DBRS Confirms Kellogg Company at A (low) and R-1 (low); Trend Remains Stable

DBRS has today confirmed the long- and short-term ratings of Kellogg Company (Kellogg or the Company) at A (low) and R-1 (low), respectively, with a Stable trend. Profitability continues to be driven by a strong portfolio of brands, large scale, and improving product and geographic diversification. Successful innovation, advertising and promotion, and in-store execution continued to propel broad-based sales growth.

Kellogg’s earnings profile remained within the context of its current rating category despite intensifying pressure from rising input and operating costs as the Company was successful in offsetting much of the increase in costs with efficiency gains and price/mix improvements in 2007. In terms of financial profile, net share repurchases and acquisitions remained in line with free cash flow generation for the year.

Going forward, DBRS estimates Kellogg’s revenue growth will remain in the mid-high single-digit range, primarily as a result of further price increases and good momentum in the Retail Snacks and International segments. On the other hand, margins are expected to weaken further as pricing and efficiency improvements will likely not offset cost increases in the near future. DBRS also believes further price increases will have an increasingly negative impact on volume growth going forward (particularly in North America).

As a result, we expect Kellogg to display slower growth in operating income and cash flow over the near-medium term. At the same time, DBRS expects share repurchases and acquisitions will remain close to free cash flow; a significant increase in debt levels is not expected over the same period. Therefore, DBRS expects Kellogg’s credit risk profile to remain stable and well placed within the current rating category.

Note:
All figures are in U.S. dollars unless otherwise noted.