Fitch affirms Kellogg ratings

by Eric Schroeder
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CHICAGO — Fitch Ratings has affirmed several of Battle Creek, Mich.-based Kellogg Co.’s ratings at “BBB+,” including the company’s long-term issuer default rating, senior unsecured debt and bank credit facility. BBB ratings indicate that expectations of default risk are currently low and the capacity for payment of financial commitments is considered adequate.

In issuing its ratings outlook, Fitch pointed to Kellogg’s strong brands, particularly in developed markets, as a key ratings driver.

“Kellogg’s ratings incorporate its leading market shares, strong brand equities in breakfast foods and snacks, as well as ample liquidity,” Fitch said. “The company has good geographic diversification, with nearly 40% of its sales generated outside the United States. However, with 85% of the company's sales in North America and Europe, Kellogg’s growth has been hampered by significant exposure to slow growing mature markets and modest exposure to faster growing emerging markets. U.S. Morning Foods and U.S. Snacks were particularly weak in 2013, generating low single-digit top-line declines. Improving these businesses, including Kellogg master brand category building programs, is a key near-term priority.

Fitch also commented on Kellogg’s integration of Pringles, which is nearly complete. The May 2012 acquisition has provided Kellogg with a stronger snacks platform for product and geographic expansion, but brought lower margins, Fitch said.

“Pringles provided high single-digit internal net sales growth in 2013, but Fitch believes longer-term growth from Pringles may not be enough to prevent the need for additional growth acquisitions,” the ratings agency noted.

Another ratings driver cited by Fitch was the “substantial cost” of Project K, a global four-year efficiency and effectiveness program designed to improve Kellogg’s long-term growth prospects and cost structure. Kellogg expects total pretax program charges of $1.2 billion to $1.4 billion plus about $300 million incremental capital expenditures. The company estimates total cash costs for the program at $1.2 billion to $1.4 billion.

“Kellogg has estimated Project K pretax savings of $425 million to $475 million annually by 2018, with more than half of the cost savings coming from the supply chain,” Fitch said. “Kellogg expects Project K costs of $300 million to $350 million in 2014, along with modest cost savings of $50 million to $60 million which the company intends to invest back in the business.”

Kellogg generated significant cash flow from operations less capital expenditures and dividends (F.C.F.), which averaged approximately $500 million annually during the past three years. And the company provided cash flow guidance for cash flow from operations less capital expenditures of $1 billion to $1.1 billion in 2014. As a result, Fitch estimates this will translate into approximately $400 million of F.C.F., including Project K cash cost and heightened capital expenditures at 4% to 5% of sales. F.C.F. also will be constrained by these factors in 2015.
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