Kellogg Company
September 4, 2014 Forward‐Looking Statement
This presentation contains, or incorporates by reference, “forward‐looking statements” with projections concerning, among other things, the Company’s global growth and efficiency program (Project K), the integration of the Pringles® business, 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, charges, rates of return, brand building, ROIC, working capital, growth, new products, innovation, cost reduction projects, workforce reductions, savings, and competitive pressures. Forward‐looking statements include predictions of future results or activities and may contain the words “expects,” “believes,” “should,” “will,” “anticipates,” “projects,” “estimates,” “implies,” “can,” “by year‐four,” 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 factors, including the ability to implement Project K as planned, whether the expected amount of costs associated with Project K will differ from forecasts, whether the Company will be able to realize the anticipated benefits from Project K in the amounts and times expected, the ability to realize the anticipated benefits and synergies from the Pringles acquisition in the amounts and at the times expected, the impact of competitive conditions; the effectiveness of pricing, advertising, and promotional programs; the success of innovation, renovation and new product introductions; the recoverability of the carrying value of goodwill and other intangibles; the success of productivity improvements and business transitions; commodity and energy prices; labor costs; disruptions or inefficiencies in supply chain; the availability of and interest rates on short‐term and long‐term financing; 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; changes in consumer behavior and preferences; the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability; legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations; the ultimate impact of product recalls; business disruption or other losses from war, 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 update them publicly.
Non‐GAAP Financial Measures. This presentation includes non‐GAAP financial measures. Please refer to the Appendices for a reconciliation of these non‐GAAP financial measures to the most directly comparable GAAP financial measures. Management believes that the use of such non‐GAAP measures assists investors in understanding the underlying operating performance of the company and its segments.
2
Page 1 of 26
Kellogg Company
September 4, 2014 Agenda
• Strategy & Overview
John Bryant
• Restage of U.S. Cereal
Paul Norman
• Financial Review
Ron Dissinger
3
Kellogg Today
4
Page 2 of 26
Kellogg Company
September 4, 2014 Kellogg Today
John Bryant
Chairman &
Chief Executive Officer
Ron Dissinger
Chief Financial Officer
Alistair Hirst
Senior Vice President,
Global Supply Chain
Paul Norman
Senior Vice President,
Chief Growth Officer
Interim President,
Morning Foods
Amit Banati
President,
Asia Pacific
Chris Hood
President,
Europe
Maria Fernanda
Mejia
President,
Latin America
Wendy Davidson
President,
U.S. Specialty Channels
David Denholm
CEO
The Kashi Company
Brian Huff
President,
U.S. Snacks
Andrew Loucks
President,
U.S. Frozen Foods
Carol Stewart
President,
Canada
Kim Miller
Vice President,
Global Snacks Category
Doug VanDeVelde
Senior Vice President,
Global Cereal Category
5
Strategy for Growth
• Win in Breakfast
• Become a Global Snacks Leader
• Grow Frozen Foods
• Win in Emerging Markets
6
Page 3 of 26
Kellogg Company
September 4, 2014 Sustainable Growth
Grow Internal Net Sales
Improve Price/Mix
Drive Innovation
Sustainable
Growth
Grow Underlying Gross Profit Dollars/Margin
Overhead Discipline
Grow Brand Building
7
Path to Sustainable Growth
• Reinvestment from Project K
• Path to Purchase
• Desire – Brand building
• Decide – In‐store execution
• Delight – Innovation/renovation
• Emerging markets
8
Page 4 of 26
Kellogg Company
September 4, 2014 Key Issues
1. Will the cereal business return to growth?
2. Do we need to invest the savings from Project K?
• Why not rebase?
• Why not drop savings to the bottom line?
3. Macro/industry concerns
4. Can/when will the company return to growth?
9
1. Sustainable Growth of Cereal
Kellogg U.S. Cereal Net Sales
10
Page 5 of 26
Kellogg Company
September 4, 2014 1. Restage Cereal – The Path to Purchase
desire
decide
delight
Great ideas and innovation to get on the list
Flawless execution to
get in the cart
Great food to get in the heart
11
2. Project K – Fuel for Future Growth
• Four‐year program
• Savings of $425 million to $475 million by year‐four
• Investment in brands, execution, and key capabilities
12
Page 6 of 26
Kellogg Company
September 4, 2014 2. Project K – Fuel for Future Growth
Advertising, as a % of sales*
*as of the latest 10‐k filing
13
2. Project K – Fuel for Future Growth
Category‐wide Initiatives
14
Page 7 of 26
Kellogg Company
September 4, 2014 2. Project K – Fuel for Future Growth
In‐Store Effectiveness
15
2. Project K – Fuel for Future Growth
Key Capabilities
• Emerging Markets
• Digital Marketing
• Appealing to Hispanic Consumers
16
Page 8 of 26
Kellogg Company
September 4, 2014 3. Addressing the Changing Environment
• Increased competition at breakfast
Address desire for protein, convenience, etc.
• Changing perception of health and wellness
Kashi, ancient grains, simplicity, etc.
• Changing definition of weight management
Special K as part of a healthy lifestyle
• Changing expectations of packaged food
Social responsibility, values, social media
17
4. Returning to Sustainable Growth
Top‐line growth is required to return to model
• Project K
Grow Internal Net Sales
Low single‐digit growth in developed regions and categories is sufficient
Improve Price/ Mix
• Brand building/Innovation
• In‐Store Execution
• Key Capabilities
Grow Underlying Gross Profit Dollars/Margin
Sustainable
Growth
Drive Innovation
Overhead Discipline
Grow Brand Building
18
Page 9 of 26
Kellogg Company
September 4, 2014 Summary
Confident… but no quick fix
19
Global Growth / Morning Foods
20
Page 10 of 26
Kellogg Company
September 4, 2014 Breakfast is Just as Important as Ever…
• ~70% say breakfast is most important meal of the day
• ~20% are eating breakfast more often
• ~75% of cereal is eaten at home
• ~40% are making breakfast a higher priority
• ~30% of breakfast meals include ready‐to‐eat cereal
Source: NPD NET Study, NPD Eating Patterns in America Study
21
… but Changing Habits are Affecting RTEC
Changing views of “healthy” foods
• Move from emphasis on absence of negatives (low fat, low calorie, low carb) to the presence of positives (fresh, unprocessed)
Changing consumer breakfast habits
More options to choose from
• Top needs at breakfast are taste, • Timeframe of breakfast is ease / convenience, satiety; expanding
followed by health
• Almost 2 eating occasions per • 4+ items being consumed per morning
• 16% eat breakfast out of the home; occasion
portability / accessibility is an opportunity
Source: Project Prime Breakfast Landscape Study
22
Page 11 of 26
Kellogg Company
September 4, 2014 To Grow Cereal Again, We Must:
1.
Meet changing needs in Health
& Wellness at breakfast (Special K, Kashi)
2.
Continue to respond to need for
more convenience
3.
Engage more with consumers regarding
what matters most to them
4.
Execute with greater impact to
drive breakthrough throughout the
Path to Purchase
23
1. Health and Wellness
Meeting Changing Needs
Together these brands account for 50% of year‐on‐year consumption declines
Source: A.C. Nielsen, YTD through June 2014
24
Page 12 of 26
Kellogg Company
September 4, 2014 Changing Views of Weight Management
From DIET…
…To WEIGHT WELLNESS
25
Reinventing All Aspects of the Brand in 2015
Communication
Innovation
CORE BENEFIT:
Packaging
Delicious foods that nourish
Promotion
26
Page 13 of 26
Kellogg Company
September 4, 2014 Renovation and Innovation
Increasing Relevancy
RTEC Renovation
RTEC Innovation
Hot and Granola
27
New Impactful, Food‐Focused Packaging
28
Page 14 of 26
Kellogg Company
September 4, 2014 Kashi/Bear Naked – Leading Brand Presence
#1 IN NATURAL & ORGANIC by a wide margin
37% category share
KEY ENTRY POINT 28% enter through into Natural & Organic
Kashi/BN
LEADING household penetration
~12% HH penetration
NATURAL & ORGANIC granola is fastest growing cereal category
Y‐O‐Y growth
BEAR NAKED #1 share
~15% share
Retailers ADDING SPACE
9% growth in dedicated sets
22% Source: A.C. Nielsen Homescan, POS, 52‐weeks ended 9 August, 2014
29
Kashi to Lead More…
Complete GoLean
Non‐GMO Renovation
Convert Heart to Heart to USDA organic
Progressive Nutrition
30
Page 15 of 26
Kellogg Company
September 4, 2014 Bear Naked Has Space to Grow…
Drive Granola Segment Growth Via Innovation
Two NEW Blends
Expand the Presence of Bars
Great Food… DISTRIBUTION Opportunity
31
2. Continue to Meet the Need for Convenience
High Growth, Highly Incremental to Base RTEC
Significant Opportunities for Channel Expansion
Meeting important consumer needs; incremental to our core RTEC business, and they are growing;
expands our accessibility, both new in‐store locations and new channels
32
Page 16 of 26
Kellogg Company
September 4, 2014 3. Parent‐Brand Events
• 1 in 5 children in the U.S. don’t get breakfast and go to school hungry
• With every purchase of Kellogg cereals, we will provide breakfast to a child in need
• Globally‐executed idea
33
Run Commercial
Global desks commercial – U.K. version
34
Page 17 of 26
Kellogg Company
September 4, 2014 3. Two‐Way Engagement – Digital
• Sustained, two‐way dialogue
• Engage consumers regarding what matters most to them…
• …including on nutrition,
sustainability and community
• Will support parent‐brand
activities
35
4. Executing With Greater Impact
Fun in the Box is Back
• Bigger events executed
through to the store
• Repertoire / fun in the
box
• Sales fundamentals
• Feet on the Street
• Perfect Shelf
Fun in the Box is Back!
36
Page 18 of 26
Kellogg Company
September 4, 2014 To Return to Growth…
•
Must meet changing needs in Health & Wellness…
•
Continue to drive more convenience…
•
Engage more with consumers regarding what matters most to them…
•
Return to big ideas/events executed
to drive breakthrough
37
38
Page 19 of 26
Kellogg Company
September 4, 2014 Agenda
• Project K
• Operating Principles
• Cash Flow and Uses of Cash
39
Project K
On Track to Meet Operational and Financial Goals
• Create global category team and regional hubs
• Build capabilities and drive functional efficiencies
• Build the global supply chain of the future
• Implement a Global Business Services model
40
Page 20 of 26
Kellogg Company
September 4, 2014 Project K – Financial Outlook*
Total pre‐tax charges $1,200 – $1,400 million
Non‐cash charges (included above)
($275 – $325 million)
Incremental capital expenditure in 2014 and 2015
~$300 million total
Total cash investment
$1,175 – $1,425 million
Cash savings (annual run‐rate by 2018)
$425 – $475 million
* Expectations for the financial aspects of the project. 41
Project K – Timing of Investments and Savings
Investments and Savings (not to scale)
$425‐$475 million
Savings (cumulative)
Investments (annual)
2013
2014
2015
2016
2017
2018
42
Page 21 of 26
Kellogg Company
September 4, 2014 Project K – Supply Chain, Progress
• Announced capacity reductions in developed cereal and snack businesses: U.S., Canada, Europe, and Australia
• Investing for growth in emerging markets
• Two‐thirds of annual savings to come from Supply Chain
• Savings expected to drive ≈150 bps in gross
margin over four years
43
Project K – Global Business Services, Progress
• Implement end‐to‐end transaction processing to improve efficiency and effectiveness of back‐office services
• Announced regional service centers in North America, Europe, and Asia Pacific, and a global center in India
• Managing transition over next several years to mitigate disruption to service
• OVD/Sales expected to improve over four years as a result of Project K
44
Page 22 of 26
Kellogg Company
September 4, 2014 Operating Principles
Grow Internal(a)
Net Sales
LT Outlook: Volume, price, mix
Grow Underlying(b)
Gross Profit Dollars/Margin
Improve Price/Mix
LT Outlook: Improvements to mitigate inflation
Sustainable
Growth
Drive Innovation
LT Outlook: Grow in line with sales or slightly above
Overhead Discipline
LT Outlook: Strengthen long‐term pipeline; incremental and sustainable
LT Outlook: Minimal growth; invest in capability
Grow Brand Building
LT Outlook: In‐line with or faster than sales growth; increased effectiveness
(a) Internal metrics exclude the impact of foreign currency translation and if applicable, acquisitions, dispositions, Project K, mark‐to‐market, and differences in the number of shipping days.
(b) Excludes the impact of any 53rd week, mark‐to‐market 45
adjustments, and costs related to Project K.
Operating Principles
Grow Comparable(a)
Net Earnings
LT Outlook: Mid
single‐digit growth
Increase Underlying(b) Return on Invested Capital
LT Outlook: Improve over time
Reduce Core Working Capital
LT Outlook: Continuous improvement
Manage For Cash
Prioritize Capital
Expenditure
LT Outlook: 3 to 4% of sales
Maintain Financial Flexibility/ Return Cash to Share Owners
(a) Excludes items that affect comparability.
(b) Excludes the impact of any 53rd week, mark‐to‐market adjustments, and costs related to Project K.
46
Page 23 of 26
Kellogg Company
September 4, 2014 Reaffirming Guidance – Fiscal Year 2014
Internal Net Sales(a)
‐1% to ‐2%
Underlying Internal Operating Profit(a)
‐1% to ‐3%
EPS, including 53rd week(b)
Operating Cash Flow $3.91 – $3.99
Low end of $1b – $1.1b
(after capital expenditure)
(a) 2014 guidance excludes the impact of acquisitions, dispositions, currency translation, the 53rd week, mark‐to‐market adjustments, integration costs and costs related to Project K.
(b) 2014 guidance excludes the impact of mark‐to‐market adjustments, integration costs, costs related to Project K, a possible devaluation of the Venezuelan Bolivar, and other items
impacting comparability; it includes the impact of currency translation, and the 53rd week.
47
Uses of Cash
• Returning excess cash flow to shareowners
• Selected strategic acquisitions
48
Page 24 of 26
Kellogg Company
September 4, 2014 Uses of Cash – Strategic Acquisitions
• Natural and/or Organic Foods
• Emerging Markets
• International Snacks
49
Uses of Cash – Returning Cash to Shareowners
• Long history of returning cash to shareowners
Dividends/ Repurchases
• Returned nearly $7 billion during last six years
• Dividend: 40‐50% payout ratio
• $1.5 billion share authorization through the end of 2015
50
Page 25 of 26
Kellogg Company
September 4, 2014 Summary
• Project K
• Brand building
• Innovation and renovation
• In‐store execution
• Strong levels of cash flow
• Confidence in our plans… but improvement will take some time
51
Page 26 of 26