kellogg annual reports 2005


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kellogg annual reports 2005

  2. 2. Net Sales (millions $) Operating Profit (millions $) Cash Flow (a) (millions $) Net Earnings Per Share (diluted) Total Share Owner Return 950 $2.36 924 1,750 856 10,177 $2.14 20% 1,681 19% 9,614 17% 769 1,544 $1.92 1,508 746 8,812 15% $1.75 8,304 7,548 1,168 18% Kellogg $1.16 S&P Packaged 2% 5% Foods Index 3% -1% -8% 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 01 02 03 04 05 Net sales increased again in Operating profit increased Cash flow was $769 million Earnings per share of $2.36 For the fifth consecutive year, 2005, the fifth consecutive despite significant investment including $400 million in were 10% higher than in Kellogg Company’s total return to year of growth. in future growth. contributions to benefit plans. 2004. share owners has exceeded that of the S&P Packaged Foods Index. Financial Highlights (dollars in millions, except per share data) 2005 Change 2004 Change 2003 Change $10,177.2 6% $9,613.9 9% $8,811.5 6% Net sales 44.9% — 44.9% .5 pts 44.4% -.6 pts Gross profit as a % of net sales 1750.3 4% 1,681.1 9% 1,544.1 2% Operating profit 980.4 10% 890.6 13% 787.1 9% Net earnings Net earnings per share 2.38 10% 2.16 12% 1.93 9% Basic 2.36 10% 2.14 11% 1.92 10% Diluted 769.1 -19% 950.4 3% 923.8 24% Cash flow (a) $1.06 5% $1.01 — $1.01 — Dividends per share (a) Cash flow is defined as net cash provided by operating activities, reduced by capital expenditure. 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 repurchase. Refer to Management’s Discussion and Analysis within Form 10-K for reconciliation to the comparable GAAP measure.
  3. 3. In 2005, Kellogg Company delivered another year of strong performance. We met or exceeded our goals while investing in our brands, our people, and our future. We have a proven, focused strategy and pragmatic operating principles in Volume to Value and Manage for Cash that keep us focused on the right metrics. All of this, in combination with our realistic growth targets, drives sustainable and dependable performance. We really do have The Tiger Inside. 2005 Annual Report Table of Contents 2 Letter to Share Owners 22 Operating Principles With 2005 sales in excess of $10 billion, Kellogg Company is 8 Global Infrastructure 24 Sustainable Performance the world’s leading producer of cereal and a leading producer of 10 North American 26 Social Responsibility and K Values convenience foods, including cookies, crackers, toaster pastries, Retail Cereal 28 Board of Directors and Officers cereal bars, frozen waffles, meat alternatives, pie crusts, and ice 12 North American 30 Manufacturing Locations and Brands cream cones. The Company’s brands include Kellogg’s®, Keebler®, Retail Snacks Pop-Tarts®, Eggo®, Cheez-It®, Nutri-Grain®, Rice Krispies®, Murray®, 14 North American Frozen & Form 10-K Austin®, Morningstar Farms®, Famous Amos®, and KashiTM. Specialty Channels Corporate & Share Owner Information Kellogg products are manufactured in 17 countries and 16 Europe marketed in more than 180 countries around the world. 18 Latin America 20 Asia Pacific
  4. 4. To Our Share Owners As we enter our 100th year, I believe and earnings per share growth for the Revenue Growth. In 2005, we fourth consecutive year; we gained posted reported revenue growth of the foundation of Kellogg Company share in the U.S. ready-to-eat cereal six percent. Our long-term internal is strong. Our heritage, and focus category for the sixth consecutive revenue growth target is for low on health and wellness, are highly year; and we held or gained category single-digit growth. Internal revenue relevant to consumers today. There share in nine of our ten focus busi- growth, which excludes the effect of is no doubt in my mind that Mr. nesses outside the U.S. This broad- foreign currency translation, acquisi- Kellogg would be very proud of this based growth gives us confidence for tions, divestitures, and differences wonderful, thriving company and the the future and proves the viability in the number of shipping days, was thousands of dedicated Kellogg of our strategy, operating principles, also six percent. Both of these results employees who, over the years, and business model. In 2005, we were significantly greater than our believed in and nurtured his vision made significant investment in brand targets and are testament to the and were guided and inspired by his building, innovation, and cost-saving strength of our brand-building cam- values. It is a deep privilege for me initiatives, which provide us ongoing paigns, the excellent new products to work for Kellogg Company. With visibility. introduced during the year, and flaw- The Tiger Inside and driving us, I have “Our strategy is aimed less execution by our employees. every confidence that our 26,000 at providing sustainable employees and our board of directors RELIABLE GROWTH rates of performance for will continue our success and will de- We manage our Company for the liver sustainable, dependable growth. long-term and having realistic perfor- the foreseeable future.” mance targets is a core component Our performance in 2005 was the of our business model. In fact, these strongest since we implemented our targets provide us the flexibility neces- focused strategy. In fact, we met or sary to make significant investments exceeded all of our long-term targets: in the business and are crucial we exceeded our targets for revenue to our continued success. 2
  5. 5. we repurchased $664 million of our Operating Profit Growth. We con- and only through continuous cash shares in 2005 and we have a $650 tinuously focus on profitable revenue flow growth can a company generate million repurchase authorization growth; our long-term target is for mid increasing value. That is why one of for 2006. single-digit internal operating profit our core operating principles, Manage growth. We achieved this goal and for Cash, focuses the entire organiza- Share Owner Return. We have had posted five percent growth in 2005 tion on maximizing cash flow. In excellent success over the last five despite increased investment in future 2005, we generated $769 million of years and this has been reflected in growth and significantly higher input cash flow including contributions to our share price. The total return to costs which affected the entire industry. benefit plans of approximately $400 investors since the end of 2000 has million, which was approximately Earnings Growth. Our long-term been approximately 90%, or a 14% $200 million more than in 2004. target is for earnings per share to compound annual growth rate, signifi- This amount of cash flow provides increase at a high single-digit rate. cantly greater than the industry’s four us with significant financial flexibil- We exceeded this goal again in 2005 percent compound annual growth ity. Since 2001, we have paid down and posted ten percent growth; this rate. The Company’s total return in approximately $2 billion of the debt was the fourth consecutive year 2005 of negative one percent was taken on to fund the Keebler of double-digit earnings per share dramatically greater than the aver- acquisition. In recent years we have growth. This performance primarily age return of the entire industry, shifted our focus from debt repay- resulted from strong revenue growth, measured by the S&P Packaged Food ment alone, to a balance between a focus on cost-containment, lower index, which declined by eight per- debt reduction and other uses of cash interest expense, a lower tax rate, and cent. So, our total return, again, far flow. As a result, in 2005, we also fewer shares outstanding. exceeded the industry average. increased the dividend for the first time in four years and increased the Cash Flow. Cash flow is the ulti- share repurchase program. In fact, mate measure of a company’s success 3
  6. 6. globally and responds well to news innovation. For example, our Kashi THE TIGER INSIDE Organizational focus is one of in the form of either innovation or brand posted strong double-digit Kellogg Company’s competitive brand building. We define brand growth in revenues in 2005. We also advantages. We operate in only a building as advertising and consumer introduced new products such as few categories and we know them promotion, or any activity that adds Cran-Vanilla Crunch and Toasted well. We recognize that share owners to the desirability of the brand. It Honey Crunch, which joined the suc- do not need or want us to diversify cessful Raisin Bran Crunch brand in does not include price-related pro- for them; they want us to maximize the U.S. and All-Bran became our fast- motions, discounts, or coupons, as the value of our Company through est growing global brand as a result these activities, while they may drive superior execution and the genera- of strong innovation including volume gains in the short-term, do tion of consistent, dependable rates All-Bran Flakes with Yoghurt in the not add to the value of the brand or of growth. To this end, a few years U.K. and in various other countries. generate sustainable category share ago we adopted a strategy which Brand building is also a very im- gains. We performed very well in “To this end, a few years ago keeps us focused on the right metrics portant driver of sales growth and cereal categories around the world in we adopted a simple strategy and categories: grow our cereal busi- we made significant investment in 2005 and we gained share in nine of which keeps us focused on the ness, expand our snack business, and compelling advertising and consumer our ten focus businesses including the pursue selected growth opportunities. promotion around the world in 2005. U.S., the U.K., Canada, and Mexico. right metrics and categories: We also continued to encourage the These businesses represent more than grow our cereal business, expand transfer of proven ideas from one Grow Our Cereal Business. More 80% of sales outside the U.S. In our snack business, and pursue Kellogg business to another. For than half of Kellogg Company’s an- many others, where we have signifi- example, the Special K two-week chal- nual revenue comes from the ready- cantly greater category share than selected growth opportunities.” lenge, which encourages consumers to-eat cereal category. We have to our nearest competitors, we benefited to eat Special K cereal twice a day for win in this important category if the from very strong category growth. In two weeks, has been very successfully Company is to succeed. Fortunately, all of the regions we generated sales adapted by many of our businesses the cereal category is growing growth through our focus on 4
  7. 7. snack business is a logical extension Europe to Latin America to the U.S. around the world. This program, of our cereal business as many of our to Australia. We remain very pleased which was developed in Venezuela, cereal brands travel easily into snack with the excellent growth posted by helped Special K become our larg- categories around the world. So, our snack businesses and see signifi- est global brand and added to sales while the cost synergies are obvious, cant potential for further develop- growth in 2005. We also extended we have benefited in many other ment, expansion, and growth. this concept into an All-Bran two- ways from the combination of these week challenge which has been a real global success accompanied by power- complementary businesses. The Pursue Selected Growth Opportunities. ful advertising campaigns. Using global snack business had another The final part of our strategy is to concepts that have been developed very successful year in 2005 after an pursue selected growth opportunities. in different regions helps reduce the equally strong 2004. We continued We do not believe that the Company time to market and increases the pos- to focus on the right metrics. In all of needs to make a transformational sibility of success. Cereal remains a the snack businesses, as with cereal, acquisition to remain competitive. growth category with strong econom- innovation, brand building, and sales Rather, we believe that most large ac- ics and is a priority for the Company; execution are of primary importance. quisitions can dilute focus and can be a we are encouraged by our prospects For example, All-Bran bars proved distraction. For these reasons, we look for 2006 and the years to come. to be an on-trend innovation that to invest capital in small complemen- continues to post strong sales growth tary acquisitions that add to, and can Expand Our Snack Business. Our around the world. This product was benefit from, our existing competencies global snack business is also a very an excellent idea that was developed and brand orientation. For example, important part of the Company. We in Mexico and that has become a during 2005, we purchased a fruit expanded the scale of this business a success in many other countries. In snacks plant in Chicago. We entered few years ago and have worked very addition, Special K bars have been the fruit snacks business in the U.S. hard recently to drive sales growth and a significant driver of that brand’s in early 2004 and quickly gained the improve profitability. Expansion of the growth around the world, from number two category share position. 5
  8. 8. Purchasing production capabilities and it benefits both the individual from experts in subjects as diverse as has improved the margin structure and the Company’s results. Conse- category management, innovation, and has allowed us considerably more quently, we initiated a process in and corporate finance. flexibility in the innovation process. 2005 designed to strengthen the entire organization. We also added new affinity groups This is a very attractive, high-return as a further development opportuni- use of capital and we intend to pursue ty for employees. In addition to the similar opportunities in the future. Learning and Development. Through our performance review Kellogg African American Resource process, each employee is challenged Group, Women of Kellogg, and the The Employer of Choice. Having a direct and workable strat- to improve their skills and develop Young Professionals, we supported egy is simply not enough. We have new strengths. We recognize that this the formation of the Kellogg Multi- to focus constantly on our employees process is a marathon, not a sprint, national Employee Resource Group, “We continued to focus on and their development. As a result, in and are committed to the long-term and ¡HOLA!, the Latino Employee improvement, we generated 2005, we devoted far more time and success of the program. Improving Resource Group in 2005. These sales growth and increasing groups provide additional training increased resources to make Kellogg the corporate identity through inclu- and networking opportunities and Company the employer of choice. sion, the formation of affinity groups, profitability which provided and extensive training is a multi-year exposure to all parts of the the flexibility to make greater organization. We increased our already strong program. Corporate sponsorship of investments in future growth.” commitment to diversity and inclu- internal and external training oppor- tunities received far greater attention Growth. We have spent a consid- sion in 2005. This improvement was in 2005 through such programs as erable amount of time aligning the a direct result of increasing invest- the Career Development Week. This development of our employees to ment and our focus on the process. program, which was open to all the growth strategy of the organiza- Improving the cohesion of our team employees, provided internal training tion. Expansion into related of employees is an ongoing process 6
  9. 9. stronger and better positioned. The categories, new product develop- A number of years ago, we made core of the leadership team that ment, and geographical expansion some significant changes to the way engineered our success remains all require additional skills and we run the Company. We adopted unchanged. They, and all 26,000 expertise. Having a process which realistic targets, operating principles Kellogg employees around the stresses individual development that concentrated on profitable world, remain committed to our enables us to capitalize on any revenue growth and cash flow, and a values and the successful execution growth opportunities as they arise focused strategy for growth. As we of our operating principles without straining the organization. continued to focus on improvement, and strategy. We believe that it In addition, we initiated a Leader- we generated sales growth and is this dedication that will drive ship Development program in 2005. increasing profitability which pro- dependable, sustainable rates of vided the flexibility to make greater growth in the future and that investments in future growth. These Simplification. Simplification is makes Kellogg Company an are processes that have evolved but one of our core corporate values. attractive long-term investment. that remain as relevant today as Making the development process We hope you agree and thank you they were then. Over this period, understandable and easy to utilize for your continued support. we have faced considerable cost was an essential step. In 2005, inflation and competitive environ- we made significant progress in ments around the world and have streamlining processes across re- still managed to meet, and in many gions and providing easy access to cases exceed, our long-term targets. resources for all employees. While So, as we consider the future, we we are pleased with our progress, James M. Jenness remain encouraged and confident. Chairman of the Board we remain committed to making We made some difficult decisions Chief Executive Officer continual improvement. and the Company has emerged 7
  10. 10. Global Infrastructure David Mackay One of Kellogg Company’s greatest Focus and Brands. Kellogg popular advertising campaign featur- President competitive advantages is our global Company competes in relatively few ing William Shatner. This concept Chief Operating Officer was then used in various other coun- infrastructure. Our founder, W.K. categories. In addition, we have been Kellogg, started the Company almost careful to leverage similar products, tries including the U.K. and Australia. 100 years ago and quickly instituted and more importantly, similar brands in different regions. This focus Innovation. As many of our brands a program of geographic expansion. provides us the opportunity to spread are similar around the world, much A significant amount of time and ideas quickly around our businesses. of our successful innovation can also effort was expended building our businesses, and the cereal category, For example, advertisements used be introduced in various countries. We have a number of global brands around the world. The early adoption successfully in one country can often including our largest, Special K and of this growth plan has provided us be used in another as the products our fastest growing, All-Bran. with a truly global business today. In and the positioning of the brands are “A significant amount of time All-Bran has grown so 2005, we posted improved ready-to- similar. This has two benefits: often eat cereal category share in the U.S. costly programs can be inexpensively and effort was expended building and held or gained share in business- tailored to another region, thus low- our businesses, and the cereal es that account for more than 80% ering overall expenses; and, we can category, around the world.” of our sales outside the U.S. This utilize already tested and proven resulted from our increased competi- programs, so the chances of success tiveness and led to category expan- are greater. For example, our sion in many regions. This category Mexican business pioneered the share improvement simply reflects the idea of a health-oriented All-Bran growth potential we have around two-week challenge. Then our the world. Canadian business developed a 8
  11. 11. global basis, regions that would not we do not yet compete. However, any successfully, in part, because of good be able to participate on their own investment will be carefully consid- innovation. We developed All-Bran can afford the costs. These partner- ered and we will evaluate the relative Flakes with yogurt, varieties of which returns of all potential projects. In- ships with studios are symbiotic as we have been introduced in the U.K. and vesting significant amounts of capital continental Europe. In addition, we promote the movie in question while in the hope that a market will develop have taken these products to Latin increasing our own sales. is risky, so we will explore alternatives America and introduced a version in that are much more cost effective. the U.S. in early 2006. We will continue to make addi- Promotions. In addition to tradi- Growth Potential. While we have tional investments in those regions tional advertising, we also execute been investing resources in global in which we already compete. For global brand-building programs. In expansion for almost 100 years, we example, we built a direct-store-door 2005, we ran a Star Wars-themed do still have opportunities for expan- delivery capability in Mexico in recent program timed to coincide with the sion and development around the years. Investment in projects such as release of Star Wars Episode III, world. Five years ago we decided to this has a higher risk-adjusted return Revenge of the Sith. This global pro- limit the resources expended to create than many others and will continue motion ran in more than 30 countries categories in emerging markets and to be a focus for our Company. and contributed to our strong second to use the funds to invest in our core quarter results. Programs such as regions. Now, from a much stronger this bring news to the categories foundation, it is possible for us to con- and help drive sales. Our global sider additional investment in regions infrastructure again allows us to with developing categories in which spread the cost over a broad base. In we already compete and to consider addition, because we negotiate on a expansion into those regions in which 9
  12. 12. North American Retail Cereal Smart Start Healthy Heart joined Our North American Retail Cereal positioning and effective support. business had a very successful year In addition, Kellogg’s Frosted Flakes the Antioxidant and Soy Protein ver- in 2005. Internal net sales, which benefited from the successful Earn sions already on the market. exclude the effect of foreign Your Stripes campaign. We also Smart Start Healthy Heart is a currency translation, acquisitions, benefited from the introduction of great-tasting cereal that helps divestitures, and different numbers some excellent new products dur- reduce cholesterol and lowers blood of shipping days, increased by ing the year. Early in the year we pressure. This introduction was also North American Retail Cereal eight percent after increasing by introduced new Frosted Mini-Wheats supported with strong advertising two percent in 2004. This result Vanilla Crème which joined the and the product has done very well was significantly greater than our already popular original version and in the months since its introduction. “Mini-Wheats is an on- long-term target of low single-digit the maple and brown sugar flavor. Mini-Wheats is an on-trend brand We introduced two new versions of growth and also far exceeded the trend brand which provides which provides consumers with a our Kellogg’s Crunch cereals to add growth rate of the broader industry. consumers with a combination combination of great taste and to the existing, popular Raisin Bran This led to U.S. retail cereal category of great taste and fiber. This fiber. This positioning, in combina- Crunch. While it is still early, we are share gains of 0.4 points in 2005 tion with an excellent advertising encouraged by the new versions’ after gains of 0.4 points in 2004.* positioning, in combination campaign, led to the brand’s strong initial results; the existing Raisin with an excellent advertising performance in 2005. Bran Crunch has also performed In the U.S., many of our exist- campaign, led to the brand’s well, primarily as a result of a ing cereal brands, including Mini- strong performance in 2005.” popular advertising campaign. Wheats, Kashi, and Raisin Bran We also introduced two new Crunch, posted good rates of flavors of Mini-Swirlz in 2005 and sales growth as a result of strong a new version of Smart Start. * Source: Information Resources, Inc FDM Ex. Wal-Mart. Rolling 52-Week Periods, Ended January 1, 2006 10
  13. 13. Finally, shape management con- Mini-Wheats, and strong brand- Cinnamon Harvest cereal in the third tinues to be a growing segment of building programs. Our business in quarter and increased its focus on the category and Special K is well Canada faced a very competitive en- hot cereal with the successful launch positioned to benefit. Consequently, vironment early in the year. However, of Go-Lean hot cereal in the fourth we introduced a new Special K Fruit we continued to execute our plans for quarter. Kashi is well positioned for & Yogurt cereal at the end of the the introduction of innovative new future growth in a growing category second quarter of 2005; this great- products and support via strong brand- and we remain confident regarding tasting cereal has posted excellent building programs. Our business its potential. Outlook. Our North American initial results. It combines Special K responded and we again gained share Retail Cereal business posted impres- flakes with clusters of oats and fruit in this region during 2005. sive internal rates of growth in 2005. and yogurt-coated clusters. With While we would never target high one-half of a cup of fat-free milk, a Our natural and organic Kashi single-digit rates of internal sales serving has only 160 calories. brand also had a very good year in 2005. This stand-alone business growth, we are justifiably pleased that our focus on innovation and Our Club business posted strong posted double-digit internal sales brand building led to such strong double-digit sales growth in 2005 as growth and currently holds U.S. results. In 2006, we expect that a result of highly successful product ready-to-eat cereal category share our internal sales growth will be in and packaging innovation. of more than two percent. Consum- ers’ continuing health concerns and line with our long-term target of low single-digit growth, despite the very Our Canadian retail cereal busi- desire for convenience also drove high base set during 2005. ness also posted very strong internal sales growth in 2005. Kashi has a growth as a result of new product strong organic presence supported by introductions, such as maple flavored the launch of Kashi Organic Promise 11
  14. 14. North American Retail Snacks Our North American Retail Snacks increase of 1.7 points since 2004. introduced over the last two years. business also posted very strong Early in the year we introduced We also introduced new Club Snack growth in 2005. Internal net sales Cinnamon Roll Pop-Tarts toaster Sticks in 2005. These uniquely- growth was seven percent; this result pastries, followed by a strawberry shaped crackers are ideal for dips is more impressive given the eight milkshake flavor at the end of the and have been very well accepted by percent growth posted in 2004. The second quarter. In addition, Pop-Tarts consumers. We have much more growth was also greater than our has benefited from a very successful, innovation planned for 2006 and long-term target and resulted from long-term advertising campaign which look forward to another good year. North American Retail Snacks effective innovation, brand building, has increased awareness and added Our wholesome snack business con- and excellent in-store execution. The to sales growth. tinues to post strong growth, even in a toaster pastry, cracker, and whole- competitive category. Early in 2004 we some snack businesses all posted Our cracker business posted strong entered the fruit snack category and “We have strong brand good rates of growth. The cookie sales growth during the year. A num- business posted lower sales, although ber of major brands, including our equity in Keebler and the Hollow the brands on which we focused largest, Cheez-It crackers, contributed Tree and we will continue to performed well. to this performance. We introduced focus on this in the future.” new Cheez-It Fiesta during the sum- Pop-Tarts toaster pastries continued mer. This corn-based cracker innova- to post strong results in 2005. tion comes in two distinctive flavors: Pop-Tarts is a truly unique brand and cheddar nacho and cheesy taco. Both has generated increased sales in each products did very well in 2005 as did of the last 26 years. This year the base Cheez-It product in its Pop-Tarts reached an 86% share* of various flavors and the Cheez-It the toaster pastry category, an Twisterz products which were 12
  15. 15. earned strong category share during and a greater focus on our leading and the introduction of new products, the first year. In 2005, we followed our brands. We introduced new Fudge including Kashi Chewy Granola bars. early success with the introduction of Shoppe and Chips Deluxe cookies in new flavors of the Twistables brand 2005 and we also saw good growth Our Canadian snack business and new Disney fruit snacks. In addi- from new versions of Sandies and posted sales growth significantly tion, we launched Fruit Streamers rolled Murray Sugar Free cookies. We have greater than our long-term target in fruit snacks. strong brand equity in Keebler and 2005. Sales growth was driven by the the Hollow Tree and we will continue introduction of various new products We also hold the number one to focus on this in the future. We including a Two Scoops Raisin Bran category share* in the wholesome have additional innovation planned bar and new Froot Loops Winders snack bar category with such brands for each of the leading brands in fruit snacks. as Special K bars, Rice Krispies Treats 2006, as well as additional brand- squares, Nutri-Grain bars, and All-Bran building programs and a continued Outlook. We expect that internal bars. Special K bars posted strong focus on strong sales execution. sales in our North America Retail double-digit sales growth in 2005 and Snacks business will increase at a were one of our fastest growing prod- The club store business posted low single-digit rate in 2006, even ucts. In addition, we introduced a new double-digit internal sales growth for after two years of high single-digit Oatmeal Raisin version of the popular the second consecutive year. This growth. We expect 2006’s growth to All-Bran bars in 2005. All-Bran bars result was driven by selected innova- be driven by continued strong sales are a great-tasting source of fiber and tion, increased distribution, and a execution from our direct-store-door will complement the cereal brand. focus on our most profitable products. delivery system, strong innovation, and The team developed club-specific effective brand-building campaigns. * Source: Information Resources, Inc. FDM Ex. Wal-Mart. Rolling 52-Week Periods, Ended We addressed the current weakness items including differentiated packag- January 1, 2006. in the cookie category with innovation ing innovation, new mixes of products, 13
  16. 16. North American Frozen and Specialty Channels The North American Frozen and and half vanilla flavored, new flavors 2006. We have additional innovation Specialty Channels business, in the of Eggo Toaster Swirlz, and Eggo planned including a new flavor of Flip aggregate, posted internal net sales Pancake products. Eggo ended the Flop waffles, which will be supported growth of eight percent in 2005; this year with 32% share of the frozen with a strong advertising campaign. built on strong four percent growth breakfast category;* this represents We also have a Lego-themed promo- last year. The growth was driven by an increase of more than one point tion planned for 2006. strength in the Eggo and Morningstar from 2004. We remain optimistic Frozen and Specialty Channels lines and the Specialty Channels regarding the outlook for Eggo in business, which is comprised of the food service, convenience store, vend- ing, and drug store businesses. “The Frozen and Specialty Channels business, in the Frozen Foods. Our Eggo brand had aggregate, posted internal net another very successful year. Existing products such as French Toaster Sticks sales growth of eight percent and base Eggo waffles continued to in 2005; this built on strong do well, with excellent innovation four percent growth last year.” helping fuel the growth. During the year we introduced Flip Flop waffles, which are half chocolate flavored * Source: Information Resources, Inc. FDM Ex. Wal-Mart. Rolling 52-Week Periods, Ended January 1, 2006 14
  17. 17. Morningstar, our frozen vegetarian Both our Drug Channel and Con- partnered with large restaurant food brand, also posted good results venience Channel businesses posted chains by emphasizing Morningstar in 2005. We introduced Honey strong internal net sales growth in veggie foods. The success with both Mustard Chik’n Tenders and a popu- 2005, building on strong growth in casual-themed and quick-service lar new Meal Starters product during 2004. In these channels, where con- restaurants led to significant net the year. Meal Starters is different sumers desire convenience, we have sales growth in 2005. from most veggie food offerings in focused on packaging innovation, that it is a meat alternative used in new products, and in-store execution. Outlook. Our Frozen and the preparation of meals such as Each of these initiatives is good for Specialty Channels businesses, in fajitas. Morningstar Meal Starters, our businesses and for our customers. combination, posted excellent and new Veggie Bites, vegetable results in 2005 after strong growth appetizers planned for introduc- Our Food Away From Home busi- in 2004. We expect that these tion in 2006, are targeted at both ness (FAFH) continued its leadership businesses will post low single-digit vegetarians and non-vegetarians who position through the introduction of internal sales growth in 2006, in recognize the health benefits of a new products, including Cinnamania, a portfolio of whole grain products line with our long-term targets. vegetarian lifestyle. designed for the primary Schools Specialty Channels. The Spe- business. This has been FAFH’s most cialty Channels business continued successful product launch in three its success of recent years in 2005. years and was recognized as best in Internal sales growth was driven by class by the International Foodservice strength across the businesses. Distributors Association. In addition, the FAFH business successfully 15
  18. 18. Europe Our European business posted relatively small base. In Spain, the In 2005, we gained ready-to-eat internal sales growth of two percent cereal category grew at a double-digit cereal category share in the U.K.,* in 2005, in line with our long-term rate in 2005. The Company held our largest business in Europe. We target of low single-digit growth. This a 51% share of the Spanish cereal are very pleased with this result as it year’s results built on the strong four category in 2005, an increase of 1.0 reflects the success of our brand- build- percent growth posted last year and points from 2004.* ing and innovation programs in this are notable as the operating important region. Our internal cereal Europe environment in Europe as a whole, sales were essentially unchanged from and some countries in particular, We initially invested in Italy in 2004 due to competitive activity. remains challenging. 1967 and currently have a 55% cat- However, a majority of our innovation egory share.* The breakfast habit is for the year was timed to be intro- “We introduced numerous new Many of our businesses in Europe well developed in Italy and the cereal duced later in the year, so products across Europe in 2005. performed very well in 2005. Kellogg category is growing far more quickly Special K Yoghurty in Spain, Company initially invested in south- than the pastry category; pastries All-Bran with Yoghurt in Italy, ern Europe in the 1960s and 1970s; are the traditional breakfast food. In certain of these countries had a fact, the cereal category grew eight and Special K Milk Chocolate well established breakfast habit, but percent in 2005; we benefited from and new versions of Coco Pops in no cereal category. Over time, the this category growth and posted France were all well received.” Company has developed the category, increased sales as a result of strong which in some cases today is growing results from effective branding and at a double-digit rate, albeit from a innovation. * Source: Information Resources, Inc. Rolling 52-Week Periods, Ended December 2005. 16
  19. 19. during 2005 and was a great success. of Europe; this is just one example of we began to see the benefits in the In addition, most of the countries in the benefits of global coordination fourth quarter. Innovation in 2005 Europe participated in the global Star and a global brand portfolio. included Crunchy Nut Nutty, a new Wars promotion in the second quarter version of Coco Pops cereal, and of 2005. This promotion was very Outlook. While we are never satis- Special K Purple Berries, which has successful globally and involved fied, 2005’s performance in Europe done very well in the short time since existing brands and products developed was relatively strong and among its introduction. We also benefited specifically for the promotion. the best in the industry. That we throughout the year from some strong Our snack business across Europe achieved this result after posting marketing programs supporting both posted a good rate of growth in excellent growth in 2004 and while Special K and All-Bran. 2005. Many of the existing products, facing significant headwinds is a and the new introductions, lever- testament to our focus and strategy. We also gained share in France and age our existing cereal brands. For In 2006, we expect to post low Benelux in 2005,* driven by strong in- example, Special K bars have been single-digit growth as a result of the novation and brand-building programs. enormously successful in the U.K. and introduction of new products and We introduced numerous new products across Europe. The snack businesses continued growth from products across Europe in 2005. Special K in both Italy and Spain grew at strong introduced late in 2005. In addition, Yoghurty in Spain, All-Bran with Yoghurt double-digit rates in 2005 as consum- we expect to benefit from category in Italy, and Special K Milk Chocolate ers continued to seek added conve- growth in certain regions and and new versions of Coco-Pops in nience and portability. All-Bran bars, effective brand-building programs. France were all well received. Our new an idea developed in Mexico, have Coco Pops Straws product was also in- also been a success in various parts troduced in various countries in Europe 17
  20. 20. Latin America Our business in Latin America In Mexico, as with a majority of the from excellent new innovation and posted internal sales growth of 11% other countries in the region, we strong brand-building programs. in 2005, significantly greater than benefit from a growing category, Early in the year we introduced an All-Bran cereal containing flaxseed, our corporate-wide, long-term target category leading share, and strong a very popular ingredient in Mexico of low single-digit growth. This year’s brands and positioning. In Mexico our due to the health benefits it provides. double-digit growth also exceeded category share is 71 percent.* While We followed this with an All-Bran bar our expectations and built on the category continued to post strong growth in 2005, we also benefited containing flaxseed in the second double-digit internal sales growth in Latin America both 2003 and 2004. In fact, inter- nal sales in both our cereal and snack businesses increased at a double-digit “ In Mexico, as with a rate for the full year. Importantly, we majority of the other countries gained ready-to-eat cereal category in the region, we benefit share in much of the region in 2005, from a growing category, including in Mexico, Venezuela, the Caribbean, and Colombia.* The category leading share, and benefit from these strong share gains strong brands and positioning.” is significant. We started our business in Mexico in 1951 and it now accounts for most of the business in the region. * Source: AC Nielsen Data. Rolling 52-Week Periods, Ended December 2005. 18
  21. 21. Special K, Choco Krispies, Extra, products, special packaging, and quarter and both products have Zucaritas, and Corn Flakes and saw included in-the-box premiums in many performed very well. Then, in the excellent results. Children and parents of the packages. third quarter, we introduced two fla- alike love our products for the taste vors of a new brand of bars, NutriDía, and the nutritional content. Parents A majority of our other businesses in containing amaranth. Amaranth is can take comfort in knowing that Latin America also did very well another grain favored by consum- children who eat a breakfast including in 2005. Venezuela, Brazil, and the ers in Mexico for its health benefits. cereal have lower body mass indices Caribbean all posted strong While NutriDía is new, we are and generally enjoy improved perfor- double-digit internal sales growth. In encouraged by its early success and mance at school. Consequently, we many of these other markets in Latin its potential. continued to highlight the nutritional America our snacks business also grew content and fortification of both at very strong rates off a small base. Also in Mexico, during the year, we existing and newly introduced introduced new flavors of Special K products in 2005. In addition, we Outlook. We again expect that our bars, a chocolate flavored Special K supported this year’s strong innova- Latin American business will post mid cereal, an All-Bran cereal with yogurt, tion program with health-oriented single-digit sales growth in 2006, even Nutri-Grain bars, a Choco-Krispies bar, campaigns for All-Bran with flaxseed after posting double-digit growth in re- and Kellogg’s Go!, a coffee flavored and NutriDía. Our Latin American cent years. A combination of category cereal targeted at adults. business also participated in the growth, strong innovation and health global Star Wars promotion. The event news, and excellent brand-building The Latin American business also provided an excellent opportunity to support make us confident that we will significantly increased its investment increase our retail presence and many reach our targets in 2006. in brand building during 2005. of our customers participated. We We ran programs supporting many introduced special Star Wars-themed of our existing brands including 19
  22. 22. Asia Pacific Brown Rice Flakes, and Black Bean The Asia Pacific region consists of also introduced our largest global Flakes. The brand has proven to be businesses in various countries in Asia, brand, Special K, in Japan during very popular and has already gained such as Japan and Korea, in combina- 2005. We continued to support new significant category share. In addi- tion with the Australian business. Asia and existing brands with significant tion, our Frosties brand did well and levels of brand building, including Pacific posted increased internal sales our Chex brand posted significant, a campaign for the new Special K, of one percent in 2005, driven by inno- double-digit sales growth for the full which began late in the year. Our vation and brand-building programs in Asia Pacific year, driven, in part, by a highly Frosties brand posted mid single-digit each of the constituent countries. This sales growth in 2005 as a result of growth built on two percent growth the introduction of Frosties with in 2004 and was achieved despite an Amino Acids and strong brand- increasingly competitive environment building programs in conjunction in the region, a continued difficult ”In Japan, we posted increased with the summer’s Star Wars- operating environment in Korea, and category share and we themed promotion. comparisons to higher-than-targeted growth in 2004 in Australia. saw good growth in adult In Korea, internal net sales cereal brands such as increased slightly in 2005 In Asia, internal sales increased at All-Bran and Bran Flakes.“ after a difficult operating a mid single-digit rate as a result of environment in 2004. We growth in each of the region’s constit- introduced a new brand, uent countries. In Japan, we posted Grain Story, in 2005. This increased category share* and we saw brand encompasses three good growth in adult cereal brands products: Five-Grain Flakes, such as All-Bran and Bran Flakes. We 20
  23. 23. posted slight full-year sales growth in We also committed resources to effective interactive television advertis- cereal in 2005. brand building in 2005 in Australia. ing campaign. This continued our trend and was We introduced a broad array of very much in line with our broader In India, we continued to see excel- new products during the year includ- corporate operating principles. We lent double-digit growth, albeit from ing Guardian Oat Puffs, Crunchy Nut supported many of the new product a relatively small base. Kellogg’s Corn Clusters, Just Right Tropical, and new introductions, but also supported ex- Flakes posted strong growth as the versions of K-Time bars, Nutri-Grain isting products using health-oriented result of a nutrition-based advertising bars, and Special K bars. Most of this programs for All-Bran and Guardian campaign, the global Star Wars- innovation launched relatively later and we also saw good growth from themed promotion, and innovation. Our Choco brand also posted good in the year. Importantly, cereal share Sultana Bran. performance as the result of the Star on a range of well-established brands such as All-Bran, Guardian, and Outlook. We expect to post low Wars promotion and a strong, differ- single-digit internal revenue growth entiated brand-building program. We Sultana Bran increased significantly. in Asia Pacific in 2006. Continued now have three brands in India and In addition, we launched into the emphasis will be placed on innova- plan to continue our focus on this rapidly growing muesli segment with very important region in 2006. Be Natural muesli. Full-year growth tion and brand building in the region for the region included double-digit and we expect to benefit from sales growth in our business in strong execution. Our Australian business posted essentially unchanged internal sales New Zealand. despite a heightened competitive * Source: AC Nielsen Data. Rolling 52-Week Periods, environment during the year. We Ended December 2005. 21
  24. 24. Operating Principles We manage our business using two We now focus on generating gross years; this is significantly more than operating principles which support profit through cost-saving initiatives, the 33.7% category share* we hold. the execution of our strategy. The supply chain efficiency programs, We believe that successful innova- two principles, Volume to Value and and mix improvement. Mix improve- tion is essential for success in all the Manage for Cash keep our entire ment is the sale of a value-added categories in which we compete. We organization focused on the right product with a higher retail price, have also been very successful with metrics: metrics that drive profitable higher gross margin, and higher gross brand-building programs. We have revenue growth and cash flow. profit in place of a less value-added significantly increased our investment “ Volume to Value and Manage for Cash keep our entire organization focused on the right metrics: metrics that drive profitable revenue growth and cash flow.” Volume to Value. Volume to Value, product. For example, sales of Raisin in this area and sales have responded the first half of our operational focus, Bran Crunch are preferable to sales accordingly. However, despite these drives revenue growth, gross profit, and of traditional Kellogg’s Raisin Bran recent increases, the absolute amount reinvestment. A number of years ago as the revenue and profit from sales spent on advertising by the Com- our Company measured its success by of Raisin Bran Crunch are higher. pany in 2005 was still less than the tonnage growth and the incentives in We take the gross profit and invest amount spent ten years ago. This is place at the time drove managers and it into two main areas: innovation because the Company dramatically employees to pursue this growth. We and brand building. We have been decreased advertising spending in the made dramatic changes to this process successful in both areas in recent late 1990s. four years ago and the improvement years. We currently hold more than has been significant. 50% share* of sales from all the new Our innovation produces value- products introduced in the U.S. cereal added products for which the con- category over the last three sumer is willing to pay more and the * Source: Information Resources, Inc. FDM Ex. Wal-Mart. Rolling 52-Week Periods, Ended January 1, 2006. 22