2. Capital Structure
KellogsInc ($'m) Coupon Maturity 2010 2011 2012 Mar'13 Leverage
Adjusted EBITDA 2,411 1,796 2,032 2,004
Cash & CashEquivalents (444) (460) (281) (252)
US CommercialPaper 0.26% 2013 - 216 853 534
Europe CommercialPaper 0.15% 2013 - - 159 253
Bank Borrowings - 2013 44 18 53 51
7.45% U.S. DollarDebentures 7.45% 2031 1,090 1,090 1,091 1,091
4.0% U.S. Dollar Notes 4.00% 2020 991 992 993 993
4.45% U.S. DollarNotes 4.45% 2016 748 763 772 772
4.25% U.S. DollarNotes 4.25% 2013 800 772 754 -
3.125% U.S. Dollar Debentures 3.13% 2022 - - 694 694
4.15% U.S. DollarNotes 4.15% 2019 498 499 513 513
1.875% U.S. Dollar Notes 1.88% 2016 - 499 509 509
3.25% U.S. DollarNotes 3.25% 2018 - 409 420 420
1.75% U.S. DollarNotes 1.75% 2017 - - 398 398
1.125% U.S. Dollar Notes 1.13% 2015 - - 350 350
2.10% CanadianDollar 2.10% 2014 - - 302 302
5.125% U.S. Dollar Notes 5.13% 2012 768 760 - -
6.6% U.S. Dollar Notes 6.60% 2011 951 - - -
Floating RateUS DollarNotes L+0.23% 2015 - - - 250
2.75% US Dollar Notes 2.75% 2023 - - - 395
Other - - 14 14 41 31
Total Senior Unsecured Debt 5,904 6,032 7,902 7,556 3.8x
Net Senior Unsecured Debt 5,460 5,572 7,621 7,304 3.5x
Net Adjusted Senior unsecured Debt 6,438 6,570 8,478 7,880 3.8x
Key Notes to Capital Structure:
$250,000,000 Floating Rate Senior Notes due February 13, 2015
Senior unsecured Obligation.
Change of Control @ 101% + accrued and unpaid interest.
Below investment grade (BBB- by Fitch or Baa3 by Moody’s) event by moody's or Fitch could result in a
Change of Control until the end of the 60-day period followingpublic noticeof the occurrence of a Change
of Control.
$400,000,000 2.750% Senior Notes due March 01, 2023
Senior unsecured Obligation.
Optional Redemption, greater of 100% or the sum of the present values of the remaining scheduled
payments of principal and interest on the Securities being redeemed on that redemption date discounted
to the redemption date on a semiannual basis at the Treasury Rate + 15 basis points.
Change of Control @ 101% + accrued and unpaid interest.
Below investment grade (BBB- by Fitch or Baa3 by Moody’s) event by moody's or Fitch could result in a
Change of Control until the end of the 60-day period followingpublic noticeof the occurrence of a Change
of Control.
Liquidity and Maturity Profile:
3. 3,500
3,000
2,500
2,000
1,500
1,000
500
-
Other US Dollar Debentures US Dollar Notes Bank Borrowing CommercialPaper
3,204
838
1,281
302
600
398 420
513
2013 2014 2015 2016 2017 2018 2019 2020 &
beyond
Liquidity Analysis FY-13E FY-14E FY-15E FY-16E FY-17E FY-18E FY-19E
Beginning Cash Flow 252 885 2,412 2,944 3,495 4,051 4,592
Unlevered Cash Flows 885 1,773 771 746 745 715 753
Cash interest Expenses (252) (246) (239) (195) (188) (175) (154)
Levered Cash Flows 633 1,528 531 551 557 541 600
RCF Drawdown - - - - - - -
Ending CashBalance 885 2,412 2,944 3,495 4,051 4,592 5,192
Debt MaturitySchedule 838 302 600 1,281 398 420 513
The Company has solid liquidity profileto repay its upcoming and manageable debt obligations. The same
is characterized by stableoperational cash flows, seasonal working capital needs and sufficient liquidity
back-up.
Kellogg’s short term working capital needs are financed by commercial papers. The major portion of the
total borrowing i.e. ($787m) at the end of March 2013 consists of Commercial papers. At the end of
March 2013, the company has total available cash and cash equivalents of $252m and $2bn of unused
and available unsecured bank credit facility.
Corporate Overview:
Kellogg Co., founded in 1906, the group is engaged in manufacture and marketing of ready-to-eat cereal
and convenience foods.
Kellogg Company is the world’s leading producer of cereal, second largest producer of cookies and
crackers and a leading producer of savory snacks and frozen foods.
Additional product offerings include toaster pastries, cereal bars, fruit-flavored snacks and veggie foods.
These products are manufactured in 18 countries and marketed in 180 countries worldwide.
The Cereal products are marketed under Kellogg’s name, while cookies, crackers, crisps, and other
convenience foods are marketed under brands such as Kellogg’s, Keebler, Cheez-It, Murray, Austin and
Famous Amos
The Company's reportable segment include; U.S. Morning Foods and Kashi; U.S. Snacks; U.S. Specialty;
North America Other; Europe; Latin America; and Asia Pacific.
On December 7, 2012, the Company completed the acquisition of Pringles business from The Procter &
Gamble Company for $2.67bn.
The acquisition resulted in 7.6% increase in the company's revenue after taking effect of Pringles'
acquisition.
At the end of FY 2012, the company generated $14.2bn revenue and $1.6bn operating profit.
4. Strategies:
The Company focuses on strong double digitgrowth in developing and emerging markets including, India,
South Africa and Brazil with its strong brand image, infrastructure and people.
Continued focus on the growth drivers in each of the company's categories and made significant progress
executing against strategic objectives.
In 2012, the company finalized the acquisition of Pringles from P&G and the acquisition tripled the size of
international snacksbusinessand made Kellogg’s the world’s second-largest savory snacks company. The
acquisition provided strong foundation for further snacks growth in international market.
The Company’s investment strategy for its major defined benefit plans is to maintain a diversified
portfolio of asset classes with the primary goal of meeting long-term cash requirements as they become
due. The current target asset allocation is 75% equity securities and 25% debt securities.
Market Segments:
U.S. Morning Foods and Kashi: The division aggregates the U.S. Morning Foods and U.S. Kashi operating
segments. The U.S. Morning Foods operating segment includes cereal, toaster pastries, and health and
wellness business generally marketed under the Kellogg’s name. The U.S. Kashi operating segment
represents Kashi branded cereal, cereal bars, crackers, cookies and Stretch Island fruit snacks.
U.S. Snacks: U.S. Snacks represents the U.S. snacks business which includes products such as cookies,
crackers, cereal bars, savory snacks and fruit-flavored snacks.
U.S. Specialty: The segment represents the food service and Girl Scouts business. The food service
business is mostly non-commercial, serving institutions such as schools and hospitals.
North America Other: This represents the U.S. Frozen and Canada operating segments. As these
operating segments are not considered economically similar enough to aggregate with other operating
segments and are immaterial for separate disclosure, they have been grouped together as a single
reportable segment.
Europe; Latin America; and Asia Pacific: The three remaining reportable segments are based on
geographic location – Europe which consists principally of European countries; Latin America which is
comprised of Central and South America and includes Mexico; and Asia Pacific which is comprised of
South Africa, Australia and other Asian and Pacific markets.
Revenue Performance 2012 EBITDA 2012
Asia Pacific Asia Pacific
7% Latin America 5%
Latin America
8%8%
U.S Morning
U.S MorningFoods & Kashi
Europe Foods & Kashi26%
13% 29%
Europe
18%
North America
U.S.Snacks
Other
12%
23% U.S.Snacks
North America
23%
Other
U.S. Specialty U.S. Specialty
10% 8% 10%
Customer Concentration:
5. The Company's largestcustomer is Walmart and its affiliates, which accounted for approximately 20% of
consolidated Net Sales in 2012.
At the end of FY 2012, approximately 18% of the company's consolidated receivables balance and 26% of
U.S. receivables balance was comprised of amounts owed by Wal -Mart Stores Inc. and its affiliates.
No other customer accounted for greater than 10% of net sales in 2012.
During2012, the top five customers, collectively,includingWal-Mart,accounted for approximately 33% of
the consolidated net sales and approximately 45% of U.S. net sales.
Raw Material:
The principal rawmaterialsof the Company comprise of Agricultural commodities, including corn, wheat,
soy bean oil, sugar and cocoa.
Cartonboard, corrugated, and plastic are the key packaging materials used by the Company.
The prices of the commodities are subject to government policy and regulation, weather conditions,
climate change or other unforeseen circumstances.
During 2006, The Company entered into two separate 10-year over-the-counter commodity swap
transactions to reduce fluctuations in the price of natural gas used principally in its manufacturing
processes.
The notional amount of the swaps totaled $84m as of December 29, 2012 and equates to approximately
50% of North America manufacturing needs over the remaining hedge period.
Margin Analysis:
15,000
42.9%
50.0%
45.0%14,500
37.3% 38.4% 40.0%
14,000 42.9%
35.0%
39.0% 37.4%13,500 30.0%
13,000 25.0%
12,500 20.0%
12,000
15.0%
15.9% 16.3% 10.0%
11,500 10.8% 11.2%
5.2% 10.5% 5.0%
11,000 0.0%
2008A 2009A 2010A 2011A 2012A LTMMar'13A
Revenue Gross Margin Operating Margin
LTM Mar’13 vs FY12:
Gross Profit declined by 100bps from 38.4% in FY 2012 to 37.4% for LTM Mar’13 due to the impact of
inflation, net of cost savings, and the lower margin structure of the Pringles business. Operating profit
has also seen a decline of 70bps due to significant increase in Selling, general and administration
percentage in the operating costs.
FY 2012 vs FY11:
Gross profit declined by 60bps in FY12 to 38.4% from 39% in FY11 due to the impact of inflation, net of
cost savings, and the lower margin structure of the Pringles business which were partially offset by
savings from cost reduction initiatives. Underlying SGA % decreased primarily due to a reduction in
6. brand-buildinginvestment as a percent of net sales and decreased costs related to costreduction
initiatives,partially offsetby increased incentivecompensation expense.
FY’13 Outlook:
The Company anticipates that2013 will be the return of its operating model. Net Sales could increase by
7% in fiscal year 2013.
Kelloggs expects to decline gross margin by 50bps in FY13 due to full year impact of Pringles business.
Projected EPS growth includes a $0.12 to $0.14 impact from Pringles integration costs.
Competition:
The Company has always experienced intense competition for sales of all of its principal products in its
major product categories, both domestically and internationally.
The Key competitors of Kelloggs include Amy’s kitchen, Annie’s Inc., Cadbury Ltd., ConAgra foods and
Danone etc.
Historical Financials:
7. LTM
Financial Metrics FY09 FY10 FY11 FY12 Mar'13
Revenue 12,575 12,397 13,198 14,197 14,618
Gross Income 5,391 5,318 5,152 5,456 5,474
Gross Margin 42.9% 42.9% 39.0% 38.4% 37.4%
AdjustedEBITDA 2,385 2,411 1,796 2,032 2,004
Adjusted EBITDA Margin 19.0% 19.4% 13.6% 14.3% 13.7%
Net interest expense 295 248 233 261 288
Capital Expenditure 377 474 594 533 572
DividendPaid 546 584 604 622 629
Operational Metrics
Operational CashFlow (CFO) 1,538 1,676 1,112 1,541 1,651
Levered Free CashFlow 1,156 1,211 511 1,007 1,083
Retained CashFlow(RCF) 992 1,092 508 919 1,022
Capitalisation
Total Debt 4,880 5,904 6,032 7,902 7,556
Cash andCashEquivalents 334 444 460 281 252
Net Debt 4,546 5,460 5,572 7,621 7,304
Total Equity 2,275 2,154 1,798 2,480 2,842
Total Assets 11,200 11,847 11,943 15,184 15,224
Credit Metrics
Total Debt/AdjustedEBITDA 2.0x 2.4x 3.4x 3.9x 3.8x
Net Debt/ AdjustedEBITDA 1.9x 2.3x 3.1x 3.8x 3.6x
RCF/Adjusted EBITDA 0.4x 0.5x 0.3x 0.5x 0.5x
Cash Conversion Ratio 0.5x 0.5x 0.3x 0.5x 0.5x
Interest Coverage Ratio 8.1x 9.7x 7.7x 7.8x 7.0x
CFO/Total Debt 0.3x 0.3x 0.2x 0.2x 0.2x
Total Debt/TotalEquity 2.1x 2.7x 3.4x 3.2x 2.7x
Total Debt/TotalAssets 0.4x 0.5x 0.5x 0.5x 0.5x
Note:-
*Cash interest expenses have not been reported, therefore we’ve considered total net income expenses from
income statement.
**Cash Conversion ratio hasbeen calculated as Levered free Cash Flow divided by Adjusted EBITDA.
***Retained Cash Flow hasbeen calculated as (Operational Cash Flow – Cash dividend paid)/ Adjusted EBITDA
Credit Strengths:
Strong brand portfolio, Kelloggs is the leader in ready-to-eat cereal, toaster pastries, and frozen waffles
and holds second position in the world in cookies and crackers.
Diversified operations: The products are manufactured by the Company in 18 countries and marketed in
more than 180 countries generally under Kellogg’s name. Significant operations in Europe and Asia
divisions.
Impressive liquidity profile with solid and consistent cash flow generation. Low leverage ratio of 3.8x ;
interest coverage of 7.0x at the end of March’13. Also, the company generates sufficient cash flow from
operations to back up its commercial paper during last four financial years.
8. As a business strategy, the company makes regular investments in the form of acquisitions to increase its
operational efficiency.In 2012,the company acquired P&G’s Pringles businessto increasemarket share in
savory snacks and frozen foods market.
Credit Weaknesses:
Relatively weaker profitability outside U.S. divisions due to problems like cost inflation, increased
commodity costs, disruptions in supply chain, unfavorable operating environment and plant closure etc.
Intense competition in food industry creates continuous pressureon operational performance and capital
expansion; makes the company vulnerable during economic downturns.
Kellogg’s substantial capital portion is financed through debt (more than 50%), tha t reduces its flexibility
to make funds available for acquisitions and dividend payments.
More leverage position than competitors could place the company at competitive disadvantage and may
cause negative outlook for long and short term credit ratings.
Higher customer concentration: Wal-Mart accounts for more than 20% of the company’s net sales and
top 5 customers contribute approx. 33% in the company’s total revenue and 45% of U.S. Sales.
Recent News/ Development:
April 26, 2013: Kellogg’s declared dividend of $0.44 per share on the common stock of the Company,
payable on June 17, 2013, to shareowners of record at the close of business on June 3, 2013.
February 22, 2013: Kellogg Company announced today the election of Cynthia H. Milligan, dean emeritus
of the College of Business Administration at University of Nebraska-Lincoln and trustee of the W.K.
Kellogg Foundation, to its board of directors effective Feb. 22, 2013.
Relative Performance:
Price/Sales
Relative Valuation EV/EBITDA EV/EBIT EV/Revenue P/E per Share
Kelloggs Co. 14.2x 18.1x 2.1x 25.2x 2.5x
B&G Foods Inc 14.5x 16.4x 3.8x 41.1x 2.8x
Annie's Inc. 34.8x 37.0x 4.2x 66.8x 1.0x
DeanFoods Co 4.8x 7.9x 0.3x 43.6x 0.2x
ConAgra Foods, Inc. 12.2x 15.5x 1.6x 19.8x 1.0x
Danone 12.1x 15.0x 2.0x 20.1x 1.6x
Source: Capital IQ
Share Valuation:
9. KelloggCompany(NYSE:K) - Share Price
70.0
68.0
66.0
64.0
62.0
60.0
58.0
56.0
54.0
52.0
50.0
As per the last one year stock chart price, the market price of Kellogg has already fluctuating on the higher side of
the last 52 weeks. On valuation front, based on the solid cash flow from operations and strong projected cash
flows along with the capacity of Pringles, the stock price range of the company hovers around $52-$66, while
implied intrinsic valueof the company as per discounted cash flow valuation has turned out to be $62.7. Although,
Company’s market price on 30th
July 2013 has reached $66.9, but since the profit margins of the company are at
their bests and based on strong operating performance of the company, the share price may touch the new highs
in FY14 and FY15. Below is the sensitivity analysis of the stock price.
EBITDA Multiple
12.0x 13.0x 14.0x 15.0x 16.0x
Growth
2% 56.5 61.5 66.5 71.6 76.6
3% 52.0 56.7 61.4 66.0 70.7
4% 47.8 52.2 56.6 60.9 65.3
5% 43.9 48.0 52.1 56.2 60.3
6% 40.3 44.1 47.9 51.8 55.6
