be on track with our 2011 plans. That said, 2011 remains a year of rebuilding in a difficult consumer and retail environment. Turning now to our results, Ron will take you through our financial highlights.

Thanks, John, and good morning. During the second quarter, we continued to execute against our plan to gain momentum in our business and we are pleased with our results. Our price realization improved in comparison to our first quarter, and we invested in innovation and brand building. We delivered strong top line growth, with reported net sales growth of 11% and internal net sales growth of 6%. And we grew sales across all of our operating segments. Operating profit increased 12% on a reported basis and 8% on an internal basis, driven primarily by our North America and Latin America businesses. Earnings per share grew 19% on a reported basis and 13% on a currency neutral basis. Earnings per share growth included a benefit from reduced average shares outstanding as a result of our share repurchase program. Slide 5 shows the components of our net sales growth in the quarter. Our volume increased 0.6 points for the quarter, driven primarily by easy comparisons to the second quarter of 2010. Our volume growth through the first half of the year is in line with our expectations. Price and mix contributed 5.4 points of growth as we recognized the full impact of our first quarter pricing, some select additional pricing in the second quarter and mix improvements. We expect to see the positive impact of our net price realization increase throughout the remainder of the year. As a result, we are increasing our full year 2011 internal net sales growth guidance to a range of 4% to 5%. Currency contributed 4.6 points of growth for the quarter. Reported gross profit dollars in the quarter were up 11%. Internal gross profit dollars grew 6%, reflecting strong net sales growth. Our price realization and cost savings initiatives covered input cost inflation. This allowed us to manage gross profit margin flat compared with a year ago at 42.6%. Over 90% of our commodities for 2011 are hedged. For the full year, our cost pressures are now expected to be at the high end of our 7% to 8% range. Full year gross margin is still expected to be down approximately 50 basis points. Now let's turn to advertising. In the second quarter, we grew advertising 3% on top of 4% growth in the second quarter last year. We made meaningful investments behind innovation and marketing programs, and our advertising investment was up 6% on a year-to-date basis. Brand building, which includes both advertising and consumer promotion events, was up 4% in the quarter. We are confident that we have good investment levels to support consumer events that will help drive our momentum. As we have refined our plans for the year, we have made some shifts in investment from advertising to consumer promotion events. It is important to note that this is a shift to consumer-directed events, not price promotion. We know that consumers are motivated to purchase products that include on-pack promotions. Examples of consumer promotion events include our Special K challenges, a promotional offer in connection with the Cars 2 movie property that allowed consumers to collect on-pack codes and then redeem them on the Internet for prizes. These are fully integrated consumer promotion events that create another platform for consumer engagement. Internal operating profit grew 8% for the quarter, driven primarily by strong sales growth, our cost savings initiatives and lapping the cost soft comparisons in 2010. This performance was partially offset by input inflation and brand-building investments. North America internal operating profit rose 11% against the 16% decline in the second quarter of 2010. The increase in operating profit reflects strong net sales growth, which more than offset higher input costs and increased brand-building investments. Europe's internal operating profit declined 9%, driven primarily by the challenging operating environment in the U.K. and input inflation across the region. We also lapped the strong 6% growth comparison in the second quarter of 2010. As we said on our last call, we expect Europe's results to remain under pressure this year. In Latin America, internal operating profit jumped 19% for the quarter, driven by strong sales growth, partially offset by a double-digit increase in brand-building investment. In addition, the performance includes the impact of several discrete items, such as the gain from the sale of our previously closed plant in Guatemala. Excluding the discrete items, Latin America internal operating profit grew approximately 10%. In Asia Pacific, our internal operating profit increased 3% in the quarter. The growth was primarily driven by price executions across the region. Slide 9 provides an update on our cash flow and the uses of cash. Our cash flow year-to-date was $403 million, $43 million below last year. Higher capital spending, combined with timing of working capital, contributed to these results. We now expect full year capital spending to be in the range of 4% to 5% of net sales, above our previous guidance of 4%. Our outlook for 2012 will likely be in a similar range. Our long-term annual target remains in the range of 3% to 4%. The increase in capital spending is driven by investments in our supply chain infrastructure. Despite this increased spending, we still expect full year 2011 cash flow to be in the range of $1.1 billion to $1.2 billion. We remain committed to returning cash to our shareowners. Year-to-date, we have repurchased more than $500 million of shares, including nearly $190 million in the second quarter. We plan to repurchase shares throughout the remainder of the year and still anticipate repurchasing approximately $800 million of shares in 2011. Our average shares outstanding are now expected to decline by 3% to 4% year-over-year. As announced in April, our quarterly dividend will increase by 6% in the third quarter of this year on top of an 8% increase in 2010. Now let's turn to our full year 2011 outlook. We expect internal net sales to grow in the range of 4% to 5% as we have better visibility to the benefits from our price execution and the mix improvements. We still expect volume to be approximately flat. As I indicated earlier, our first half volume performance is in line with our expectations and supports our outlook for the full year. Internal operating profit is still expected to be flat to down 2%. The increase in our sales outlook is essentially offset by increased cost pressures. As I mentioned earlier, we now expect cost pressures as a percentage of cost of goods to be at the high end of the 7% to 8% range as a result of these increased costs. Our estimate of cost savings, while slightly lower, remains at approximately 4% of cost of goods sold. We continue to expect earnings per share to grow low single digits on a currency neutral basis, in the range of $3.33 to $3.40. And while we generally do not provide quarterly guidance, I want to highlight that we are lapping a significant reduction to our incentive compensation costs in the third quarter of 2010. Remember that we cited the impact was approximately 10 points of operating profit last year in the third quarter. This creates considerable headwind to our third quarter comp. As a result, we expect our third quarter reported earnings per share to be down slightly from last year. There were also a few moving pieces below the line that I'd like to highlight. We expect our tax rate to be approximately 29% versus the original 30% estimate. As I mentioned earlier, our share repurchases are likely to provide 3% to 4% improvement to earnings per share versus our previous expectation of 4%. These 2 items are relatively offsetting below the line. The estimated impact from currency is in our appendix. The latest estimate indicates that the benefit from currency is in line with our previous estimates of $0.09. This implies a reported earnings per share range of $3.42 to $3.49. We'll continue to update you on any meaningful changes to currency in our third quarter conference call. Now let me turn it back to John.

Thank you, Ron. Before I discuss our end market performance, I would like to take a moment to discuss our supply chain. First of all, we have very talented and dedicated people, who have a great track record of delivering top-quality food. We have a new head of Global Supply Chain from outside the company, who has been with us since April and has hit the ground running. Second, we are also making important investments in our facilities, including infrastructure, equipment and people. Third, we have also made significant enhancements to our supplier programs. We view these operating costs as an ongoing increase in our cost structure, and as we mentioned last quarter, these investments are included in our 2011 guidance. We also expect, as Ron mentioned earlier, a higher level of capital spending for the next few years. We are making good progress and are confident these investments will help mitigate future risk, and more importantly, drive our long-term supply chain capabilities and strengthen our company. Now let me turn to a discussion of our end market results. In North America, we delivered strong top line results across the board, with internal net sales growth of 8%. We are pleased with our second quarter results in our North America cereal business, with internal net sales growth of 13%. This growth was largely driven by softness in Q2 2010. Our measured channel consumption growth was approximately 5%. The category dynamics continued to improve in the quarter. We estimate that across all outlets, category sales grew for the first time since the third quarter of 2009. These positive trends were reflected in our results. Our growth was driven by good base performance, supported by our 2011 innovation and first half net price realization. Our share grew 1.7 points in measured channels in the quarter, bringing us to a 35.5 share. We also saw broad-based share gains across virtually all of our alternative channels. Our strong commercial plans helped us to generate this performance. For example, with the support of an effective advertising campaign, we saw high single-digit growth in Frosted Flakes. Our innovation continued to drive results as the recent launch of Crunchy Nut continued to perform well, with a 0.6 share and Mini-Wheats' new innovation, Touch of Fruit [in the Middle], had a 0.4 share. Kashi cereal had another strong quarter, delivering mid-single digit internal net sales growth. BearNaked grew double digits as consumers continue to respond to our leading natural cereal offerings. Our back half innovation includes the recently launched Rice Krispies Gluten Free cereal and FiberPlus Caramel Pecan Crunch cereal. We are targeting Rice Krispies Gluten Free to a passionate community and as a result, it was the #1 selling Kellogg product on Amazon in June. Turning to Retail Snacks. We had a solid quarter, with 3% growth driven by strength in our cracker business. We gained share in crackers, wholesome snacks and toaster pastries in the quarter. Second quarter cracker sales grew 12% and gained 1.2 share points in measured channels, driven by increased net price realization, good execution and strong innovation. We saw 8% net sales growth and a strong 0.5 share growth across our big 3 brands: Cheez-It, Town House and Club. Our 2 varieties of Special K Cracker Chips, launched in January, have exceeded our expectations and hold over 1 share point in measured channels. We also have solid second half innovation, which includes Cheez-It Colby and Kashi TLC Pita Crisps. In cookies, in the second quarter, we successfully launched the Keebler master brand initiative, which aligns cookie pricing, packaging and scale behind the Keebler brand. The shift caused a reduction in activity during the second quarter, which impacted our merchandising results. However, our base sales were strong and outpaced category-based sales growth. Keebler Fudge Shoppe continued to perform well and we had strong innovation with Coconut Dreams, JUMBO Fudge Sticks and Mint Creme Middles. During the second quarter, wholesome snacks lapped tough year-ago comparisons. In measured channels, we gained 0.4 share points. Across our business, we saw improved net price realization and strength from Special K Fruit Crisps and FiberPlus bars. Recently introduced Keebler Fudge Granola (sic) [Granola Fudge] Bars are showing positive consumer acceptance with a 0.6 share. Pop-Tarts gained over 2 share points, reflecting continued performance from the Pop-Tarts Mini Crisps innovation. Our frozen and specialty business posted a 10% gain in internal net sales growth for this quarter, driven by double-digit growth from our frozen foods business. Our 2011 innovation includes Eggo Thick & Fluffy Waffles and the reintroduction of Kashi Waffles, which are both off to a great start. We recently launched our second half innovation, which includes a Nutri-Grain Honey and Oat waffle and 2 SKUs of Eggo Mini Muffin Tops. We are excited about the veggie category, with sales growth of approximately 4% in the second quarter. Reflecting this trend, our Morningstar Farms business grew approximately 5% and gained 0.4 share points in measured channels. Our food service business remained soft in the quarter due to a continued difficult operating environment. Turning to our International business. Outside North America, internal net sales rose 3%, driven by growth across all regions. Internal net sales in our European business grew 1%, driven by a positive performance in France, Italy and Russia. In the U.K., we began to see early signs of improvement in cereal despite the tough consumer and trade environment. However, the U.K. snacks business continues to struggle as we face a tough environment. We expect strong performance from cereal innovation in the back half with Minimax, a new whole grain product that is high in fiber and low in sugar. We are also relaunching All-Bran with All-Bran Golden Crunch. In snacks, we are introducing Rice Krispies Squares Chocolate Orange flavor. We're starting to see better results on the continent, with Tresor and Extra cereals continuing to grow share in France. Not only do they contribute to net sales growth, but also help to expand the ready-to-eat cereal category, serving as a good example of the importance of innovation for both us and the category. We also grew share in Italy and saw a consumption growth in Spain. In the second quarter, Latin America internal net sales rose 7%, supported by the successful implementation of list price increases across the region. Volume growth in Brazil and the strength in Colombia also contributed to the strong results. Mexico delivered flat net sales due to the first half retail trade issues, which contributed to the softer share performance and slightly lower volume. We believe these issues are behind us. The Special K relaunch continued to gain momentum across Latin America. In August, we are launching Krave cereal in Mexico, capitalizing on our success in Europe and a growing chocolate segment. In Asia-Pacific, second quarter internal net sales grew by 4%, driven by strong top line performance in India, South Africa and Korea. We saw a modest growth in our Australian business, reflecting the difficult retail environment. We have strong back half innovation, including Special K Fruit and Nut medley cereal and 2 varieties of Special K dessert bars. All in, we are pleased with our first half results, which are in line with our expectations. We are seeing improving category dynamics and strong share growth, driven by our increased innovation and brand building. While it is important to note that the consumer and retail environment remains difficult, we are confident we can meet our 2011 guidance and continue building momentum. I'd like to take a moment to thank all of the Kellogg employees, customers and consumers for their ongoing support. Now let's open it up for questions.

[Operator Instructions] And our first question today comes from David Palmer from UBS. David Palmer - UBS Investment Bank: I just want to ask you about that U.K. trend. You mentioned the struggling consumers being part of the reason for the issues over there. I had heard that retailers were being particularly aggressive in having these "buy one get two free" type deals, and it was my impression that the retailers were really driving a discounting war over there, particularly in cereal. Could you comment on that? And you mentioned new product news, you seem to be implying that perhaps there is some hope of stabilizing trends here in the second half of the year.

Yes, David. If you think about as we came into the year, we said that Europe would be the most difficult operating environment for us. And within Europe, it's really the U.K. that's giving us the greatest number of challenges. And within the U.K., we are seeing improving trends in cereal. The cereal category is still struggling and we actually declined a little bit in the quarter. But that's an improved trend from where we've been, say last year. So I think the category and the dynamics are improving, but they're kind of lagging behind the improvement we've seen in the U.S. cereal category over the last 6 months or so. David Palmer - UBS Investment Bank: And so basically, if that 6 months lag holds true, then perhaps things might look a lot better or look a bit better in 3Q?

We are expecting the performance to get better. As we said, we have innovation coming at the back half of the year. I don't think the business is going to turn on a dime. I think it will continue to have a tough back half, but I do expect the trends to continue to improve across the back half of the year.

Our next question comes from Tim Ramey from D.A. Davidson. Timothy Ramey - D.A. Davidson & Co.: Just following up on Europe a little bit. Is that a trade-driven phenomena entirely or -- I mean, the category you mentioned is still soft. What do you really see going on there as the driver of the softness?

I think the U.K. is a very tough consumer environment right now. The consumer's very depressed. I think retailers are trying to give the best offer they can to consumers and I think that manufacturers -- like ourselves, going back a year or so, we were also trying to follow a similar path. And that did lead to a very similar dynamic in the U.K. cereal category to what we had in the U.S. cereal category last year. I do think with inflation coming through and cost pressures coming through, you are seeing improving trends in that U.K. cereal category but it's still lagging the trends we're seeing in the U.S. Timothy Ramey - D.A. Davidson & Co.: So you feel that the discounting environment softens a bit based on higher input costs?

I don't want to talk to the future, but certainly what we're seeing over the last 6 months is it's starting to soften a little bit.

Our next question comes from Terry Bivens from JPMorgan. Terry Bivens - JP Morgan Chase & Co: John, just a quick question on U.S. cereal. Obviously, the recall, I think, kind of distorts last year's performance in the second half. But if you look at it, I guess, more on a normalized basis, do you anticipate a more normal level of promotion here? And I'm talking sales on deal, mainly coming from your competitors, General Mills and particularly Post, where -- a lot of things are going on over there. How are you looking at the promotional intensity in the second half?

Yes. It's very hard for me, Terry, to comment on promotional intensity in the second half and talk about what competitors may or may not do. But if you look at the second quarter results, if you look at the category, in the category, price per pound was up about $0.13 in the second quarter. Base price or price on shelf was up $0.09 and dealt volume or incremental sales was up $0.16 per pound. So we're seeing a little bit of a pullback in the amount of activity and an increase in the pricing that's being realized when merchandising activity does occur. I think that just reflects the intense cost pressures going on in the marketplace, and I think we have to wait and see how the back half plays out. Terry Bivens - JP Morgan Chase & Co: Well, as you sit here today, though, are you anticipating any change in those kind of trends?

No, I'm not. And I'm not because I'm not anticipating any changes in the cost trends either. So I do believe that we're seeing these improved trends in the category, and I expect them to continue through the back half of the year.

Our next question comes from Andrew Lazar from Barclays Capital. Andrew Lazar - Barclays Capital: John, you mentioned volume was up overall around a little over 1% through the first half and still expecting sort of flattish volumes for the year. So I guess that suggests potentially volume a little bit weaker as more pricing comes through in the second half. Last quarter, I think you had talked about elasticity being -- at least at that stage, while it was early, pretty minimal. Is the volume sort of deceleration coming because you've seen some different trends in elasticity, as to where this pricing came through in the second quarter? Or again, is it just "let's hope it's better, but in this kind of environment, we just don't want to bank on it"?

Andrew, I think we're seeing the volume performance that we expected to see. So we're right on track from our internal expectations. We have had some benefit in the first half of the year from a volume perspective, as we lapped through the Eggo disruption and the cereal recall. We do have more price mix coming in the back half of the year. And so we do expect our volume to be soft in the back half of the year than the front half of the year. So I would say that we have not been surprised by the elasticity. There has been some elasticity as you'd expect, given the amount of price mix that's coming through the business. But it's right in line with what we anticipated. Andrew Lazar - Barclays Capital: And it's early, I know, but based on where costs are sort of today for you and some of the fiscal year companies that have started the new fiscal year have talked about inflation levels that are even higher than sort of the high end of 7% to 8% that you're currently seeing for this year, I mean do this suggest -- I think you'd maybe mentioned some additional pricing actions that you took in the second quarter. I just wanted to make sure I heard that right. And then from the industry as a whole, maybe not just Kellogg, do we see more pricing in the back half to kind of get better set up for where '12 might be? Do you think?

Well, Andrew, I can't really talk about prospective pricing. We did take additional pricing actions in some markets around the world in the second quarter. And we, as we look out to 2012, are expecting another year of fairly significant inflation.

Our next question comes from Eric Serotta from Wells Fargo. Eric Serotta - Wells Fargo Securities, LLC: Looking at the guidance, you still have a pretty wide -- I think it's $0.07 range for the year. With 2 quarters in the books and a pretty good visibility as to your cost structure for the rest of the year, I'm wondering why the guidance range is as wide as it is. Could you talk about some of the puts and takes that you're seeing or that you could potentially see that would cause you to be towards the upper or lower end of that range?

Eric, this is Ron. We're comfortable with the range of the guidance that we've given for the full year and how we look at our back half as well. Keep in mind, there are a lot of moving parts here. We had said that we're about 90% hedged on commodities. So we've still got approximately 10% open at this point in time, and we're still seeing our price realization settle in from what we've taken over the front half of the year. So there's still some things moving around. Clearly as our price execution gets taken, we're expecting volume to be a little bit softer in the back half of the year, probably down approximately 1 point. We need to see how the consumer reacts. So we're keeping that range at low single digits on a currency neutral basis and we're comfortable with that at this point. Eric Katzman - Deutsche Bank AG: Okay. And then briefly, I thought Ron made a comment that your cost savings were coming in a little bit lower than anticipated. Could you elaborate on that and then discuss why that's the case?

Yes, it's not significant, Eric, but I did want to point it out. We've said approximately 4% in the past. It's about 20 basis points lower than plan. And keep in mind, this is an estimate when we start the year, in terms of our cost savings expectation.

And our next question comes from Alexia Howard from Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., Inc.: I just wanted to ask about the investments that you mentioned in the supply chain on both the capital expenditure side and perhaps the expense side as well. Want to get a sense to how far through we are on that. Is this something that's going to continue to step up in coming years or do you think it's sort of in somewhat of a later inning? How are you thinking about that at the moment?

Well Alexia, if you think about it in 2 buckets, one's the expense piece and the second is the capital piece. On the operating expense piece, we view these costs as ongoing. We've got about a $30 million increase in these sorts of investments this year versus last year. As we go into 2012, we'd expect to probably hold at that level. It's too early to give that sort of guidance, but we don't see any reason at this stage why it would step up. And on capital expense -- capital itself, we're spending about $160 million, $170 million this year on capital in this sort of area. So it's a meaningful investment. And as Ron said, we do expect that capital would be sort of in the 4% to 5% range as we go forward for next couple of years, just as we continue these investments.

And our next question comes from Judy Hong from Goldman Sachs. Judy Hong - Goldman Sachs Group Inc.: Just following up on the volume question, so it sounds like based on your comments and based on the data, the share momentum actually looks pretty strong with innovation, execution, the retailers' support on the merchandising just really firing in all cylinders. Your comment that volume is basically tracking in line with expectations, you think it's more reflective of internally you're doing all the right things and things are actually better, but just the macro is pretty challenging and that makes the category and just the broader -- the markets themselves a little bit more muted. So if we start to see the category turn, the share momentum potentially drives better volume performance is my first question. And then secondly, just on the reinvest, John you've talked about a number of times potential 2011 really being more of a rebuilding year coming out of a weak 2010. So maybe talk a little bit more about if you do get a potential upside, where the reinvestments could potentially direct to. Is it marketing, advertising? What categories and what geographies?

First, on the volume piece. We feel very good about how our business is performing. We have strong innovation out there. As you pointed out, we're seeing good market share gains and we think that the plans are really bearing fruit and the team is doing a great job. So I think on the volume side, we're looking good. And I think that what's really happening is the level of price mix that's coming through is putting a bit of a dampener on that volume growth. And so I'd say it's a combination of the macro environment, the consumer's under pressure, and the need for us to take pricing to reflect the high level of cost pressures that we have. Certainly on the volume piece -- on the back half, Ron, do you want to talk on the back half outlook?

Yes, Judy, let me talk a little bit about our second half profit outlook. We feel comfortable right now with the guidance that we've given. If you look at our second half from an operating profit perspective, it would imply, based on the first half, we intend to be up about 3 to 4 points on internal operating profit. Remember, we're lapping some headwinds as a result of this adjustment we made to incentive compensation in the third quarter, where we reduced our accruals last year. And also, there's an impact of that in the fourth quarter, though we know we're lapping the China impairment. If we take those items and set them aside and look at the comparable growth rates on operating profit in the back half, we're somewhere in the neighborhood of 9% to 12% growth on an internal operating profit basis. So we feel comfortable we've given the right guidance at this point in time.

Judy, I guess what we're saying there is that, that back half, we view that as a challenging but appropriate guidance. If we do have upside, we'll reinvest it back in brand building, but our expectation is that guidance is good solid guidance.

And our next question comes from Eric Katzman from Deutsche Bank. Eric Katzman - Deutsche Bank AG: Just maybe -- just a quick follow-up on Judy's question. So in your guidance today for the year, you're including the $29 million charge in the fourth quarter that you took for the China impairment?

That's embedded in the base, Eric. Yes, absolutely. So we recognize we're lapping that when I just talked about the performance expectations.

Just to clarify. So in the back half of the year, we have about $100 million of bonus headwind, about $29 million of tailwind from China. When you adjust for those 2 items, our guidance implies 9% to 12% in operating [ph] profit growth in the back half of the year, year-on-year. Eric Katzman - Deutsche Bank AG: All right. And then you called out this Guatemala gain on -- I guess it was a facility sale. I mean, in Latin America, a couple of percent, to me it doesn't sound like much. But was there any material like after-tax amount on that? Or like what was the pretax versus the after-tax value of that sale?

Yes. The pretax amount of the sale was about $6 million. Now we had some other discrete items partially offsetting that and that's why we communicated up 19% in Latin America, but if you adjust for these discrete items, more like up 10%. And then it would have been tax-affected [ph] at the normal rate. Eric Katzman - Deutsche Bank AG: Okay. And then the last question I had, which I didn't exactly understand your explanation of operating cash flow. So on the one hand, you're raising CapEx to deal with all the supply chain issues, which is a good thing. Working capital is higher than you expected because of the inflationary pressure and you're telling us that that's probably likely to continue into 2012. So you're not changing your net income forecast. So what am I missing that's keeping free cash flow in the same range? Because it seems to me that if anything, given those factors you named, free cash flow should be coming in at the low end.

Yes. Fair question, Eric. First, we are comfortable with the $1.1 billion to $1.2 billion guidance. If you think of the raise that we did in capital spending, our capital spending is up about $100 million on a year-to-date basis. That's virtually all of the increase that we expect to occur this year. So our back half capital spending should be pretty comparative to last year. We mentioned the timing on working capital. So our working capital is a little bit higher. We didn't say necessarily that, that working capital was going to carry through the end of the year. In fact, we believe that, that's going to turn around pretty quickly on us, and we've even seen some of that turnaround as we've started out the third quarter here. And we're good at managing working capital. So as we look at the cash flow performance, we feel comfortable that we'll be in this $1.1 billion to $1.2 billion range. Keep in mind as well what we're lapping last year, which was around $1 billion of cash flow delivery before the pension contribution that we made. We had a very soft back half operating cash performance, the underlying cash performance, Eric, and we'll be lapping that in the second half of this year. Eric Katzman - Deutsche Bank AG: Yes, but we're talking absolutes, we're not talking year-over-year.

Understood. Understood, but the point is we're generating strong second half cash flow.

There's no question, Eric, the higher capital has put a bit more pressure on the cash flow number, but we're still in the middle of that range that Ron gave you.

And our next question comes from Chris Growe from Stifel Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I just had 2 questions for you. The first one is as you look at your cost inflation for the year, is it expected to be higher in the second half versus the first half?

Yes. The third quarter, and this may help you guys in understanding how the quarters may play out, the third quarter we do expect to be our highest level of cost pressures or cost inflation. So a little bit over 9%. That'll come down in the fourth quarter, because if you think about how our year played out last year, we started to see some inflation come through the fourth quarter. So our fourth quarter comes down a little bit. When you look at the back half versus the front half, the 2 should be relatively comparative. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then related to that, in the second quarter, without getting to -- I don't think you can give exact detail on this, but you had a higher level of pricing than I expected, and I'm just trying to understand how that matched up with the cost inflation in the quarter. I mean your gross profit dollars grew, I realized, and your margin was flat. Were those roughly comparable -- that is, the increase in pricing and the increase in cost inflation in the quarter?

In the second quarter? Christopher Growe - Stifel, Nicolaus & Co., Inc.: In the second quarter, yes.

Yes. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then my final question is just in relation to advertising and promotion, a bit of that shift. Can you help us understand how much that is shifting? Is it a meaningful number? Or how much is going to promotion versus what was planned to go into advertising?

Yes. As we look at advertising now for the full year, we've seen about 1 to 2 points shift out of advertising and into promotions. So our advertising could be flat to up slightly as we look at the year.

Our next question comes from David Driscoll from Citi investment. David Driscoll - Citigroup Inc: So John, your pricing seems to be coming in a bit better than expected, and I know you've made a lot of comments here on volumes but I want to just take another pass at it. The volume piece, certainly in the second half of 2010, volumes at the company were pretty weak. I believe they were down approximately 2%. So it's not as if the comparisons are particularly challenging. If the pricing is better than expected, cost -- you said it was 8% but that was within the range you gave before. Productivity sounds like it's very similar, down a touch but I can't imagine that's really a material issue right here. It does seem like you're tracking ahead. Are you just simply saying that it's not enough to make any change to the guidance? Or is -- there is some opportunities to spend more? I think you made a comment earlier in the Q&A that you would seek to reinvest. It just looks like things are stronger, and I suppose I'd like to hear the comments about the year-ago volume comparison.

David, I think we're very happy with the first half performance. We're tracking right on line, and we think we're on line for our full year guidance. Maybe a different way of coming at the volume question, if I looked at the second quarter, our volume's up 0.6%. If you would adjust for the cereal recall and the Eggo disruption, our volume in the second quarter would be down 1%. We're looking at the back half of the year and saying we expect our volume to be down roughly 1%. So we're actually expecting back half performance to be very similar to the underlying second quarter performance. And then if anything, we have a little bit more price mix coming through in the back half than what we had in the second quarter. So as I look at the guidance, I think it's very consistent, the back half, to what we've seen here in Q2. David Driscoll - Citigroup Inc: And then maybe just a related question to the volume piece. Of course, the back half of last year, the U.S. cereal category was also particularly weak. You did make the comment that second quarter saw cereal category growth for the first time. But again, when you're making this whole comparison that volumes go down, I suppose I'm not tracking against the idea that the cereal category gets better, yet we're still expecting volume pressures related to the price increases in light of a very weak category in the year-ago.

Well, when you think about the cereal category, the cereal category performance is based upon the performance of the all the manufacturers within the category. And I think we're very happy with our business. We're driving about 2/3 of the innovation sales in U.S. cereal so far this year. Our 5% consumption growth in the second quarter was strong. Innovation's working. We feel good about the business. I think the category's a little softer than we would like it to be, and I think it does have the potential to improve in the back half of the year. That doesn't necessarily mean that our business will grow even faster. That might just mean that we gained a little bit less share. We gained 1.7 share points in the second quarter.

And our next question comes from Bryan Spillane from Bank of America. Bryan Spillane - BofA Merrill Lynch: Just a question of clarification on the guidance for the share repurchase. So if it's going to contribute a little bit less than you were thinking originally to earnings growth this year, does that mean that you were expecting the share price to actually be lower? Like you're buying fewer shares than you originally thought? Or is there going to be more dilution I guess, from options? I'm just trying to understand why it's not contributing as much as you originally thought.

Yes. Bryan, there is a little bit more dilution from options. And if you look at our cash flow statement, you can kind of see that pop out. So we're seeing about $100 million more in terms of dilution from options exercises over the front part of the year. So that's having an impact on our range of benefit from average shares outstanding. Bryan Spillane - BofA Merrill Lynch: And is that an effect of the share price? Or is that because you're like going to be ahead of your plan? I'm just trying to figure out why that would be different.

This is a case of employees choosing to exercise options, and I think not paying a bonus last year has probably impacted some of that decision.

And our next question comes from Scott Mushkin from Jefferies & Company. Scott Mushkin - Jefferies & Company, Inc.: So I just wanted to understand a little bit, did you guys up your guidance -- more costs and more price increases for the back half? Is that kind of a little bit of the adjustment that was made? Or did I read that wrong?

That's correct. So a combination of more pricing and mix as well. And then our cost pressures being slightly higher, at the higher end of the 7% to 8% range. And then remember, I mentioned also our cost savings down slightly, about 20 basis points. Scott Mushkin - Jefferies & Company, Inc.: Right. So I'm going to kind of maybe be a little devil's advocate here with the back half and just say, we hear one of your biggest customers is really starting to struggle, from a volume perspective. And with pricing being a little bit higher than you thought, I mean, what gives you the confidence that down 1% volume is the right place to be or where it will end up given the condition of the U.S. consumer? I know you talked about the U.K. consumer being in a bad spot, but certainly the U.S. consumer is not great.

I think what gives us confidence is in part the second quarter performance and even the first quarter performance. We have a very strong innovation pipeline this year and that innovation will still be there through the back half of the year. And we're bringing in additional innovation at the halfway mark of the year. So clearly, volume is the most difficult part of our P&L to forecast, and if we have issues upside or downside, it will be on that volume line. But we think that the back half forecast is the right forecast and it's very consistent with what we've seen in the marketplace. Scott Mushkin - Jefferies & Company, Inc.: Do you worry about what I'm talking about? I mean, as you look at the retail channel, look at the consumer, look at the pricing that's going through and just say, "Whoa. This could be a little bit more challenging than we thought 6 months ago"?

I think the consumer is under pressure, but I also think our products tend to be staples. And if anything, we're seeing that split in the consumer. So we're seeing double-digit growth in BearNaked in the second quarter, one of our highest priced cereals on a per unit basis. And so you're seeing consumers who realize that the world's not going to end certainly being prepared to pay the extra money for the extra value. And then there are customers who are under pressure, but if you have great brand-building programs like the Frosted Flakes advertising, great innovation like Crunchy Nut and FiberPlus, then consumers are prepared to come into the category. Scott Mushkin - Jefferies & Company, Inc.: And then trade spending. There seems to be some cyclicality to what you guys do with the trade. Do you anticipate, at least to the Nielsen data, do you anticipate that we're going to take that down a level of promotion you do in the back half. I think you've kind of a normal pattern here or do you expect to continue the kind of the levels you did in the first half?

Well, I don't want to talk too much about prospective trade spend. But I think our activity in the second quarter, take U.S. cereal, it looks like our sales -- incremental sales are up 10%. A part of that is a relatively weak comparison. And so I wouldn't expect that sort of growth to continue, because the comparison doesn't continue that way. So I think it will tend to moderate. Scott Mushkin - Jefferies & Company, Inc.: Okay. And then one final question. I know you talked a little bit about the supply chain and manufacturing issues, but I think another one popped up here in New Zealand and Australia overnight. Any thoughts when this will actually -- it was just an unfortunate event, but any thoughts on that? Any comments on that?

You're right. We had a very small recall in Australia and New Zealand overnight. It was to do with some hard plastic in cereal. But it was a very small amount of cereal, a couple days of production. It's the first recall we've had in Australia for 5 years. So it really is a very minor issue. It really is unrelated to some of the issues we've had in the U.S. Clearly, our first preference is not to have any recalls at all. And secondly, if you do have them, you want to make them as contained as possible and as quick as possible. And I think that's what we've done in Australia.

And our next question comes from Robert Dickerson from Consumer Edge Research. Robert Dickerson - Consumer Edge Research, LLC: I just wanted to go back to a couple of questions that were asked earlier on free cash flow, and specifically how it pertains to the buyback plan for the rest of the year. Because it seems like as of now, if you just run current share count for the rest of the year, it looks like that should get us down to the negative 3% for the year or down 3% for the year. So I was just curious, if we're building up for a better or stronger fiscal '12, and we still are on line for $2.5 billion 3-year buyback plan, then what would cause you to not be buying back shares in the back half of this year, if we obviously expect the share price to be going up? Is that just based upon pressure coming off of free cash flow? An increased dividend? Or is there something else there?

No, not necessarily. Let's separate out the financing activities and the share repurchase from the operating cash flow first. So the options proceeds or the dilution from that is really a separate matter. We're still planning to buy back shares in the back half of the year. So we didn't say that we weren't going to buy any shares back. We said we bought a little over $500 million through the front half and expect about $800 million for the year. It's still early, though. I mean, we're a little bit more than halfway through the year. We have the $2.5 billion authorization, so there's some flexibility there. We feel comfortable, based on what we will execute over the back half of the year, that it will be in that 3% to 4% range. Robert Dickerson - Consumer Edge Research, LLC: Okay. Fair enough. And then just a clarification. I'm pretty sure your guidance before on interest for the year was $235 million to $245 million. Has that changed?

It remains in the exact same place. So our guidance is still at $235 million to $245 million. Robert Dickerson - Consumer Edge Research, LLC: Okay, perfect. And then last question, just on a category basis. It seems like obviously there's been a lot of talk over the last couple of years on cereal. It's a large category. But I mean, could you add any color, what you think potentially could be happening with the consumer if you look at just potential growth just in the U.S. in the cereal category relative to what we've been seeing in frozen breakfast? Because obviously, Morningstar Farms is doing well and frozen breakfast category is doing extremely well.

I think frozen breakfast is doing very well. And you can see that with the Eggo consumption up 40% and the Morningstar Farms doing very well also. I think cereal, long-term, has great growth potential in the U.S. I'm not suggesting it's going to be in mid-single digit category, but it can certainly grow in that sort of low single-digit ranges. And I believe that's going to continue to happen because it's on trend from a health and wellness perspective. It's on trend from an older population perspective. And I think there's opportunity to drive consumption of cereal beyond just the breakfast occasion. So I think there's a lot of reasons to believe, a lot of tailwinds on the cereal category. Just given the sheer size of the category, it's going to be more moderate growth rates. But I don't think what we're seeing right now is a weak cereal category because we have a strong frozen breakfast category. I think what we need to do in the cereal category is to see an increased rate of innovation across the category, increased level of brand building across the category and bring consumers into the category.

And that final question will come from Eric Larson from Ticonderoga. Eric Larson - Ticonderoga Securities LLC: Just a quick follow-up on your top line growth. You've got a lot of innovation this year, John. You talked about that and the success thereof. Yet when we look at kind of the first half volume numbers, we don't see it in that per se. Maybe it's in your price mix, maybe the volume impact is more second half. Can you help us understand how you're measuring the success in your innovation and new products, either year-to-date and what metric we might want to look at to see where the benefit would come from that?

Well, I think you can see the innovation coming through in the market share results. And if I just take U.S. cereal as an example, FiberPlus is 0.4 share points, Crunchy Nut 0.6, Mini-Wheats Touch of Fruit 0.4 as well. So you can see the share performance there. I think obviously there is always some level of cannibalization of innovation from existing products. I do believe that these products, are to some degree, also bringing people into the category. And I think that the price elasticity also does have some impact on the category. So we are seeing innovation come through and help our volume line. And then subtract from, that to some degree, some elasticity from the pricing actions that are being taken. We have reduced our trade spend significantly across the back half -- the front half of this year, okay? And that trade spend reduction is putting some pressure on consumers. Eric Larson - Ticonderoga Securities LLC: Just a quick follow-up then. I know we're out of time. But you had put out, I believe, a goal of -- and it's a pretty standard number for you folks, of about $800 million of net new product sales from innovation/new products. Would that $800 million sales goal be the same for 2011 as what you had previously stated?

I would say we might be tracking slightly ahead of that now.

Okay. Thanks, everyone, for joining us today. Kim Stumm and I would be happy to answer any follow-up questions you might have. If you would please contact Kathryn Koessel's line. She's at (269) 961-9089, and we'd be happy to answer any questions. Thanks very much.

And ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your phone lines at this time, and have a great day.