Kellogg Announces Strong First Half and Increased Investment

BATTLE CREEK, Mich., Jul 26, 2007

Kellogg Company (NYSE:K) today reported excellent second quarter sales, operating profit, earnings, and cash flow growth. The Company posted better-than-expected results despite continued inflation and a difficult competitive environment. Effective innovation and brand building both contributed to the quarter's growth and provide additional confidence for the remainder of the year.

Reported net earnings for the quarter were $301 million, a 13% increase from last year's $267 million. Earnings were $0.75 per diluted share, an increase of 12% from last year's $0.67 per share. This year's second quarter results included up-front costs related to cost-reduction initiatives that equated to approximately $0.08 of earnings per share.

"We have remained committed to our business model, operating principles, and strategy," said David Mackay, Kellogg's chief executive officer. "This focus continued to provide strong returns in the second quarter and we now enter the second half of the year with additional confidence and the flexibility to increase our investment in future growth."

Reported net sales in the quarter increased by 9% to $3.0 billion. Internal net sales growth, which excludes the effect of foreign-currency translation, was 6% and built on growth of 7% in the second quarter of last year.

Kellogg North America posted reported net sales growth of 7%; internal net sales growth was 6%, driven by growth in each of the businesses. The Retail Cereal business posted internal sales growth of 3%, as the result of innovation introduced during the past year and strong brand-building programs. The Retail Snacks business posted 9% internal sales growth; each of the cookie, cracker, and wholesome snack businesses posted good growth. In combination, the North America Frozen and Specialty Channels businesses posted 8% internal net sales growth. The frozen food, foodservice and vending, and convenience and drug businesses all posted growth.

Kellogg International reported second quarter net sales growth of 13%, and 6% internal sales growth. This internal growth built on a strong comparison of 5% growth posted in the second quarter of last year. The Latin American region posted internal sales growth of 8%, which built on double-digit growth in the comparable quarter of last year. Both the cereal and snacks businesses contributed to these results. Internal net sales in the European business increased by 7%, as the result of mid single-digit growth in the cereal business and double-digit growth in the snacks business. The Asia Pacific region posted an internal net sales decline of 1 percent.

Reported gross margin in the second quarter expanded by approximately 120 basis points as the result of operating leverage, cost-savings, and a favorable impact from pricing actions. In addition, quarterly gross margin benefited from lower spending for consumer promotion as a result of last year's efficiency initiative and a difference in the amount of up-front costs related to cost-reduction initiatives recognized in cost of goods sold. This performance led to gross profit growth of 11 percent.

Reported operating profit was $518 million in the second quarter, an increase of 12% from the second quarter of last year. Internal operating profit growth, which excludes the impact of foreign exchange, was 9% in the second quarter. The Company achieved these results despite a significant increase in cost inflation and a double-digit increase in its advertising investment which supported both new and existing brands. The Company now expects that up-front costs for the full year will equate to approximately $0.17 of earnings per share. Up-front costs in the second quarter totaled approximately $0.08 of earnings per share, significantly higher than the investment in the second quarter of 2006; this increased investment lowered internal operating profit growth by almost 5 percent.

Cash flow, defined as cash from operating activities less capital expenditures, was $569 million in the first half of the year, $229 million more than was generated in the first half of 2006. Strong net earnings growth, excellent performance in trade payables, and the timing of brand-building investment all contributed to this improvement.

Kellogg Expresses Increased Confidence for the Full Year

Kellogg Company continues to expect that full-year earnings will be approximately $2.71 to $2.74 per share. The Company expects to achieve this growth despite significantly increased investment in brand building and its increased estimate for full-year cost inflation of $0.26 - $0.30 per share, or an increase of $0.08 from prior expectations. The Company continues to expect that full-year cash flow will be approximately $950 million to $1.025 billion. The Company also continues to expect that internal sales and operating profit will increase at a mid single-digit rate for the full year.

Mr. Mackay concluded, "Our momentum continued in the second quarter and the good results through the first half of the year have provided us with increased levels of confidence that 2007 will be another year of dependable, sustainable growth. Most important, though, is the fact that we will post this growth while continuing to make significant and increased investment in future growth."

About Kellogg Company

With 2006 sales of nearly $11 billion, Kellogg Company is the world's leading producer of cereal and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal bars, fruit snacks, frozen waffles, and veggie foods. The Company's brands include Kellogg's, Keebler, Pop-Tarts, Eggo, Cheez-It, Nutri-Grain, Rice Krispies, Murray, Morningstar Farms, Austin, Famous Amos, and Kashi. Kellogg products are manufactured in 17 countries and marketed in more than 180 countries around the world. For more information, visit Kellogg's web site at

Forward-Looking Statements Disclosure

This news release contains forward-looking statements related to business performance, earnings, costs, brand building, and cost-saving initiatives. Actual performance may differ materially from these statements due to factors related to competitive conditions and their impact; the effectiveness of advertising, pricing and promotional spending; the success of productivity improvements and business transitions; the success of innovation and new product introductions; the recoverability of the carrying value of goodwill and other intangibles; the availability of and interest rates on short-term financing; commodity and energy prices and labor costs; actual market performance of benefit plan trust investments; the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses; changes in consumer behavior and preferences; U.S. and foreign economic factors such as interest rates, statutory tax rates, and foreign currency conversions or unavailability; legal and regulatory factors; business disruption or other losses from terrorist acts or political unrest; and other factors. Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.

 Kellogg Company and Subsidiaries
 (millions, except per share data)
                             Quarter ended           period ended
                          -------------------     --------------------
                          June 30,    July 1,     June 30,    July 1,
 (Results are unaudited)    2007       2006         2007       2006

 Net sales                 $3,015     $2,773       $5,978     $5,500

 Cost of goods sold         1,638      1,538        3,337      3,068
 Selling, general, and
  administrative expense      859        774        1,624      1,498

 Operating profit             518        461        1,017        934

 Interest expense              76         77          154        152
 Other income
  (expense), net               --          4            2          9

 Earnings before income
  taxes                       442        388          865        791
 Income taxes                 141        121          243        250

 Net earnings                $301       $267         $622       $541

 Net earnings per share:
    Basic                    $.76       $.68        $1.56      $1.36
    Diluted                  $.75       $.67        $1.55      $1.35

 Dividends per share       $.2910     $.2775       $.5820     $.5550

 Average shares
    Basic                     397        394          397        396
    Diluted                   401        397          401        399

 Actual shares outstanding
  at period end                                       396        396

 Kellogg Company and Subsidiaries
                              Quarter ended          period ended
                           -------------------     ------------------
                           June 30,    July 1,     June 30,  July 1,
 (Results are unaudited)     2007       2006         2007     2006

 Net sales
    North America          $1,980      $1,859      $3,982    $3,724
    Europe                    623         538       1,197     1,028
    Latin America             253         225         482       440
    Asia Pacific (a)          159         151         317       308
    Consolidated           $3,015      $2,773      $5,978    $5,500


 Operating profit
    North America            $365        $327        $726      $679
    Europe                    127          97         235       181
    Latin America              55          58         102       113
    Asia Pacific (a)           20          24          47        49
    Corporate                 (49)        (45)        (93)      (88)
    Consolidated             $518        $461      $1,017      $934

 (a) Includes Australia, Asia and South Africa.

 Kellogg Company and Subsidiaries
                                            Year-to-date period ended
                                              June 30,        July 1,
 (unaudited)                                    2007           2006

 Operating activities
 Net earnings                                  $622             $541
 Adjustments to reconcile
  net earnings to operating
  cash flows:
   Depreciation and amortization                185              173
   Deferred income taxes                        (92)              (2)
   Other (a)                                     79               74
 Postretirement benefit plan
  contributions                                 (34)             (30)
 Changes in operating assets
  and liabilities                               (10)            (254)
 Net cash provided by operating
  activities                                    750              502
 Investing activities
 Additions to properties                       (181)            (162)
 Investments in joint ventures
  and other                                      (4)              (1)

 Net cash used in investing
  activities                                   (185)            (163)
 Financing activities
 Net issuances of notes payable                 699              433
 Reductions of long-term debt                  (729)               -
 Issuances of common stock                      100              116
 Common stock repurchases                      (264)            (580)
 Cash dividends                                (232)            (218)
 Other                                           10                7

 Net cash used in financing
  activities                                   (416)            (242)

 Effect of exchange rate changes
  on cash                                        14               (1)
 Increase (decrease) in cash
  and cash equivalents                          163               96
 Cash and cash equivalents
  at beginning of period                        411              219
 Cash and cash equivalents at
  end of period                                $574             $315

 Supplemental Financial Data:

 Cash Flow (operating cash
  flow less property additions) (b)            $569             $340
 (a) Consists principally of non-cash expense accruals for employee
     compensation and benefit obligations.

 (b) We use this non-GAAP measure of cash flow to focus management
     and investors on the amount of cash available for debt reduction,
     dividend distributions, acquisition opportunities, and share

 Kellogg Company and Subsidiaries
 (millions, except per share data)         June 30,       December 30,
                                             2007             2006
                                          (unaudited)          *
 Current assets
 Cash and cash equivalents                    $574              $411
 Accounts receivable, net                    1,118               945
    Raw materials and supplies                 219               201
    Finished goods and materials
     in process                                596               623
 Deferred income taxes                         149               116
 Other prepaid assets                          125               131
 Total current assets                        2,781             2,427

 Property, net of accumulated
   depreciation of $4,310
   and $4,102                                2,845             2,816
 Goodwill                                    3,448             3,448
 Other intangibles, net of
  accumulated amortization
  of $41 and $49                             1,412             1,420
 Pension                                       383               353
 Other assets                                  254               250
 Total assets                              $11,123           $10,714

 Current liabilities
 Current maturities of
  long-term debt                              $466              $723
 Notes payable                               1,969             1,268
 Accounts payable                              971               910
 Accrued advertising and
  promotion                                    398               338
 Accrued income taxes                           92               152
 Accrued salaries and wages                    225               311
 Other current liabilities                     341               318
 Total current liabilities                   4,462             4,020

 Long-term debt                              2,588             3,053
 Deferred income taxes                         572               619
 Other liabilities                           1,100               953

 Shareholders' equity
 Common stock, $.25 par value                  105               105
 Capital in excess of par value                329               292
 Retained earnings                           4,011             3,630
 Treasury stock, at cost                    (1,044)             (912)
 Accumulated other comprehensive
  income (loss)                             (1,000)           (1,046)
 Total shareholders' equity                  2,401             2,069

 Total liabilities
  and shareholders' equity                 $11,123           $10,714
 * Condensed from audited financial statements.


SOURCE: Kellogg Company

Kellogg Company
          Analyst/Media Contact: 
          Simon D. Burton, CFA 
          (269) 961-6636