DBRS Upgrades Kellogg Company to A (low)

Dominion Bond Rating Service (“DBRS”) has today upgraded the Senior Unsecured Debt rating of the Kellogg Company (“Kellogg” or the “Company”) to A (low) from BBB (high). The Commercial Paper rating of Kellogg Canada Inc. remains unchanged at R-1 (low). Since January 2005, the long-term rating trend has been Positive; in conjunction with the upgrade, both trends are now placed at Stable.

The upgrade in the Company’s long-term rating is supported by the following:

(1) Kellogg’s track record of generating organic net sales growth continues, as a result of the strength of Kellogg’s existing brands and the successful launch of new products and brand extensions. The result has been a growth in Kellogg’s market share position vis-à-vis other cereal companies. DBRS notes that the organic growth is broad based, as it is being achieved in all of its geographic divisions, and most of its product groups.

(2) Improvements in earnings and cash flow have continued, despite the ongoing increase in costs (such as commodity, energy, benefits, advertising, and consumer promotion). Kellogg has successfully been protecting margins to-date by offsetting higher costs with product mix gains, productivity improvements, cost-reduction initiatives, and price increases.

(3) Net free cash flow was used primarily to reduce debt by approximately US$2.3 billion from around US$6.8 billion since the acquisition of Keebler Foods in 2001. The outcome has been an operating cash flow-to-total-debt ratio that has improved to 0.28 from 0.22 times since F2003.

DBRS finds acceptable the Company’s recent announcement that it will increase the size of its share repurchase authorization to US$675 million for F2005 and has approved an additional US$650 million for F2006. The effect is essentially a shift in the use of net free cash flow from debt reduction to share buybacks in the near term. Accordingly, DBRS does not anticipate a significant use of debt to fund the share repurchases, and, as a result, credit metrics are expected to remain stable at favourable levels.

Therefore, Kellogg’s financial metrics and overall credit risk profile have consistently been improving to a level that DBRS believes is commensurate to an A (low) rating.

Note:
Senior Unsecured Debt for Kellogg Company was formerly a Corporate Rating.