kellogg annual reports 2007


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kellogg annual reports 2007

  1. 1. ® Sustainable Dependable Performance TM 2007 ANNUAL REPORT
  2. 2. Kellogg Company 2007 Annual Report TM Sustainable Total Shareowner Return Net Sales (million $) Dependable 20% 11,776 19% 18% Performance 10,907 16% 15% 10,177 9,614 Vision To be the food company of choice. 7% 5% 8,811 3% -1% Mission To drive sustainable growth through the power of our people and brands Kellogg S&P Packaged by better serving the needs of our consumers, customers and communities. Foods Index -8% 03 04 05 06 07 03 04 05 06 07 For the seventh consecutive year, Net sales increased again With 2007 sales of nearly $12 billion, Kellogg Company is the world’s leading producer of cereal Kellogg Company’s total return to in 2007, the seventh and a leading producer of convenience foods, including cookies, crackers, toaster pastries, cereal shareowners exceeded that of the consecutive year of growth. bars, fruit-flavored snacks, frozen waffles, and veggie foods. The Company’s brands include Kellogg’s ®, S&P Packaged Food Index. Keebler ®, Pop-Tarts ®, Eggo ®, Cheez-It ®, Nutri-Grain ®, Rice Krispies ®, Morningstar Farms ®, Famous Amos ®, Special K ®, Stretch Island ®, All-Bran ®, Frosted Mini-Wheats®, Club ® and Kashi ®. Kellogg products Cash Flow (a) (million $) Net Earnings Per Share ($) (diluted) Operating Profit (million $) Dividends ($ per share) are manufactured in 18 countries and marketed in more than 180 countries around the world. 1,868 Table of Contents 1,031 2.76 1.20 1,766 1,750 1.14 957 950 1,681 Letter to Shareowners 2 2.51 924 1.06 2.36 1,544 1.01 1.01 Global Operations 8 2.14 769 Sustainable Dependable Global Brands 14 1.92 Our Nutrition Heritage 15 Our People 16 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 03 04 05 06 07 Including over $60 million of Dividends per share have Operating profit increased Earnings per share of $2.76 Environmental Sustainability 18 voluntary pension contributions, increased 19% over the past despite significant cost were 10% higher than 2006. Corporate Social Responsibility 20 cash flow for 2007 remained 3 years. inflation and continued strong at $1.03 billion. reinvestment into our business. Corporate Officers 22 Board of Directors 23 Financial Highlights Manufacturing Locations and Brands 24 2007 Change (dollars in millions, except per share data) 2006 Change 2005 Change Annual Report on Form 10-K $11,776 8% Net sales $10,907 7% $10,177 6% 44.0% -0.2 pts Gross profit as a % of net sales 44.2% -0.7 pts 44.9% - 1,868 6% Operating profit 1,766 1% 1,750 4% 1,103 10% Net earnings 1,004 2% 980 10% Net earnings per share 2.79 10% Basic 2.53 6% 2.38 10% 2.76 10% Diluted 2.51 6% (b) 2.36 10% Cash flow (net cash provided by operating 1,031 8% 957 24% 769 -19% activities, reduced by capital expenditure) (a) $1.20 5% Dividends per share $1.14 8% $1.06 5% (a) Cash flow is defined as net cash provided by operating activities, reduced by capital expenditures. The Company uses this non-GAAP financial measure to focus management and investors on the amount of cash available for debt repayment, dividend distributions, acquisition opportunities and share repurchases. Refer to Management’s Discussion and Analysis within Form 10-K for reconciliation to the comparable GAAP measure. (b) Comparable 2006 earnings per share growth of 11% excludes $65 million ($42 million after tax or $.11 per share) of costs attributable to the Company’s adoption of a new accounting standard that required the expensing of stock options.
  3. 3. TM At Kellogg we have an unwavering focus on the long-term health of our business. Letter to Shareowners Thanks to the hard work and passion of Kellogg Kellogg employees achieved these solid results Operating efficiencies. We continued the disciplined Brand building. In 2007 we continued to focus on Company employees around the world, 2007 was despite being faced with the most difficult operating funding of projects that will provide cost efficiencies building our brands through advertising and consumer another year of continued sales growth, strong environment our industry has experienced in many and enhanced productivity into the future. It has promotion. In fact, we spent more than $1 billion on financial results and increased shareowner return. years. World commodity prices for many of our raw become a part of the Kellogg culture for employees advertising this year. We also focused the expertise The growth was broad-based across categories and materials spiked to all-time highs. Fuel and energy throughout all areas of the organization to of our marketing and promotions groups geographies. Here are some highlights: inflation was dramatic, but the cost pressure did not continually assess our supply chain and throughout the world on increasing the • Ex S a les Net shake the solid foundation upon which we have network for potential improvements desirability of our brands and building pan al d rn Gr • Net sales increased 8% to $11.8 billion. built our business – a business model that is simple, in simplicity, effectiveness, cost consumer brand loyalty. Advertising te resilient and designed to deliver sustainable growth. control and quality. Solutions and and consumer promotions build os In • Internal net sales, which excludes the effects of s row Kellogg people rose to meet this year’s challenges system enhancement projects sustainable brands sought by Pr currency exchange rates, increased more than 5%. ofi P r ic e/Mi x • G by delivering compelling innovation, exciting new are initiated at all levels of consumers and selected as t • Incre a s e B r • Internal operating profit increased by 3%. SUSTAINABLE advertising and cost efficiencies around the world. the company, and there is a household mainstays. We 2 3 • Diluted net earnings per share (EPS) grew 10% This dedication to superior execution is characteristic pervasive sense of accountability focused on increasing our GROWTH to $2.76. of Kellogg employees everywhere, and we sincerely for keeping our cost structure presence with more targeted thank each person in our organization for their lean while continuing to produce communications at a lower cost, • Cash flow was over $1 billion, or 9% of net sales. ase commitment to success and their passion for results. We believe this is the right allowing us to invest more in our an • Total shareowner return was 7%. e cr our business. way to run our business day-in, best ideas. d In B ui • The dividend was increased by 7% starting in the day-out, which is why we account ld • ing on third quarter. ati A proven business model. At Kellogg we have an for these up-front investment costs By continuing these significant • D ri ve In n o v unwavering focus on the long-term health of our within our P&L as part of the cost of investments, we are building a • This was our sixth consecutive year of growth in business. While we are realistic about the challenges doing business. This practice avoids the company with a solid future of dependable sales, operating profit and earnings per share. ahead, our performance in 2007 demonstrates the need for large, one-time charges that impair performance and consistent growth. Our • We reinvested in the business through increased strength of our business model and its capacity to earnings quality or obscure actual performance commitment to reinvesting in the business is a core brand building, innovation capability, expansion produce growth, even under difficult conditions. for a particular quarter or year. pillar of our sustainable growth business model. and cost-saving projects, all of which enhance Despite increased inflation, we continue to our future sustainable performance reinvest into our business. visibility. David Mackay (Left) President Chief Executive Officer Jim Jenness (Right) Chairman of the Board
  4. 4. We take a global approach to innovation, expanding and adjusting our portfolio to meet consumer needs around the world. TM Letter to Shareowners Realistic targets. Every day, we manage our business A clear and focused strategy. The focal points for expenditures. In 2007 this disciplined financial Innovation. Kellogg drives development and visibility in a way that supports its dependable, sustainable strategy again enabled continued and rigorous building our business have remained constant over of a robust pipeline of new products. In 2007 we performance. Our long-term targets of low single-digit review of costs while, importantly, funding the the past six years: continued our commitment to this key growth driver net sales growth, mid single-digit operating profit investments that will grow and sustain our business. by increasing our innovation. We take a global growth, and high single-digit EPS growth encourage • Grow our cereal business approach to innovation, expanding and adjusting our Flexibility. Our strong cash flow allows us to actively Kellogg people to prioritize their activities and make portfolio to meet consumer needs around the world. • Expand our snacks business good decisions that support the long-term health make decisions based on what is best for sustaining More than 270 new products or adaptations of other • Pursue selected growth opportunities of our business – not simply hit short-term, our business and for building shareowner return. successful products were introduced in 2007 alone unsustainable goals. Realistic targets drive In addition, our cash flow gave us the flexibility and we generated nearly $2 billion, about We remain committed to this the behaviors and decisions that most to repurchase 12.4 million shares of Kellogg 17% of sales, from products launched simple strategy because it et Income ro w N effectively deliver sustainable growth. Company stock, increase the quarterly dividend within the past three years. These • •G works. The effectiveness of Mi It’s the right way to run our business paid to shareowners and acquire companies in key results exceeded our long-term ni m IC 4 5 RO our strategy is proven, and and is responsible management of geographies or product lines that fit with our strategy. target of 15% of net sales from iz e se our results in 2007 and our shareowners’ interests. innovation and helped drive re a Co the momentum with re W I nc another year of improved sales MANAGE which we enter 2008 xibility • orking Capital • Financial vision. Strong cash volume, price and mix for are indicators of its flow generation. The ability to Kellogg Company. continued relevance. FOR CASH generate cash is an essential ial Fle Kellogg people component of a financially healthy Our innovation teams around around the world anc company. As a result of strong the world are focused on have embraced Dis in net earnings, disciplined capital developing value-added and nF c our strategy. ip ai expenditures and sound balance sheet differentiated products that in l int ed Ma Ca management, our cash flow in 2007 provide additional sales and/or p i ta l Expenditure • was over $1 billion, delivering again on improved economics. This focus our Manage for Cash operating principle. continually improves our already-strong Combined with our focused business strategy, portfolio by improving mix and producing our disciplined financial strategy creates a solid higher returns. Strong innovation, backed with platform for sustaining cash flow for years to come. solid marketing support, will drive top-line growth and keep our categories vital. Our commitment to Disciplined expenditure. Following the Manage for investing in innovation and research and development Cash principle keeps Kellogg people around the is another core pillar of our sustainable growth world focused on continually exploring strategies business model. In line with this, we are expanding for decreasing the amount of cash committed to the facilities and capabilities of our state-of-the-art working capital. It is part of the way we manage global research and development center, the W. K. our business every day. Furthermore, we are Kellogg Institute for Food and Nutrition Research. This committed to carefully planning and prioritizing is one way we will continue to drive top-line growth. the amount of cash we spend each year on capital
  5. 5. Our business model and our focused strategy served us well in 2007. TM Letter to Shareowners Entering 2008 with momentum. With our success Some of our strategic growth leverage Kellogg Company’s sales, grow operating profit, and continue to reinvest opportunities will show brand-building and innovation and continued investments in 2007, we enter 2008 in our business for future growth. In short, while tremendous potential right expertise, our understanding with confidence. Commodity and energy prices delivering strong growth in 2007, Kellogg people away, while others will take of the biscuit and ready-to-eat are projected to remain high and volatile, and around the world have set the stage for another year time and further investment cereal categories, with UB’s competition in the marketplace will likely intensify. of strong performance in 2008. to grow. Because we manage existing manufacturing, sales The year ahead will no doubt be challenging. our business for long-term and distribution infrastructure However, because our business model works, we are Finally, we thank our shareowners for valuing our performance with realistic to drive continued strong confident in our ability to deliver strong results yet long-term perspective on growth and investment. targets, we have the flexibility growth of this business. We again in 2008. We are confident we will grow net We are steadfast in our commitment to delivering to make strategic investments have stringent criteria for sustainable, dependable performance in the future. that strengthen the health of our assessing growth opportunities, and this investment company. Late in 2007 we made acquisitions relating was selected for its ability to create value in the long 6 7 to Bear Naked Inc., maker of all-natural granola and term and contribute to the sustainable, dependable trail mixes, and Gardenburger brand. growth of Kellogg Company. 2007 summary. Our business model and our Our emerging markets growth strategy moved forward significantly in 2007. We grew our ready-to-eat cereal focused strategy served us well in 2007. Throughout David Mackay Jim Jenness market share in Turkey to 22%. Before our 2006 joint the year, Kellogg people around the world President Chairman of the Board venture with local Turkish food distributor, Ülker, our successfully managed difficult external challenges Chief Executive Officer market share was just 2%. We are actively exploring – unprecedented commodity price increases and other international alternatives and have identified continued tough competition – and delivered another Eastern Europe and Asia as areas where we can year of strong earnings and increased shareowner enter developing markets with immediate scale and value. Each quarter of 2007, Kellogg Company was distribution capabilities. faced with higher input costs, and each quarter we were able to grow our business and increase our Early in 2008 we acquired The United Bakers investment in cost-efficiency projects. We raised Group (UB), one of Russia’s largest cracker, cookie our 2007 annual earnings guidance twice during and breakfast cereal producers. UB’s products, the year and ultimately delivered solid results. This marketed primarily under the Yantar and Lyubyatovo performance speaks to the power of our business brands, are a good strategic fit with the Kellogg model, and we remained focused on it despite the portfolio and expand our presence in international added challenges. In 2007, we continued to reinvest snacks and cereal markets. into our businesses through increased brand building and additional cost-saving projects. We continued to This acquisition is a long-term investment that invest wisely in key growth opportunities in strategic provides Kellogg with a tremendous platform for categories and geographies. Our innovation pipeline growth in a large and fast-growing market. We will continues to be substantial and dynamic.
  6. 6. By continuing to focus on nutrition, taste and convenience, Kellogg innovation really resonated with consumers. TM measured category share rising to 2008, we are excited about Keebler Fudge Shoppe Fudge Global Operations the move of Kashi snacks (bars, in 2007. This was driven by Stripes and Chips Deluxe. We innovations such as Sandies Butter cookies, crackers) to the DSD built upon these successes in Pecan Drops and Keebler Dipping distribution system. 2007 by introducing Right Bites North America Delights. Echoing this positive Fudge Shoppe Grasshopper and Ready-to-eat cereal. In 2007 we Mini-Wheats Strawberry and Rice The Pop-Tarts toaster pastry business progress was a strong performance assortment packs. saw sustained growth in our North Krispies Vanilla cereals, added to the from Famous Amos. continues to be strong and retains a American Retail Cereal business. strong sales growth. Additionally, category share above 86%. During Strong performances in our Cracker Plus, measured channel share grew our largest cereal brand in the Club 2007, we launched Pop-Tarts In 2007 innovation drove strong business came from power brands for the full year to 34.1%, making channel, Special K, experienced sales in Wholesome Snacks with the Printed Fun, debuting with Trivial including Club, Town House and this the seventh consecutive year broad growth. performance of Nutri-Grain Fruit & Pursuit and Barbie editions. Cheez-It, which all grew in dollar of share growth in the U.S. retail Nut bars, along with new flavors of This exciting innovation allows sales and measured market share. ready-to-eat cereal category. Snacks. North American Retail Kellogg’s Crunchy Nut Sweet & Salty consumers to enjoy edible printing This performance was aided by Snacks had a very good 2007. Our bars. Special K and Special K Honey on their favorite toaster pastries. innovation in Snack crackers, By continuing to focus on nutrition, business, consisting of cookies, Nut bars were also a huge success. including Club Puffed and Cheez-It taste and convenience, Kellogg crackers, wholesome snacks, Other snacks that performed well Stix. All-Bran has a hit innovation innovation really resonated with fruit-flavored snacks and toaster 8 9 include Kashi snack bars, which Canada had solid performances with All-Bran crackers, a strong All-Bran continues to be one of consumers. Our innovations, pastries, lapped strong 2-year from the popular All-Bran Snack continue to have significant repeat performer rated best snack cracker our strongest global brands, and including Special K Chocolatey growth rates by building on 11% in Bites, Munch’ems, Nutri-Grain, consumer purchases. Fruit Snacks by Women’s Health magazine. we launched All-Bran Strawberry Delight, proved a big success both 2006 and 7% in 2005. We posted and Kellogg’s Crunchy Nut Sweet & were innovative in the natural/ All-Bran continues to grow in Medley cereal in the U.S. in January at breakfast and as an evening 7% internal sales growth to finish organic channel with FruitaBü Salty bars. U.S. popularity. 2008. Kashi had another successful snack. Plus, perennial favorites the year. Smoooshed fruit products and in year and added to its popular line Raisin Bran Crunch cereal and Our Special K brand extended its the grocery channel with Stretch Our Cookie business with Kashi GoLean Heart to Heart Special K cereals responded well We’re able to maintain sustainable global reach with protein water and Island fruit leathers and Yogos fruit was important to our Blueberry cereal and Kashi GoLean to our advertising strategies. growth by building existing brands meal and snack bars, showing that flavored snacks. Fruit Flavored growth, with Honey Almond Crunch cereal, and targeting innovation by utilizing “The Difference Snacks were moved into the DSD which contains DHA omega-3. Rice Krispies, one of our oldest our DSD (Direct Store Delivery) is K” for many system to provide additional sales brands, also experienced a strong distribution system. Recently, the consumers. As opportunities and allow these Throughout the U.S., consumers year, thanks to the introduction of Advantage Group Performance we look forward products to gain shelf presence. are having “milk-sippin’ fun” Rice Krispies with Real Strawberries Monitor rated the Kellogg DSD with new Kellogg’s Cereal Straws and our “Childhood is Calling” system #1 among all snack – launched with Cocoa Krispies and advertising campaign. Great food companies. Froot Loops flavors. innovation continued in kid’s cereals with Froot Loops Smoothie We increased advertising at Canada’s cereal business had a and Corn Pops Peanut Butter, a double-digit rate and had a strong year. New products such as which had new advertising particularly good innovation year Special K Fruit & Yogurt, campaigns. Each of these with portion-controlled packs. In All-Bran Guardian, Frosted innovations lifted base brand 2006 we introduced 100 Calorie sales as well. Right Bites packs in Cheez-It,
  7. 7. Europe’s growth was broad-based across countries and categories – driven by strong commercial programs, category-leading product innovations and a double-digit increase in advertising investment. Europe Kellogg Europe turned in another Adult consumption of cereal Our Snacks business in these TM solid year in 2007. In what continues to expand across markets is still young and continues continues to be a challenging the region. Optivita, our heart to expand rapidly, helped by operating environment, overall health cereal, was launched, and increased availability and inclusion sales increased mid single-digits, combined with market leader in major cereal programs. lapping similar growth in 2006. Special K, continued to drive our Europe’s growth was broad-based Global Operations adult business. Performance in France, our second across countries and categories largest European market, was also – driven by strong commercial Southern Europe reported the positive with mid single-digit growth programs, category-leading product strongest growth across the area, in cereal. innovations and a double-digit with high single-digit sales increases Frozen and Specialty Channels. Specialty Channels. Growth in our increase in advertising investment. in both Italy and Spain. With per Solid performance came from Specialty Channels business was capita cereal consumption in Frozen and Specialty Channels, driven by Food Away From Home, Our two most developed markets, these markets below the with sales rising 6% for the year, as well as Convenience and U.K. and Ireland, posted mid levels of Northern Europe, further building on 8% growth in 2006 Drug channels. single-digit growth in cereal and growth potential exists. and 2005. even stronger growth in snacks. Success continued with our We increased our share in a U.K. Frozen. In 2007 sales in our Frozen strategy to leverage key equities ready-to-eat cereal catagory that business grew, driven by a double- for channel relevance. This was to dinner. With our acquisition of continued to show strong growth. digit increase in advertising from clearly illustrated in our successful Gardenburger veggie foods, we We also grew share in the cereal launch of Jump-Starts breakfast kits 2006. Our leading market share will be producing more exciting bar category in both markets. in frozen breakfast products grew for the K-12 school segment. This innovations. 10 11 Programs like our Special K because of strong innovation in convenient breakfast alternative “Drop a Jeans Size” proved very Eggo Blueberry pancakes, Eggo for public schools is designed to With “7 whole grains on a mission,” effective in engaging consumers. waffles and Eggo Stuffed French provide students access to a Kashi continues to provide And there was strong response to Toaster Sticks. In addition, our quality breakfast. additional growth opportunities cereal innovations like Special K healthy waffle segment had solid with its popular frozen line. Kashi Sustain and Coco Pops Creations. growth with the launch of And finally, the success of our waffles are off to a good start, and Special K Mini Breaks snacks were Nutri-Grain Cinnamon waffles and Convenience/Drug business the new frozen entrees and pizzas introduced in the second half of Special K Red Berries waffles. continued from leveraging core have performed above expectations. the year to a strong start, and both equities, such as the introduction We saw a strong response to three Rice Krispies Squares and of single-serve Keebler Soft Batch Our Veggie Food business, under additional entrees and introduced Rice Krispies cereal enjoyed the Morningstar Farms brand, cookies for convenience stores. three new pizza varieties in 2007. tremendous growth, driven by continues to perform well. In This, along with broad wins engaging advertising campaigns. 2007 we added to the popular in the Drug channel through Another strength is our Club Morningstar Farms sausage patties efficient participation in key business, which continued to with the introduction of Breakfast promotion periods such as back successfully build the Kashi brand Starters and Breakfast Bites. Our to school and New Year’s franchise. The launches of Kashi consumers continue to “see veggies resolution, also contributed to frozen entrees and pizzas were key differently” with creative new our continued success. to the brand’s continued success choices like Mushroom Mozzarella in Club. Veggie Bites. Consumers can now enjoy meatless diet choices with our product line from breakfast
  8. 8. Our Mexico business has now grown to be our third largest business, behind the U.S. and U.K. TM Global Operations Latin America Asia Pacific Kellogg Latin America continued Colombia, Ecuador and Venezuela We continued to strengthen the Sales in Asia Pacific were about flat and Wholesome Snacks were and while total sales declined, we to grow and showed strong was the result of strong growth relevance of the cereal category for 2007 as a difficult competitive launched in Korea in June 2007. are encouraged by the aggressive performance through 2007. Our in advertising investment and the with investments in innovation of environment in Australia was offset Our consumer programs were strategy we have in place to move popular brands like Special K and Mexico business has now grown rollout of our Snacks portfolio. by strong sales increases across well tested and grounded in strong this business forward in 2008. We Choco Krispis. to be our third largest business, the rest of our Asian business unit. consumer insights. We effectively refocused our media spend and behind the U.S. and U.K. Double- Throughout Latin America, our This year’s growth in Asia was engaged Asian consumers with advertising efforts, and we are With programs like the Special K digit sales growth in Brazil, results were driven by strong driven by our existing Ready-to-eat advertising and innovations built putting emphasis on developing a Challenge, we were able to attract performance of cereal businesses in Korea, South largely off power brands like more sustainable innovation plan. All-Bran and Special K. existing brands like and retain new consumers. We Africa and India, as well as our Australia saw success with healthy Zucaritas (Frosted continue to build the Special K brands such as All-Bran and Whole new Wholesome Snacks business Flakes) and Grain Mini-Wheats cereal. Snacking brand, including ready-to-eat cereal, in Japan and Korea. Our success Kellogg Company’s growth in India All-Bran. as well as snack products such as in these categories is based on our was based on continued brand- brands that performed well include 12 13 Special K Delicia (Bliss) Bar. LCM Shakes, Kellogg’s Crunchy Nut efforts to entice consumers with building investment in our two core brands, Kellogg’s Corn Flakes and bars and the re-launch of Be Natural programs that combine global Chocos. Innovation contributed to We expanded our presence learnings with local expertise. bars, which have quickly gained a in Mexico with the growth of growth with the launch of single- 2.2% share. Our Australian business healthy drinks (All-Bran ready- It was another strong year for Japan serve cereal pouches. is a good one for Kellogg, and we to-drink). Sales for this business and Korea. Our Snacks business are putting steps in place to support were significantly above our enjoyed its first full year in Japan, In Australia, we faced strong a strong future. expectations, driven by excellent competitive headwinds in both consumer response. Ready-to-eat cereal and Snacks,