Kellogg Companyinvestor.kelloggs.com/~/media/Files/K/Kellogg-IR/reports-and... · Kellogg Company February 8, 2018 Page 1 of 11 Kellogg Company FOURTH QUARTER 2017 ... (including

Kellogg Company February 8, 2018

Page 1 of 11

Kellogg CompanyFOURTH QUARTER 2017FINANCIAL RESULTSFebruary 8, 2018

Q4 Kellogg Company Earnings February 8, 2018

Forward-Looking Statements

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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 acquired businesses, the Company’s strategy, zero-based budgeting, 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,” 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 (including the exit from its Direct Story Delivery system) 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 benefits from our implementation of a more formal Revenue Growth Management discipline, the ability to realize the anticipated benefits and synergies from the acquisitions 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.

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.


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Recasts & Terminology Changes

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• Revenue Recognition – Accounting Change, Recasting 2016-2017 for Comparability

• Pension/Post-Retirement Expense – Accounting Change, Recasting 2016-2017 for Comparability

• Transfer of SKUs – Shift of certain SKUs out of U.S. Morning Foods and into U.S. Snacks, Recasting 2017 for Comparability

• Non-GAAP Measures – Aligning to Internal Management metrics and Industry Practices


2017 – On Guidance, Good Progress

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Note: All referenced metrics are on a currency-neutral comparable basis; Cash Flow is defined as cash from operations less capital expenditure.

Delivered on Financial Outlook

• Delivered 2017 guidance for Net Sales, Operating Profit, EPS, and Cash Flow

• Project K and ZBB drove substantial margin expansion

• Improved net sales performance in 2H

• Boosted brand-building investment in Q4

Progressed on Strategic Initiatives

• DSD transition in U.S. Snacks

• Acquisition of on-trend brands/food

• Global expansion of Pringles

• Stabilization of core developed international cereal markets

• Expansion in emerging markets

• Expansion in eCommerce


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Q4 Kellogg Company Earnings February 8, 2018 5

2018 Plan

• Complete Project K initiatives – realize savings, plan next productivity projects

• Post-DSD U.S. Snacks – operate in new go-to-market, re-set P&L, boost reinvestment

• Increase Brand Investment – higher investment, behind better growth ideas

• Integrate and growing acquired businesses – RXBAR, Parati

• Invest to grow in our joint ventures – expand in Africa and China

…and still deliver mid-single-digit Operating Profit growth and achieve Margin Expansion target (excluding accounting change)

…and still deliver mid-single-digit Operating Profit growth and achieve Margin Expansion target (excluding accounting change)

* Please refer to appendices for reconciliation of non-GAAP measures to the most directly comparable GAAP measure, as well as 2017 recast information for accounting-rules changes.

.

*


Reported +585.9% +39.5%

Currency-Neutral Comparable* +4.1% +7.6%

Financial Results – 2017 Summary

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* Please refer to appendices for reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

Change Versus Prior Year

Net Sales

OperatingProfit

EarningsPerShare

Reported +920.0% +84.7%

Currency-Neutral Comparable* +3.3% +9.1%

Reported +3.6% (0.7)%

Currency-Neutral Comparable* (1.5)% (2.6)%

Q4 Full Year

Within Guidance

Within Guidance

Within Guidance


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Net Sales – Underlying Improvement

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Year-over-year, % change


Net Sales Growth – Currency-Neutral Comparable Basis *

Strong 2H Improvement:

DSD Transformation (list-price adjustment, SKU rationalization)

Pringles’ return to growth (Europe 1H disruption)

Frozen Foods’ acceleration (Eggo, Morningstar Farms)

Stabilized international cereal markets (U.K., Australia, Canada)

Accelerated emerging markets growth (Asia, Middle East)

1Q17 2Q17 3Q17 4Q17

Improved Special K performance (cereal sales and consumption)


Margin Expansion Initiatives – On Track

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• Network Restructuring

• Global Business Services

• Organizational Design

• Go-to-Market Model

• Discretionary Spending

• Process and Tools

• Policies

• Budgeting from Zero

• Revenue Growth Management

• New Marketing Model

Project K Zero-Based Budgeting Return on Investment

Savings $600-700 million run-rate in 2019

Savings $450-500 million run-rate in 2018

Higher ROI on commercial investment

$480 million through 2017 $400 million through 2017 Ongoing


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Profit Margins – Continued Expansion

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Fourth Quarter and Full Year 2017% of Net Sales, Comparable Basis

Gross Profit Margin Operating Profit Margin


+150basis points

+80basis points

Increased, excl. DSD

re-set

Increased, excl. DSD

re-set


Cash Flow – Delivered On Target

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Cash Flow *

* Cash Flow defined as cash from operating activities, less capital expenditure. Please refer to appendices for reconciliation of non-GAAP measures to the most directly comparable GAAP measure.

Core Working Capital **

** Expressed as % of net sales, “Core Working Capital” is an internal Kellogg metric defined as last 12 months’ average trade receivables and inventory, less 12 months’ average trade payables, divided by last 12 months’ net sales.

$1,121 $1,146

$ in Millions

$1,138

3.0%4.0%6.2%


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2018 Financial Guidance – Net Sales

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~ (1)-0% Underlying Business

~ (1)% DSD Transition

1-2% Acquisition – RXBAR

~ FlatCurrency Neutral

• 1H carryover of list-price adjustment and SKU rationalization

• Improvement from 2017’s (1.6)% x-DSD growth

• 10 months of acquired sales, plus strong double-digit organic growth

Reported Net Sales Growth, Currency Neutral, Vs. Recast 2017*



2018 Financial Guidance – Operating Profit

12* Please refer to appendices for reconciliation of non-GAAP measures to the most directly comparable GAAP measure, as well as 2017 recast information for accounting-rules changes.

• Savings Project K and ZBB

• Reinvestment Brand Building, capabilities (overhead), food/packaging (COGS)

• Acquisitions RXBAR

Adjusted Operating Profit: +4-6%, currency neutralAchieves 18% OP Margin excluding pending accounting changes

Adjusted Operating Profit: +4-6%, currency neutralAchieves 18% OP Margin excluding pending accounting changes

Adjusted Operating Profit Growth, Currency-Neutral, Vs. Recast 2017 *


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2018 Financial Guidance – Earnings Per Share

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Adjusted EPS Growth, Currency-Neutral, Vs. Recast 2017 *


Net Sales ~Flat

Adjusted Operating Profit +4-6%

Currency Neutral

Currency Neutral

*

Reduces Effective Tax Rate

Pension changes• Reduces

Other Income

Deleverage capital structure• Moderates increase in

Interest Expense

U.S. Tax Reform:U.S. Tax Reform:

Adjusted EPS +9-11%Currency Neutral

*

Q4 Kellogg Company Earnings February 8, 2018 14

(a) 2018 guidance for Currency Neutral Net Sales growth excludes the impact of foreign currency translation. Organic growth also excludes acquisitions, divestitures, and changes in shipping days.

(b) 2018 guidance for adjusted Earnings Per Share excludes the impact of mark-to-market adjustments and costs related to Project K. Currency neutral also excludes the impact of foreign currency translation.

Adjusted EPS(b)

Currency Neutral

Adjusted Operating Profit(b)

Currency Neutral

Net Sales(a)

Currency Neutral

~ Flat

+4-6%

+9-11%

• Down (1)-(2)% on Organic basis• Organic decline comprised of DSD exit ~(1)%, with underlying

business improving to (0)-(1)%• Includes roughly 1-2% of acquisition-related sales (RXBAR)

• Achieves 3-year OP margin target (excl. pending accounting changes)• Productivity savings, partially reinvested in Brand Building• Includes impact of acquisitions +1-2%

• Higher interest expense due to acquisition• Tax rate 20-21%, due to Tax Reform• Modest decrease in average shares outstanding


Cash Flow $1.2-1.3 billion• Underlying growth plus Tax Reform benefit• Includes remaining cash outlays for Project K• Includes capital expenditure of ~0.5 billion

2018 Financial Guidance – Summary *Growth vs. Recast 2017*


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U.S. Snacks – Performance & Priorities

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• Resumed promo activity post-DSD

• Consumption growth for key supported brands

• Double-digit investment in Brand Building

• DSD overhead savings boosted OP

Currency-Neutral Comparable BasisWhat to Watch For in 2018:• Expanded brand support• Steady consumption improvement• Re-shaped P&L post-DSD

Q4 Highlights:

Q4 2017

Net Sales * (6)% (4)%

Op. Profit * +18% +6%

OP Margin * +360 bp +130 bp



U.S. Morning Foods – Performance & Priorities

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• Special K back to share growth

• Improved Pop-Tarts performance

• Readied stronger 2018 commercial plan


Currency-Neutral Comparable Basis

Q4 Highlights:

Q4 2017

Net Sales * (5)% (5)%

Op. Profit * (14)% +1%

OP Margin * (190) bp +130 bp

What to Watch For in 2018:• Stabilize RTEC share• Invest behind adult-segment brands• Pop-Tarts food news• E-Commerce expansion

Re-Stabilizing Special K Cereal:Change in Share vs. Year Ago

Source: Nielsen, xAOC


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U.S. Specialty Channels – Performance & Priorities

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• Continued top-line growth

• Continued expansion in emerging channels

• Continued operating profit margin expansion


What to Watch For in 2018:• Steady sales growth• Expand reach, improve core mix• Share growth in key channels

Q4 Highlights:

Q4 2017

Net Sales * +2% +3%

Op. Profit * +3% +9%



North America Other – Performance & Priorities

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• Strong momentum for Eggo and Morningstar Farms

• Kashi Co. share gain led by Bear Naked

• Canada in growth again

• Substantial increase in Brand Building



What to Watch For in 2018:• Frozen momentum• Canada steady

improvement• RXBAR expansion

Q4 Highlights:

Q4 2017

Net Sales * +1% (1)%

Op. Profit * (9)% +12%

OP Margin * (160) bp +190 bp

Source: Nielsen, xAOC, Frozen Syrup Carriers, Frozen Vegetarian/Vegan


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Europe – Performance & Priorities

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• Pringles growth in consumption and net sales

• U.K. cereal stabilized

• Substantial increase in Brand Building


What to Watch For in 2018:• Pringles firmly in growth• Improving sales

performance in cereal• Increase operating profit

margin

Q4 Highlights:

Q4 2017

Net Sales * +3% (4)%

Op. Profit * (4)% (3)%

OP Margin * (100) bp Flat

Pringles Europe Net Sales** vs. YAG

* Please refer to appendices for reconciliation of non-GAAP measures to the most directly comparable GAAP measure.** Constant-currency net sales are translated using 2016 foreign exchange rates.

U.K. RTEC Share Stabilizing:Change in Share vs. Year Ago

Source: Nielsen


Latin America – Performance & Priorities

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• Mexico consumption and sales growth

• Integration and momentum of Parati

• Slowing declines in Caribbean/Central America



What to Watch For in 2018:• Growth in Pringles• Expansion of Parati• Stabilization in Caribbean/Central America

Q4 Highlights:

Q4 2017

Net Sales * (1)% (2)%

Op. Profit * (1)% (2)%

OP Margin * (10) bp FlatBetter Second Half, Led by Largest Market:Currency-Neutral Comparable Net Sales Growth vs. YAG *

1H 2017 2H 2017


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Asia Pacific – Performance & Priorities

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• Australia cereal share gains continued

• Strong growth in Asia

• Pringles momentum and expansion

• Significant increase in Brand Building

• Joint ventures’ rapid growth


Currency-Neutral Comparable Basis; does not include joint ventures

What to Watch For In 2018:• Cereal and Pringles growth in

Asia & Africa• Stable Australia• Continued growth in JVs

Q4 Highlights:

Q4 2017

Net Sales * +4% +3%

Op. Profit * +6% +18%


Growing Australia RTEC Share:Change in Share vs. Year Ago

Source: Nielsen


In Summary…

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Strong Foundation

• Special brands, food, and culture

• Sound financial footing

Solid 2017

• Big strategic moves

• Delivered on expected results

• Tangible signs of progress

Confidence in 2018

• Stronger commercial plan

• Balance between investment and profitability

• Committed to returning to growth

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Kellogg Companyinvestor.kelloggs.com/~/media/Files/K/Kellogg-IR/reports-and... · Kellogg Company February 8, 2018 Page 1 of 11 Kellogg Company FOURTH QUARTER 2017 ... (including