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Kellogg Quarterly Profit Falls 5%, Missing Analysts' Views By a Penny

Kellogg, the largest cereal maker in the U.S., said fourth quarter earnings fell 5%, due to costs for job cuts at an England plant and slumping North American cereal sales.

But the company also raised its 2007 earnings-per-share forecast by a penny, though the new outlook still falls short of analysts' expectations. Kellogg said it saw internal sales, excluding currency fluctuations and other factors, exceeding long-term targets, helping offset rising costs for corn and other commodities and spending on brand building.

Fourth quarter net income fell to $182.4 mllion, or 45 cents a share, from $192.4 million, or 47 cents a share, a year ago. Analysts polled by Thomson Financial expected earnings of 46 cents.

Earnings in the latest quarter include 3 cents a share from the expensing of stock options and investment in up-front or restructuring costs of 8 cents a share, which was higher than the level spent in the year-ago period, the company said. In September, Kellogg said it would cut jobs at a facility in Manchester, England, in order to improve production in Europe.

Sales rose 8% to $2.58 billion from $2.39 billlion a year ago, falling shy of the $2.53 billion analysts had anticipated. North American retail sales for cereal fell 2%, hurt by changes in inventory levels.

In the latest period, Kellogg's profit margin fell 0.3 of a percentage point to 43.3%.

Indeed, increased upfront costs cut the margin by 0.7 of a point, and higher energy, commodity and benefit costs lowered it by 1.6 points, the company said.

Kellogg, which also makes Keebler cookies and Pop-Tarts toaster pastries, has benefited in recent years from a steady stream of higher-priced products such as new varieties of cereals like Special K and All Bran. But like many U.S. food makers, Kellogg has also suffered from soaring energy, grain, sugar and corn costs. To help offset them, the company raised cereal prices last year.

"We faced a difficult cost environment in 2006 and still achieved another year of results that met, or even exceeded, our targets," David Mackay, Kellogg's new chief executive officer, said in a written statement. "Equally as important, though, is that we achieved these results while making significant investment in the business and in future growth."

Although shares of the company fell, they are still trading near the higher end of their 52-week range of $42.41 to $51.

For the full year, net income in 2006 grew 2% to $1 billion, or $2.51 per share, from $980.4 million, or $2.36 per share, in 2005. Full-year revenue gained 7% to $10.91 billion from $10.18 billion.

Annual Outlook

Kellogg raised its 2007 outlook by a penny a share, saying it expects to earn between $2.68 and $2.73 per share. In October, Kellogg said it expected earnings between $2.67 and $2.72 per share.

However, the new estimate is still below analysts' forecast for a profit of $2.75 per share, according to a Thomson Financial poll.

Kellogg said it expects sales growth could be 4%, implying sales of $11.34 billion, in line with analyst consensus.

The company said the outlook includes estimates for "significant" commodity cost inflation and continued investment in brand building.

"We will face more inflation in 2007 but we remain confident that we have the right strategy, operating principles and business model," said Mackay, who replaced Jim Jenness as CEO on Dec. 31. "It is our continued focus and strong execution, driven by the strength of our organization, that give us confidence that we will deliver dependable rates of growth in 2007 and beyond."

Jenness remains chairman of Kellogg's board.

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