Simon Burton - Executive Officer of Snacks business unit John A. Bryant - Chairman of the Board, Chief Executive Officer, President and Member of Executive Committee Ronald L. Dissinger - Chief Financial Officer.

Matthew C. Grainger - Morgan Stanley, Research Division Jonathan P. Feeney - Athlos Research LLC Andrew Lazar - Barclays Capital, Research Division Alex Sloane - Societe Generale Cross Asset Research David Palmer - RBC Capital Markets, LLC, Research Division Robert Moskow - Crédit Suisse AG, Research Division Alexia Howard - Sanford C.

Bernstein & Co., LLC., Research Division Eric R. Katzman - Deutsche Bank AG, Research Division Jason English - Goldman Sachs Group Inc., Research Division David C. Driscoll - Citigroup Inc, Research Division.

Good morning. Welcome to the Kellogg Company Full Year and Fourth Quarter 2014 earnings call. [Operator Instructions] Please note, this event is being recorded. Thank you. At this time, I will turn the call over to Simon Burton, Vice President of Investor Relations for Kellogg Company. Mr. Burton, you may begin your conference call..

Thanks, Gary, and good morning, and thank you, everyone, for joining us today for a review of our full year and fourth quarter 2014 results. I'm joined here by John Bryant, Chairman and CEO; and Ron Dissinger, Chief Financial Officer.

The press release and slides that support our remarks this morning are posted on our website at www.kelloggcompany.com.

And as you are aware, certain statements made 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, investments 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, February 16.

The call will also be available via webcast, which will be archived for at least 90 days. And I'll turn it over to John..

Desire, Decide, and Delight. First of all, we support our brands with great brand building ideas that generate the Desire for our products. The way in which we engage with consumers has continued to evolve and our investment takes various forms, including digital media, consumer promotions such as inserts and traditional advertising.

As you know, we currently spend a high percentage of sales on brand building. And while we're increasing our investment in brand building, we are as focused on optimizing the impact of this investment as we are on increasing the amount of the investment. Next is the Decide phase, where we bring it all to life in store.

We're investing in sales capabilities. We have invested in both the cereal and snack sales forces in the U.S. and have always started [ph] to see better execution and results in store and have also started to invest in the 3 international regions, including investment in regional sales Centers of Excellence, designed to share best practices.

And finally is the Delight phase. We Delight consumers with great food. Consumer trends in health and wellness and in weight management are evolving. And we must appeal to those trends with foods that address the needs of consumers and that also taste great.

We've been doing a lot of work on our foods around the world, including the recent launch of Mueslis and granolas and the reformulation of many of our existing foods. Specifically, we've launched new Special K bars with improved food and packaging.

We have new Kashi cereals and we're converting the GOLEAN brand to be GMO-free the heart-to-heart brand to organic. And we're also promoting the versatility of our foods. So to sum up. Much of this activity is intended to address the challenges that we faced in developed businesses around the world in the last year or so.

I mean, some of these activity has started and it's early in the year, but we're starting to see a response and we're optimistic that it will provide a base for future sales growth. And now I'll turn it over to Ron for a discussion of the financial results for the quarter and full year..

Thanks, John, and good morning, everyone. Slide 6 shows the financial results for the fourth quarter and full year. Comparable net sales for the full year decreased by 2%. We had better performance in some of our international businesses, particularly in the second half of the year.

But we experienced declines in our developed cereal businesses and the U.S. Snacks business. We are executing initiatives in these businesses, including the introduction of new foods and investment in marketing, as John mentioned, to improve performance.

The recorded quarterly operating loss was $422 million, which included a significant non-cash mark-to-market adjustment of $822 million. This was primarily driven by the impact the changes in interest rates had on pension plan liabilities. Comparable operating profit decreased by 0.1% in the fourth quarter.

Operating profit declined by 3.9% for the full year, more than we expected as a result of lower production volume and higher distribution costs. Cost management actions and lower incentive compensation and overhead contributed positively to fourth quarter and full year performance.

As John mentioned, investment in brand building is significant and overall brand building for the year remained unchanged as a percentage of sales in 2014.

Comparable earnings per share, which exclude integration costs, mark-to-market adjustments to 53rd week, Project K cost and other items that affect comparability, were $0.84 per share on the fourth quarter and $3.81 per share for the full year, in line with our expectations.

These results include $0.02 of currency headwind in the fourth quarter and $0.01 for the full year. The 53rd week added $0.07 to earnings per share in the quarter. Slide 7 shows the composition of the fourth quarter and full year sales growth.

For the full year, reported sales decreased by 1.4% and comparable sales decreased by 2%, with a similar decline in comparable net sales in the fourth quarter. Comparable volume decreased by 2.6% for the full year and price mix increased by 0.6%. Comparable volume stabilized in Europe and in Latin America in the fourth quarter.

The decline in volume was primarily the result of the developed cereal and snack businesses in the U.S. The impact of currency translation reduced sales growth by 0.8 points for the full year and nearly 3% in the fourth quarter as many currencies weakened against the U.S. dollar.

The 53rd week also contributed growth in the quarter and for the full year. Slide 8 shows our comparable gross profit and gross margin for the quarter and the year. Comparable gross margin decreased by 40 basis points for the full year and by 70 basis points in the fourth quarter. And this decline was consistent with our latest guidance.

Lower production volume driven by our sales performance and higher distribution costs impacted margin. Our savings from productivity were in line with expectations and savings from Project K also met expectations. Slide 9 shows the comparable operating profit performance for each of the regions in the fourth quarter.

North America's comparable operating profit decreased by 7%, largely as a result of lower sales posted in the quarter. We continue to face challenges in our U.S. cereal and snacks businesses. And this was the primary driver of the decline in operating profit in the quarter.

In addition, we also saw lower production volume and greater-than-anticipated distribution cost continue through the fourth quarter. Investment in brand building as a percentage of sales was unchanged for the full year.

Comparable operating profit in Europe increased by 24% in the fourth quarter as a result of net deflation in cost of goods sold, including strong productivity savings, the timing of investment in brand building and cost discipline and overhead. Comparable operating profit declined by 4% in Latin America in the fourth quarter.

Benefit from top line growth of more than 7% was more than offset by the timing of costs, including a double-digit increase in investment in brand building to support second half product launches across the region. Fourth quarter comparable operating profit increased by 50% in the Asia-Pacific region.

This was driven by solid productivity improvements and Project K savings in cost of goods sold as well as lower brand building, primarily in Australia. Slide 10 shows full year cash flow for 2014. Cash flow was $1.2 billion, which exceeded our expectations for the year. This was driven by a benefit from year end U.S.

tax legislation and broad-based working capital improvements, including our supplier financing initiative. This initiative added more than $200 million to annual cash flow in 2014 and nearly offset approximately $250 million of incremental cash impact from Project K.

We expect additional benefit from this program in 2015 as we cascade it across the globe. Capital spending for the year was $582 million, at the low end of our range. This includes the impact of some timing between 2014 and 2015 as well as lower costs for certain projects.

Share repurchases for the year were $690 million and we reduced our average share count by 1.4% as planned. Dividends paid in 2014 were $680 million so total cash return to share owners was almost $1.4 billion. Now let's turn to Slide 11 and our guidance for 2015.

As always this guidance excludes items that affect comparability, so please see our notes for details. We expected challenging macroeconomic environment in 2015. And the devaluation of foreign currencies also presents both translational and transactional foreign currency headwinds.

So the guidance we're providing today is realistic and reflects the investment necessary to stabilize our business and return it to sustainable growth. We expect that comparable net sales will be approximately flat for the year, an improvement when compared to the performance we saw in 2014. We expect net deflation in cost of goods sold.

Overall, commodity and packaging costs are relatively neutral and we are approximately 70% covered for the year. However, we do anticipate inflation in wages, benefits and logistics costs. We expect the benefit from productivity to be 3% to 4% cost of goods, in line with our long-term goals, and we'll see incremental savings from Project K in 2015.

So if you add all of these factors together, we expect to see net deflation for the year and slight gross margin expansion. Comparable operating profit is estimated to be down between 2% and 4%.

This includes the impact of rebasing incentive compensation costs, just between a 3- and 4-point headwind to operating profit growth, slightly higher than the 2 to 3 points we communicated in our third quarter 10-Q. Excluding this headwind, comparable operating profit growth would be approximately flat to up slightly.

We expect brand building will increase at a rate faster than sales growth. And we expect the currency-neutral comparable earnings will be in a range of flat to down 2% or $3.74 to $3.82 per share. Of course, the incentive compensation headwind also impacts our earnings per share in 2015 by between 3 and 4 points.

These earnings expectations exclude the impact of 2014's 53rd week and the impact of foreign currency translation, which currently looks like it could be as much as $0.15 per share. The tax rate is expected to be between 27% and 28% and interest expense is anticipated to be between $215 million and $225 million.

We expect that cash flow after capital spending will be approximately $1 billion. This includes total incremental cash costs of $350 million from Project K. So underlying cash flow is between $1.3 billion and $1.4 billion. We anticipate the total capital spending will be in the range of 4% to 5% of sales.

This includes approximately 1 point of sales for incremental capital for Project K. It also includes investment to increase the capacity in our Pringles business and the completion of a new cereal plant in India.

As I said, the total incremental after-tax cash cost for Project K will be approximately $350 million in 2015, including the additional point of sales for capital spending. This makes 2015 the year with the most cash outflows over the life of Project K. We expect to repurchase between 700 million and 750 million of shares in 2015.

Our current outlook for the first quarter earnings per share is that it will account for approximately one quarter of our total estimate for the full year on a comparable basis, including the impact of currency. Currently, our expectations are that the impact of currency will be spread relatively evenly across the year.

Slide 12 shows our annual EPS log, based on comparable earnings in 2014 of $3.81 per share. As I mentioned, currency translation could have an impact of as much as $0.15 per share, although this does not include the impact of any significant currency devaluations we might see during the year, such as in Venezuela.

Obviously, this estimate will change and we plan to update you on the impact on future quarterly calls. We expect a small amount of costs related to the integration of distributors and other items for Pringles in 2015. And we estimate this cost of between $0.03 and $0.05 per share and expect that this will be the last year of these integration costs.

While it's early in the integration process at this time, we expect that the impact on the investment in BiscoMisr in Egypt will not be material in 2015. And finally, we expect that incremental savings from Project K will be between $90 million to $100 million for the full year, approximately 2/3 of which will come in cost of goods sold.

Pretax P&L cost related to the project are estimated to be between $400 million and $450 million, or approximately $0.80 to $0.90 per share in 2015, 75% of which will be in cost of goods sold. Obviously, the timing and cost of the projects may change over time.

So we'll provide an update regarding Project K on the quarterly conference calls and at the upcoming CAGNY conference. And now I'll turn it back over to John, for more detail on the operating segments..

Desire, Decide, Delight. We will continue to invest in brand building and we have more programs launching now and across the balance of the year that will support our new foods and our existing products. We are bringing it all to life in store with increased sales capabilities and are starting to see better execution and improvement in the results.

And we've made significant improvements to our food in order to meet the rapidly changing views of consumers regarding health and wellness. This includes new foods and new packaging and the reformulation of many of our existing foods. So 2015 is a rebuilding year for us.

It's an opportunity to invest in great food and ideas and to build a solid platform for long-term growth. As I'm sure you can see, our Kellogg employees are dedicated to returning the company to growth. They are executing Project K, they are delivering the savings, they are developing the growth plans and they are implementing the plans.

It's thanks to them that in 2015, we can build a platform for future growth. And with that, I will open up for questions..

[Operator Instructions] Our first question comes from Matthew Grainger with Morgan Stanley..

John, I just want to ask you about the reduction in long-term sales guidance. You've spoken pretty recently that you believe you can achieve that mid-single digit operating profit growth even in an environment where you're only generating 1% to 2% internal sales. So that's consistent.

But does that guidance only hold true during this period of accelerated savings in Project K? And is it feasible to sustain that, I guess, 50 basis points of annual margin expansion beyond the conclusion of Project K, when you'll be more reliant just on ongoing productivity? And secondly, is there any implied change in your cereal category expectations that are baked into that 1% to 3%?.

So Matthew, as you think about how economics work, we're not relying upon Project K to drive bottom line results. We've said before we're reinvesting Project K back into the business and that's our primary objective, as we drive the business back to sustainable long-term growth. So we've got to get this business back into growth.

If we can achieve 1%, 2% growth, 3% on the top line, and we can offset inflation with underlying productivity programs, that gives us gross margin expansion because of the leverage we get through our manufacturing facilities.

We can have modest investment back into our organization and into our brand building programs and still deliver mid single-digit operating profit growth. So the way our economics work is we are quite a leveraged P&L. Small amounts of top line growth can lead to mid-single digit operating profit growth, irrespective of Project K.

In terms of our views long-term on the business and the category growths, we continue to believe that Europe and North America can grow low single digits and Asia-Pacific and Latin America can grow mid-single digit and even mid to high single digit in the case of Latin America. And we'll talk more about this at CAGNY next week.

As I think about our developed cereal businesses, we believe we can return our developed cereal business back to growth. However, we think being pragmatic, that growth is pretty much at the low end of the low single-digit kind of range, where those categories have historically outperformed over the last 5, 10 years.

Again, we'll show you some of that information at CAGNY next week.

So the key reason for us changing our guidance was to really remind investors that even though our average growth over last 10 years has been about 3.5% on the top line, we really only need low single-digit growth to make the mid-single-digit operating profit algorithm work, and then we generated a lot of extra cash that enables us to buy back shares and get to the high-single-digit EPS and pay a good dividend, which can even get us to double-digit tiers, all else being equal.

So that low single digit is obviously is our goal internally. It's important to have those realistic goals. We will aspire to do better, but we believe we can absolutely achieve the low single-digit growth over time..

And I know one question but just to quickly follow-up on the reinvestment sort of initiative within Project K. Clearly, you're rebuilding this year.

But if the top line recovery doesn't materialize the way you expect, would you be willing to change the way you think about that balance between reinvestment and bottom line going forward?.

Matthew, again, we don't need to get a lot of top line growth, but we do need to get top line growth to make the economics of the business work. It's very hard to save your way to prosperity. I think ultimately, we have to grow our way there.

We don't need a lot of growth, but just even low single-digit growth makes a lot of difference to how our economics work. And that's why we're absolutely focused on investing the money back into the business to ensure we get sustainable, long-term, low single-digit top line growth..

The next question comes from Jonathan Feeney with Athlos Research..

John, I just wanted to ask a kind of big picture question.

I wonder if, if anything that -- how close is Project K getting to either the innovation process or the service and delivery process where maybe it affects the mindset of Kellogg in such a way that there's a, maybe, a trade-off on growth? I mean, maybe it focuses certain segments of the organization on saving versus growth? I know for a long time Kellogg has great history of reinvesting cost savings and that people understand that savings leads to more investment.

Where, now it seems like you're more dependent on that or that savings has become a bigger feature of the earnings growth.

Let's look at it that way and of the amount of investable dollars generated, does this emphasis in cost savings, is that part of the reason we're seeing your deceleration and such tough growth across the businesses?.

Jon, I think Project K is instrumental in helping us return to growth. There are parts in an organization that have to be absolutely focused on productivity and efficiency. So we have our supply chain, we have our global business services organization, they are designed to ensure that we are being as efficient and effective as possible.

We have other parts of our organization, sales and marketing, where we still want them to be efficient obviously, but it's much more about driving the top line. And in fact, if you look at what we've done with the Project K savings in 2015, we've invested it back into the capabilities that, over time, will enable us to grow our top line.

So we've invested back into our global category teams. We've invested back into rebuilding the Kashi team. We've invested back into our sales force in snacks and the Morning Foods in the U.S. Those investments do not provide an immediate return.

Those investments provide returns over time because you have to invest in the people, then they start to generate the ideas. They start to bring these ideas to market. So these are not short-term payback reinvestments. But I can assure you that we have the conversation internally. We have our organization focused on returning to long-term growth.

We have some parts of our organization absolutely focused on being more effective and efficient. It's about doing both well..

The next question comes from Andrew Lazar with Barclays..

John, I think if I heard you right, you mentioned the cost structure performance. I think you termed it as mixed. I think with good work in Europe, Australia, but I guess more work needs to be done in the U.S.

I think just given that's such a strong piece of what's driving obviously the reinvestment this year, I guess what -- if you could just get a little bit more detail on what were the issues in the U.S.

and I guess where maybe some of those future opportunities lie?.

So Andrew, we are committed to -- I'm sure we have a very cost competitive manufacturing network around the world. We've made some strong progress in markets like Australia and the U.K. where we worked with our unions to ensure we have a more competitive labor situation and we've closed in excess capacity. In the U.S., we've closed in excess capacity.

We're still working with our unions to ensure that we have a cost competitive position as well..

Right. So it's more timing in the process, more than....

It's more where we are in the process. I mean, we are absolutely committed in the U.S. to having a competitive cost structure. We're not quite there yet. There's a couple of different parts we can go down to get there. But we're committed to working with our employees to try to get there..

The next question comes from Alex Sloane with Societe Generale..

Just a question. Obviously, you've talked a lot through the presentation about 2015 being a year that you're building a platform for growth in the years to come.

Are you still confident that you can do that with your current category mix or given the continued weakness in 2014, might you consider using your balance sheet in cash flow to perhaps build positions in adjacent categories, where growth prospects might be better and you might be able to leverage the Kellogg's master brand?.

We are focused on returning our business to growth over time. Our soup business has been weak largely in 4 developed markets. One of those markets, Canada, is always [ph] seeing significantly better trends and the category has been more flat here recently. The U.S.

is starting early days here in 2015, but seeing some better trends in the early part of '15. And I think we still have some challenges in markets like the U.K. and Australia. So we are seeing improvement from where we were.

And we have confidence that we can get these businesses back to growth, not high growth, but back to modest -- at the low end of a low single-digit range type growth. In terms of acquisitions, you've seen us do the acquisition in Egypt of BiscoMisr to relatively modest sized business, less than $100 million of sales.

But it's the leading biscuit business in Egypt and is a great example of the intersection of emerging markets and snacks in an area where we're very interested in continuing to build that business over time.

But I wouldn't say we're looking at transformational type acquisitions in terms of really major, major category evolution type acquisitions that fundamentally changes the shape of the company. However, we continue to be very focused in growing our breakfast business and growing our snacks business around the world..

The next question comes from David Palmer with RBC Capital Markets..

John, you talked about the consumer move away from weight management.

Is this being replaced in your view by a search for simple high-quality ingredients and perhaps satiety? And building on that is, is the key to the future of the domestic business in particular, and in particular, your premium cereal brands like Special K and Kashi? Then renovation side, you mentioned that you're doing renovations.

Are they, perhaps, working in ways that we can't see yet? And what gives you confidence that it will work?.

Thank you. I think that Special K, there's 2 issues there. One is how we've been talking about the brand and the second is the delivery of some of the foods.

So in terms of how we've been talking about the brand, we got ourselves into a 2-week challenge, starting to get close to dieting the -- basically asking people to deprive themselves where they have less calories. And really, people want to have weight wellness. They want to be eating great food because it's good for them.

And we actually have foods that deliver upon that promise. And those foods will continue to be in the market and unchanged. And we have other foods that we've renovated to be more in line with what consumers are looking for. So for example, we have renovated the Special K bar line here in early 2015 and we're seeing some initial good results.

So what gives me some confidence that we can move the food to be more on trend? One would be our experience in Australia, where we launched the Special K Nourish cereal in 2014, that actually now has the Special K business back to growth in Australia, although Special K is a smaller brand for us in that market than it is in many other markets.

So we've demonstrated that changing the foods -- so to your point, it's simpler food, it's clearly less refined, if you like. And that's what I think consumers are looking for as well as satiating, so it can be a bit more of a complicated eat and maybe some protein in there as well.

And we have an opportunity to both change the communication in Special K. So it's more about weight wellness as well as changing the foods that's more aligned with consumer trends.

Early days in the U.S., but even here at the very beginning of 2015 we're seeing meaningfully better results from the Special K wholesome snacks bars and Special K Cracker Chips and even from some of our cereal programs..

The next question comes from Robert Moskow with Credit Suisse..

This is kind of a follow-up to David's question. But -- you talked about repositioning Special K. It's a really important brand for you globally. And I think consumers still think of it as a diet, kind of a weight management brand. And I look at the packaging that's still on the shelves and I see the big K.

And all I can think about is can't pinch an inch and the 2-week challenges. It just -- it doesn't seem on shelf to be very different from how it's been in the past. And I guess secondly, what kind of feedback do you have from consumers that they can look at the brand differently? To me, Special K means weight management..

Well, and Robert, I don't think we're trying to move Special K away from helping people look great and feel good about themselves and have a wonderful start to the day. That's very much where we are.

I think we just -- in the spectrum of weight management moving from more dieting to weight wellness to -- rather than holding back on calories to having great food that really makes you feel good about yourself and it gets you off to a great start to the day.

So I would say it's more of a sort of repositioning is the right word, relaunch of the brand perhaps with new food, new packaging and new communication. And I'm not sure what stores you've been in or when you're in the stores looking at the packaging, but we have changed a lot of the packaging, particularly on the snacks side here in early 2015.

But this is not a radical shift of the brand. This is just improving the positioning of the brand so it's more on trend with what consumers are currently looking for..

I know you say it's early days, but do you have any feedback yet from consumers as to whether in the U.S.

they are looking at it differently?.

I hesitate because the programs have only been in there for the beginning of '15. We were down significantly in Special K last year, and Special K sales are flat here in the first 4-week period, but it's only a 4-week period. So I don't want to draw too much from that..

The next question comes from Alexia Howard with Sanford Bernstein..

So I'll turn over to the U.K. market. It seems as though the issues over there are quite different from what we're seeing in the U.S. with the hard discounts [indiscernible] are really shaking things up with the regular grocery stores.

Can you talk a little bit about how that's shaping up and whether it's reasonable to expect improvement in sales, particularly in cereals, but also in snacks over in the U.K.

at present?.

Thanks, Alexia. Hard discounts are certainly putting the U.K. retail trade environment under significant pressure. We've seen some of those U.K. retailers react to hard discounts with significant price rollbacks. And we'll see how that plays out. I think it's too early to conclude how that's going to impact the market.

We are struggling a little bit in that environment and we have pragmatic expectations for the U.K. business, given the environment the U.K. is going through. Having said that, we continue to see good growth from Pringles in the U.K. business. And we have an opportunity, I think, to do better in our cereal and our cereal snacks business.

So we are looking to see improvements in the trends in the U.K. But I think it remains a difficult market for us, given, as you say, that unusual retailer backdrop..

The next question comes from Eric Katzman with Deutsche Bank..

Simon, a couple of questions.

So with the change in the long-term target on the top line, John, which I think is reasonable, could you also kind of frame that like cereal versus snacks globally? Because you've underperformed in snacks and that's kind of been maybe more of the unexpected drag as opposed to cereal, which is kind of more of a, call it a developing market category issue?.

So I think, Eric, in general, we would expect, in developed markets, for our snacks business to grow faster than our cereal business. I think in developing and emerging markets, they can both grow at very similar sorts of rates. I would also agree with you that very disappointing result in 2014 was in our U.S. Snacks business.

I think if you get beyond U.S. Snacks and you look at snacks also around the world, we've actually seen very strong growth in our international snacks business. So I think our weakness in snacks is more focused in the U.S.

and quite frankly, in the U.S., where that weakness occurs more around the Special K brand, in Special K Cracker Chips and in Special K bars and wholesome snacks..

Okay. And then kind of somewhat related, but I'll admit that Canada haven't been tracking as much. It sounded like that actually ended the year pretty solidly for you.

Did -- was that -- was that in any case, in any way, like an R&D on Special K and recovery in cereal? Like, is there something that you've learned about the positioning of the product there that's kind of helping that business? And how long did it take to kind of -- if that's true, how long did it take to recover there?.

Eric, we have a very strong team, very strong business up in Canada. When we did the parent brand activity earlier in 2014, the cereal and milk program, we got tremendous response from Canadian retailers and from Canadian milk providers.

And that program really made a meaningful difference in Canada, whereas it did not have the impact we were hoping it to have in markets like the U.S.

Since then the Canadian business has been performing better, sort of more low single digits in the first part of the year, it's been more flat in the back part of the year from a cereal category perspective and our share has been relatively stable within that category. The Kashi brand is growing in Canada.

So there's one difference between the 2 markets right there. But I think the experience in Canada does give us reinforced belief that we can return these businesses back to growth. Of course, Canada remains a very difficult market. It's got a difficult retail environment.

So we're very pragmatic on expectations in that market, but it's good to see the consumer respond to the programs..

Okay. And then Ron, I can't let you get off the hook without asking a little bit about currency in Venezuela.

So I guess you're still getting like cash from the government and you're still at the 6 rate?.

We are in this outlook, Eric. Remember, the valuation and translation of our sales and profits are based on facts and circumstances. We know and I'm sure you saw the government of Venezuela came out with a communication around exchange rates. The official rate remains, our business remains a priority business or priority industry.

Remember, we produce locally and most of the inputs that go into our food is brought in locally as well. For those inputs to come from outside of the country, we are getting access to dollars at the official rate as well. We will obviously provide disclosures within our 10-K and have in our past 10-Qs in terms of the impact.

If we were to move from the official rate to a SICAD 1, which, remember, is about VEF 12 to the U.S. dollar, our latest outlook is that, that could be approximately $0.18 of earnings per share impact.

That includes both the onetime write-down of the net assets as well as a translational impact if, for example, that change were to occur here in the first quarter. I believe the SICAD 2 rate goes away, based on what the government recently communicated. I'm not sure where the secondary rate will go that they have communicated.

It looks like it could be around VEF 120 to the U.S. dollar. If that were the case and if we were to value to that level, it would be about twice the impact of moving to SICAD 1..

The next question comes from Jason English with Goldman Sachs..

This feels like it's a bit of a cathartic rebase for next year, but then we just get off the last question, where you're saying, "Well, we may have sort of $0.18, $0.30 incremental downside of Venezuela deval." Why wait? Why not, proactively, like so many other companies, just move your accounting there so we have this clean base and not a continued overhang?.

Look, we're valuing the business according to the right accounting, based on our facts and circumstances, Jason. I can't comment on other companies' facts and circumstances and why they may have moved off of the official rate. But for us, as I said, we're still a priority industry, and we're getting access to dollars at that official rate.

So we're valuing appropriately..

Okay. And then to understand a bit more on the spend. I suppose we'll get more detail. I hope we get more detail on where you're putting all this money at CAGNY. But one thing you cited is incentive compensation. And it kind of surprises me, given that you've taken so many efforts to shrink your employee population over the last year.

And obviously results are pretty disappointing.

So can you understand -- can you help me understand what's changing to drive so much higher incentive compensation on a go forward?.

Well, I think Jason, as you know, we have a pay-for-performance orientation. And unfortunately, our performance in 2014 was not what we had hoped it to be. And so we've paid out below the target rates in 2014. In 2015, those incentive compensations just go back to the target. This is an incentive compensation program for the entire company.

We have literally thousands of people within this incentive compensation program. So it is just a reflection of really underperformance in 2014 and going back to target in '15..

The next question comes from David Driscoll with Citi..

Two questions for me. First, on your sales growth guidance.

What is the foreign exchange impact to the top line?.

The foreign exchange impact is around 3 to 4 points, David, at the top line. And frankly, as you cascade down the profit and loss statement, it's very comparable at operating profit earnings per share as well..

Okay. And then, kind of a bigger picture question here, guys. Project K, I think you said $90 million to $100 million of savings generated into 2015. This is the first kind of really big year of savings from Project K. Your productivity programs, again, I think you said in line with historics, kind of 3% to 4%.

And against cost of goods sold, that's something like $300 million or more. So in total, you guys would be producing savings of north of $400 million, which is like $0.80 a share. I think the management comp number, 3% to 4%, that's like $0.15.

I guess I want to understand that when I put these numbers together, it just feels like you should be in a much better environment from the internally generated savings than what your bottom line earnings are showing.

So where's all the money going if the $0.80 saving is right, if management comps only $0.15, if sales are comparable year-on-year, how much is brand building, building up? And how much is SG&A in total going up, such that we're going to see a $0.20 decline in earnings year-on-year?.

Well, David, maybe I'll walk you through the guidance, just to give you an understanding. So our guidance is realistic and it does reflect improving trends, including investments that are going back into our business around innovation, investments into our food as well and investments into our commercial programs, for example, into brand building.

Of our sales, it is estimated to be approximately flat. I said we expected also slight net deflation in cost of goods sold, which should give us a slight improvement in gross margin. Keep in mind, we are seeing inflation within cost of goods sold. Our commodities, as I commented, are relatively neutral to down slightly.

We are seeing increases in our factory costs and wages and in benefits and in higher logistics cost as well. Not so much around fuel. We can see that fuel is declining. This is more around carrier rates and the supply and demand impact on carriers. We also have a little bit of transactional FX exposure that sits in cost of goods sold as well.

And then as I said, our operating profit is down 2% to 4%, but that includes a 3- to 4-point headwind associated with the incentive compensation. We are investing in brand building. We are also investing, as we've discussed before, in sales capability and other overhead to drive the growth of our business impact to sustainable growth..

Okay, everybody, I think that's about all we have time for. We'll be around if you have follow-up questions during the rest of the day. And thanks for joining us..

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