IMPROVING OUR PROFITABILITY To be able to afford increased brand building and innovation investment  we need to improve our gross profit margin and control our overhead expenses. In 2003  we improved our underlying prof- itability enough to invest for the future. While our reported gross profit margin declined modestly  this was largely due to investment. We incurred $70 mil- lion of asset write-offs and other up-front costs relat- ed to cost-savings initiatives; these are investments in future profitability. We also increased the use of toys in the box and other inserts  a form of consumer promotion that is accounted for in cost of goods sold. We faced higher costs in the form of commodi- ties  fuel  and benefits  but we were able to offset them with a combination of the following: These factors are expected to raise our gross profit margin over time  even as we continue to face rising commodity  fuel  and benefits costs. Importantly  we plan to use this improved profitability to reinvest in our brands. When we refer to brand building  we mean advertising and consumer promotion  not price discounting. In 2003  our brand-building investment was increased at a strong double-digit rate  and we plan for this investment to again out- pace sales growth in 2004. Our earnings growth in 2003 was of very high quali- ty. It included the investment in brand building and cost-savings projects  as well as nearly $30 million of other charges related to asset impairments and bond repurchases that are not typical events. To post a strong earnings gain in the face of these signficant charges and investments suggests a very strong underlying profitability that can be used to drive growth in the future. Kellogg Company has a significant competi- tive advantage in its global infrastructure. The decision to expand our business internationally was taken early in the Company’s history and was a far-sighted one. This scale allows us to take advantage of global sourcing  decrease our input costs  transfer production and administrative functions between regions  and share best practices and ideas across all our markets. In 2003  our global packaging sourcing group  which has members around the world  instituted a broad program to coordinate the sourcing of materials  adhesives  and cartons in many of our markets. This program is expected to dramati- cally improve efficency and save the Company millions of dollars each year. Yet another way we are earning our stripes. Kellogg Company 17 $699 2003 $519 2001 $589 2002 2001 2002 2003 45.0% 44.2% 44.4% Gross Profit Margin  Investing in Our Business: Advertising Spending % of Net Sales Millions • Increased net sales  which leveraged our fixed costs; • A favorable mix shift toward our more profitable products  thanks to the  Volume to Value focus; • Synergies related to the Keebler acquisition  which reached their targeted level; • Ongoing productivity improvements  which we have relentlessly pursued and achieved over the past several years.