John Bryant, Chief Financial Officer & Chief Operating...

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John Bryant, Chief Financial Officer & Chief Operating OfficerKellogg Company – 11/12/09

Financial OutlookFinancial Outlook

Forward-Looking StatementsForward-Looking Statements

This presentation contains, or incorporates by reference, “forward-looking statements” with projections concerning, among other things, the Company’s strategy, and the Company’s sales, earnings, margin, operating profit, costs and expenditures, interest expense, tax rate, capital expenditure, dividends, cash flow, debt reduction, share repurchases, costs, brand building, ROIC, working capital, growth, new products, innovation, cost reduction projects, and competitive pressures. Forward-looking statements include predictions of future results or activities and may contain the words “expects,” “believes,” “should,” “will,” “will deliver,”“anticipates,” “projects,” “estimates,” or words or phrases of similar meaning.

The Company’s actual results or activities may differ materially from these predictions. The Company’s future results could also be affected by a variety of other factors, including competitive conditions and their impact; the effectiveness of pricing, advertising, and promotional spending programs; the success of productivity improvements and business transitions; the success of innovation and new product introductions; the recoverability of carrying amounts of goodwill and other intangibles; the availability of and interest rates on short-term financing; changes in consumer behavior and preferences; 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, and other general and administrative costs; U.S. and foreign economic conditions including interest rates, taxes and tariffs, and currency rate translations or unavailability; legal and regulatory factors; the ultimate impact of product recalls; the underlying price and volatility of the Company’s common stock and the impact of equity-based employee awards; business disruption or other losses from terrorist acts or political unrest; and other items.

Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.

This presentation contains, or incorporates by reference, “forward-looking statements” with projections concerning, among other things, the Company’s strategy, and the Company’s sales, earnings, margin, operating profit, costs and expenditures, interest expense, tax rate, capital expenditure, dividends, cash flow, debt reduction, share repurchases, costs, brand building, ROIC, working capital, growth, new products, innovation, cost reduction projects, and competitive pressures. Forward-looking statements include predictions of future results or activities and may contain the words “expects,” “believes,” “should,” “will,” “will deliver,”“anticipates,” “projects,” “estimates,” or words or phrases of similar meaning.

The Company’s actual results or activities may differ materially from these predictions. The Company’s future results could also be affected by a variety of other factors, including competitive conditions and their impact; the effectiveness of pricing, advertising, and promotional spending programs; the success of productivity improvements and business transitions; the success of innovation and new product introductions; the recoverability of carrying amounts of goodwill and other intangibles; the availability of and interest rates on short-term financing; changes in consumer behavior and preferences; 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, and other general and administrative costs; U.S. and foreign economic conditions including interest rates, taxes and tariffs, and currency rate translations or unavailability; legal and regulatory factors; the ultimate impact of product recalls; the underlying price and volatility of the Company’s common stock and the impact of equity-based employee awards; business disruption or other losses from terrorist acts or political unrest; and other items.

Forward-looking statements speak only as of the date they were made, and the Company undertakes no obligation to publicly update them.

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Financial OverviewFinancial Overview

• Financial Model

• 2009 / 2010 Guidance

• Analyst Financial Questions

• Financial Model

• 2009 / 2010 Guidance


Sustainable Growth 2003 – 2008Sustainable Growth 2003 – 2008

Grow Gross Profit Dollars 2003–2008: CAGR = 4%

Increase Advertising2003–2008:CAGR = 8%

Price / Mix / Trade2003–2008:

CAGR = 3.6%

Grow Internal Net Sales(a)

2003–2008:CAGR = 5.5%

Drive Innovation2003–2008: CAGR = 14%

SUSTAINABLEGROWTH

(a) Internal net sales excludes the impact of foreign currency translation and if applicable, acquisitions, dispositions and shipping day differences.

(b) CAGR = internal growth

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8%7%

10%

11%

9%

10-12% 10-12%

2004 2005 2006 2007 2008 2009 LE 2010 LE

8%7%

10%

11%

9%

10-12% 10-12%

2004 2005 2006 2007 2008 2009 LE 2010 LE

Strong Currency-Neutral EPS Growth (a)Strong Currency-Neutral EPS Growth (a)

Reported EPSGrowth

12% 10% 10% 8%11% (b)

Stock Option Impact

Stock Option Impact

(a) Currency-neutral earnings per share growth excludes the impact of translational foreign exchange.(b) Before impact of stock option expense.(c) Based on FX spot rates 10/26/09.

(b)

3-5% (c) 13-15% (c)

Grow Net Earnings2003-2008: Net Earnings

increased $427M CAGR = 8.1%

Grow Net Earnings2003-2008: Net Earnings

increased $427M CAGR = 8.1%

Reduce CoreWorking Capital

2008: 6.2% of sales rolling 12 months

260 bps reduction vs. 2002

Reduce CoreWorking Capital

2008: 6.2% of sales rolling 12 months

260 bps reduction vs. 2002

Prioritize Capital Expenditure3 – 4% of sales

Prioritize Capital Expenditure3 – 4% of sales

Improve Financial Flexibility2003 – 2008:

Total debt flatShare repurchases: $3.0B;

Dividends paid: $2.7B;Voluntary pension

contribution: $920M

Improve Financial Flexibility2003 – 2008:

Total debt flatShare repurchases: $3.0B;

Dividends paid: $2.7B;Voluntary pension

contribution: $920M

Increase Return on Invested Capital

2008: 17.8%; 380 bps increase vs. 2003

Increase Return on Invested Capital

2008: 17.8%; 380 bps increase vs. 2003

Manage for Cash2003 – 2008Manage for Cash2003 – 2008

MANAGEFOR CASH

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6.7%

10.5% 11.0%12.6%

13.2% 13.3% 13.9%15.5%

22.4%

Kellogg Company A Company B Company C Company D Company E Company F Company G Company H

Working CapitalWorking Capital

Average (Ex. Kellogg): 14%

% of Net Sales, Fiscal 2008% of Net Sales, Fiscal 2008

For peer comparison, working capital includes total receivables versus trade receivables.

Based on last 12 months’ average trade receivables and inventory, less 12 months’average trade payables, divided by last 12 months’ sales.

7.0%

9.9%

8.8%

8.2%

7.3%6.8% 6.8%

6.2%

2001 2002 2003 2004 2005 2006 2007 2008

Core Working Capital ImprovementsCore Working Capital Improvements% of Net Sales% of Net Sales

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Return On Invested Capital (a)Return On Invested Capital (a)

17.8%16.6%

15.4%15.1%14.3%14.0%12.4%

2002 2003 2004 2005 2006 2007 2008 2009 LE

17.8%16.6%

15.4%15.1%14.3%14.0%12.4%

2002 2003 2004 2005 2006 2007 2008 2009 LE

(a) Return On Invested Capital = (Operating Profit + Amortization - Tax) / (Shareholder Equity + Notes Payable + Long Term Debt + Deferred Taxes + Accumulated Amortization)

≈ 19%≈ 19%


• Financial Model

• 2009 / 2010 Guidance


• Financial Model

• 2009 / 2010 Guidance


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2009 Guidance: Re-Affirm 2009 Guidance2009 Guidance: Re-Affirm 2009 Guidance

Internal Net Sales (a)

Internal Operating Profit (a)

Earnings Per Share (b)

+3 – 4%• Greater than our long-term target

• Tax rate of between 28 – 29% • Increased interest expense outlook

+8 – 10%

+10 – 12%Currency-neutral basis

• On target to achieve $1 billion in annual cost savings by year-end 2011• Up-front cost investments approximately 26 cents per share• Advertising growth above sales growth

OP and EPSguidance

above long-term

targets

Full-Year 2009

(a) Internal net sales and operating profit growth exclude the impact of foreign currency translation and if applicable, acquisitions, dispositions and shipping day differences.

(b) Currency-neutral earnings per share growth excludes the impact of translational foreign exchange.

2010 Guidance:Re-Affirm 2010 Guidance 2010 Guidance:Re-Affirm 2010 Guidance

Internal Net Sales (a)

Internal Operating Profit (a)

Earnings Per Share (b)

+2 – 3%• In line with long-term target

• Tax rate of approximately 30 – 31% • Greater than long-term target

Full-Year 2010

(a) Internal net sales and operating profit growth exclude the impact of foreign currency translation and if applicable, acquisitions, dispositions and shipping day differences.

(b) Currency-neutral earnings per share growth excludes the impact of translational foreign exchange.

+High SD

+10 – 12%Currency-neutral basis

• On target to achieve $1 billion in annual cost savings by year-end 2011• Up-front cost investments of 14 –16 cents per share• Advertising growth broadly in line with sales growth

Sustainable

Dependable

Performance

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• Financial Model

• 2009 / 2010 Guidance


• Financial Model

• 2009 / 2010 Guidance


Analyst Financial QuestionsAnalyst Financial Questions

• Components of COGS

• Up-front cost visibility

• $1 billion cost-savings goal

• Gross margin progress

• Uses of cash

• Components of COGS

• Up-front cost visibility

• $1 billion cost-savings goal

• Gross margin progress

• Uses of cash

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Components of COGSComponents of COGS

Factory≈ 35%Factory≈ 35%

Energy &Distribution≈ 15%

Energy &Distribution≈ 15%

Food ≈ 35%Food ≈ 35%

Packaging≈ 15%Packaging≈ 15%

2009 Estimate

Components of COGS: FoodComponents of COGS: Food

5%13%

9%

11%

11%

9%16%

26%

5%13%

9%

11%

11%

9%16%

26%All otherAll other

WheatCorn

Sugar

Rice

Oils

Fruit & NutsDairy & Eggs2009 Estimate

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Up-Front CostsInvestment in Cost-Reduction InitiativesUp-Front CostsInvestment in Cost-Reduction Initiatives

$0.14 - $0.16

$0.18

$0.12

$0.18$0.15 $0.14

$0.26

$0.14

2003 2004 2005 2006 2007 2008 2009 LE 2010 LE

EPS Impact

Cost Savings

Cost Savings = Run Rate Impact

2009 2011

SG&A

COGS

$1 Billion Challenge – Savings Visibility$1 Billion Challenge – Savings Visibility

Potential upside to the $1 billion …Potential upside to the $1 billion …

≈ $400

$1+ Billion

Annual Run Rate

Millions

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$1 Billion Cost-Savings Goal$1 Billion Cost-Savings Goal

DSD EfficiencyDSD Efficiency

Sales Force RealignmentSales Force Realignment

Indirect ProcurementIndirect Procurement

SAP OptimizationSAP Optimization

SG&A Key ProjectsSG&A Key Projects

Zero Overhead Growth – ZOG

Before Reinvestment

Zero Overhead Growth – ZOG

Before Reinvestment

Gross Margin: Solid Gross Profit Margin vs. the Peer GroupGross Margin: Solid Gross Profit Margin vs. the Peer Group

53%49%

42%40%

37% 36% 35%34% 33%

22%

PepsiCo Nestle Kellogg Campbell Sara Lee Gen Mills Heinz Hershey Kraft ConAgra

53%49%

42%40%

37% 36% 35%34% 33%

22%

PepsiCo Nestle Kellogg Campbell Sara Lee Gen Mills Heinz Hershey Kraft ConAgra

Based on latest fiscal year-end results.

Average (ex. K): 38%

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2008 Gross Profit Margin

Pricing / MixSavingsCost PressuresUpfront CostsOther

2009 Latest Estimate

Change

2008 Gross Profit Margin

Pricing / MixSavingsCost PressuresUpfront CostsOther

2009 Latest Estimate

Change

Gross Margin PerformanceGross Margin Performance

Projecting a strong 100bp improvement in 2009Projecting a strong 100bp improvement in 2009

42%

140bp240bp

(180)bp(40)bp(60)bp

≈ 43%

100bp

42%

140bp240bp

(180)bp(40)bp(60)bp

≈ 43%

100bp

• Maintain liquidity

• Manage retirement plan

• Bolt-on acquisitions

• Return cash to shareholders

• Maintain liquidity

• Manage retirement plan

• Bolt-on acquisitions

• Return cash to shareholders

Uses of CashUses of Cash

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$4,701$5,201

$4,634$4,679$5,023

$5,983$5,616

$4,505

2001 2002 2003 2004 2005 2006 2007 2008

$4,701$5,201

$4,634$4,679$5,023

$5,983$5,616

$4,505

2001 2002 2003 2004 2005 2006 2007 2008

Uses of Cash: LiquidityUses of Cash: Liquidity

MillionsNet Debt LevelNet Debt Level

Fiscal year-end data.

Uses of Cash: Retirement PlansUses of Cash: Retirement Plans

• S&P 500 declined 37% during 2008- YTD 9/30 S&P +19%

• Philosophy to fund ahead of requirements to maximize financial flexibility

• Discretionary funding of $450 million, $300 million after tax in 2008 / 2009

• Current funding estimate approximately 90%

• S&P 500 declined 37% during 2008- YTD 9/30 S&P +19%

• Philosophy to fund ahead of requirements to maximize financial flexibility

• Discretionary funding of $450 million, $300 million after tax in 2008 / 2009

• Current funding estimate approximately 90%

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Uses of Cash: M&A StrategyUses of Cash: M&A Strategy

NewBrands

NewBrands

NewGeographies

NewGeographies

ManufacturingCapacity

ManufacturingCapacity

What we are not doing - New category acquisitions- Transformational acquisitions

What we are not doing - New category acquisitions- Transformational acquisitions

Bolt-on AcquisitionsBolt-on Acquisitions

$650$664 $650 $650

$475$450$435 $495

2005 2006 2007 2008

$650$664 $650 $650

$475$450$435 $495

2005 2006 2007 2008

$1,099 $1,100 $1,125 $1,145

Millions

Uses of Cash: Return Cash to ShareholdersUses of Cash: Return Cash to Shareholders

Share RepurchasesDividends

2009 – 2010

+$1.0B Dividends

+$1.3B ShareRepurchases

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SummarySummary

• Our financial model is working

• We have excellent visibility

• Our financial model is working

• We have excellent visibility

John Bryant, Chief Financial Officer & Chief Operating...

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