Kellogg Company
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August 4, 2016
Kellogg Company2016 SECOND QUARTER
FINANCIAL RESULTSAugust 4, 2016
Forward‐Looking Statements
2
This presentation contains, or incorporates by reference, “forward‐looking statements” with projections concerning, among other things, the Company’s global growth and efficiency program (Project K), the integration of acquired businesses, the Company’s strategy, zero‐based budgeting, and the Company’s sales, earnings, margin, operating profit, costs and expenditures, interest expense, tax rate, capital expenditure, dividends, cash flow, debt reduction, share repurchases, costs, charges, rates of return, brand building, ROIC, working capital, growth, new products, innovation, cost reduction projects, workforce reductions, savings, and competitive pressures. Forward‐looking statements include predictions of future results or activities and may contain the words “expects,” “believes,” “should,” “will,” “anticipates,” “projects,” “estimates,” “implies,” “can,” or words or phrases of similar meaning.
The Company’s actual results or activities may differ materially from these predictions. The Company’s future results could also be affected by a variety of factors, including the ability to implement Project K as planned, whether the expected amount of costs associated with Project K will differ from forecasts, whether the Company will be able to realize the anticipated benefits from Project K in the amounts and times expected, the ability to realize the anticipated benefits and synergies from the acquisitions in the amounts and at the times expected, the impact of competitive conditions; the effectiveness of pricing, advertising, and promotional programs; the success of innovation, renovation and new product introductions; the recoverability of the carrying value of goodwill and other intangibles; the success of productivity improvements and business transitions; commodity and energy prices; labor costs; disruptions or inefficiencies in supply chain; the availability of and interest rates on short‐term and long‐term financing; actual market performance of benefit plan trust investments; the levels of spending on systems initiatives, properties, business opportunities, integration of acquired businesses, and other general and administrative costs; changes in consumer behavior and preferences; the effect of U.S. and foreign economic conditions on items such as interest rates, statutory tax rates, currency conversion and availability; legal and regulatory factors including changes in food safety, advertising and labeling laws and regulations; the ultimate impact of product recalls; business disruption or other losses from war, terrorist acts or political unrest; and other items.
Forward‐looking statements speak only as of the date they were made, and the Company undertakes no obligation to update them publicly.
Non‐GAAP Financial Measures. This presentation includes non‐GAAP financial measures. Please refer to the Appendices for a reconciliation of these non‐GAAP financial measures to the most directly comparable GAAP financial measures. Management believes that the use of such non‐GAAP measures assists investors in understanding the underlying operating performance of the company and its segments.
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Kellogg Company
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August 4, 2016
Second Quarter 2016
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*On a currency‐neutral comparable basis
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
• Investing in our food and packaging – renovation and innovation across portfolio
• Expanding Pringles – good sales growth*worldwide
• Enhancing sales capabilities – Revenue Growth Management
• Increasing earnings visibility – raising margin* expectations
Clear Progress on Priorities:
Profit Margin Outlook
4August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
• Ongoing• Project K• ZBB
Invest forImpact
PriceRealization
Productivity
10.0%
12.5%
15.0%
17.5%
20.0%
2015 2018E
Currency‐Neutral, Comparable Basis, Operating Profit as % of Net Sales
14.4%
• ROI• New Marketing
model
~18%
• Revenue Growth Management
On‐TrendFood
• Renovation• Innovation• Portfolio Management
Kellogg Company
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August 4, 2016
Year to Date
Summary of Financial Results
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* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
Change Versus Prior Year
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Q2
Net Sales
Reported (6.6)% (5.5)%
FX‐Neutral Comparable * 8.6% 7.6%
FX‐Neutral Comparable
x‐Venezuela * (2.0)% (1.5)%
Op.Profit
Reported 9.1% 11.5%
Earn.PerShare
Reported 25.4% 2.4%
Comparable * (1.1)% (1.6)%
FX‐Neutral Comparable * 8.7% 22.6%
FX‐Neutral Comparable * 10.6% 23.0%
FX‐Neutral Comparable
x‐Venezuela * 5.3% 3.4%
Net Sales Components
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Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
$3,498 M +10.2%, (0.5)% ex. VZ
$3,268 M
(1.6)%,(1.5)% ex. VZ (15.1)%,
(1.8)% ex. VZ
Currency‐NeutralComparable Growth
+8.6%; (2)% ex. VZ+0.1%
YTD: (1.1)% 8.7% 0.3% (13.4)%excluding VZ (1.0) (0.5) 0.3 (2.0)
(year‐over‐year, % change)
Kellogg Company
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August 4, 2016
Gross Profit Margin
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* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
36.0%
37.0%
38.0%
39.0%
40.0%
Q2 YTD
2015 2016
Currency‐Neutral, Comparable Basis, Excluding Venezuela, Gross Profit as % of Net Sales*
+ GPM flat ex‐Venezuela in Q2
+ Productivity, Project K, ZBB efficiencies, led by North America
‐ Adverse mix, investment in food, adverse transactional FX
+ Projecting improvement for year
Operating Profit Margin
8
* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
+ OPM +110 bp ex‐Venezuela in Q2
+ Project K, ZBB efficiencies, and some timing of Brand Building
+ On‐track to post improvement for year
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
16.0%
Q2 YTD
2015 2016
Currency‐Neutral, Comparable Basis, Excluding Venezuela, Operating Profit as % of Net Sales*
Kellogg Company
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August 4, 2016
Financial Performance by Region
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North America
Europe
Latin America
Asia Pacific
(3)%
0%
112%
3%
5%
67%
17%
• Volume declines on price‐elasticity and non‐core brands • Adverse mix• Net input deflation and cost savings
• Pringles +DD growth, Wholesome Snacks +MSD growth, offset by softness in RTEC
• Efficiencies more than offset adverse transactional FX
• Pringles +HSD, Africa +DD, Asia +LSD, Australia cereal stabilizing• Brand Building and Overhead efficiencies/reductions
* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
4%
• Pricing in hyperinflationary Venezuela; elsewhere, price‐elasticity and promo timing in Mexico
• Ex‐Venezuela price realization, cost savings, and Brand Building efficiencies
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Net Sales
Growth*
Operating Profit
Growth*
x‐Venezuela
OP Margin
Growth*
1.4 pt.
0.5 pt.
(3.1) pt.
0.8 pt.
(1)% 4% 0.8 pt.
Q2 2016, Currency‐Neutral, Comparable Basis, Operating Profit as % of Net Sales
Cash Flow
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* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
• Year‐to‐date cash flow* $399 million
• Includes headwind of $(97) million from bond tender
• Ahead of year‐ago period, in line with expectations
• Continued reduction in core working capital* as % of sales
• On‐track to deliver approx. $1.1 billion cash flow* for the full year
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
* “Cash Flow” is Operating Cash Flow After Capital Expenditure; Year to Date through Q2 2016. “Core Working Capital” is an internal Kellogg metric defined as last 12 months’ average trade receivables and inventory, less 12 months’ average trade payables, divided by last 12 months’ net sales.
Kellogg Company
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August 4, 2016
2016 Outlook
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(a) 2016 guidance excludes the impact of acquisitions, dispositions, currency translation, differences in the number of shipping days, mark‐to‐market adjustments, integration costs, costs related to Project K, Venezuela remeasurement, VIE deconsolidation, and other items that could affect comparability.
(b) 2016 guidance excludes the impact of currency translation, differences in the number of shipping days, mark‐to‐market adjustments, integration costs, costs related to Project K, Venezuela remeasurement, and other items that could affect comparability. Does include the impact of prior acquisitions and investment in JVs.
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
EPS(b)Currency‐Neutral Comparable
Operating Profit(a)Currency‐Neutral Comparable
Net Sales(a)Currency‐Neutral Comparable
+4‐6%
+15‐17%
$4.11 ‐ $4.18
Note: Excluding Venezuela
Currency‐NeutralComparable
+0‐2%
+4‐6%
• Still expecting return to slight growthin 2H
• Now expected to be low end of range
• Expanded ZBB savings in North America, and early ZBB savings in International
• Now expected to be high end of the range
Previous: 0‐2%Previous: 4‐6%
Previous: 4‐6%
• Venezuela performance and ZBB savings• Comparable EPS comes down to $3.58‐
$3.65 (from previous $3.64‐$3.71 guidance) for European currency translation
Previous: $4.00‐$4.07
Previous: 11‐13%
* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
2016 Outlook – Guidance Items
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(a) 2016 guidance excludes the impact of currency translation, differences in the number of shipping days, mark‐to‐market adjustments, integration costs, costs related to Project K, Venezuela remeasurement, VIE deconsolidation, and other items that could affect comparability. Does include the impact of prior acquisitions and investment in JVs.
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
• Currency Translation – Venezuela $(0.41)/sh. Previously $(0.30)
• Currency Translation – Others $(0.12)/sh. Previously $(0.06)
• Interest Expense ~$400 Includes $150 from bond tender
• Comparable Tax Rate ~27% Previously 27‐28%
• Share Buybacks $700‐750 No change
$ in Millions, Except Per‐Share Data
• Up‐Front Costs (post‐tax) $(0.40)‐(0.50) No change; pre‐tax $(0.56)‐(0.71)
• Integration Costs (post‐tax) $(0.02)‐(0.03) No change; pre‐tax $(0.03)‐(0.04)
Kellogg Company
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August 4, 2016
U.S. Snacks
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Overview
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Crackers
Cookies
Bars
Salty
Fruit Snacks• Big, profitable business
• Great brands
• Broad portfolio
• Impacted by Special K
Net Sales$3.2 billionNet Sales$3.2 billion
Retail Sales$1 bn
Retail Sales$0.2 bneach
Retail Sales$0.5 bn
Retail Sales$0.2 bneach
Retail Sales$0.7 bn
U.S. Snacks
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• Project K
• Zero‐Based Budgeting
• Revenue Growth Management
Improving Profit Margins
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
YTDOperating Profit
Margin*
+120bp
RGM results:
• Consumption +5%• Avg. price increased on base,
promoted, and overall• Higher profit margin
* Currency‐neutral, comparable basis. Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
Kellogg Company
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August 4, 2016
U.S. Snacks
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Investing in Growth Brands
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Source: Nielsen, xAOC
Consumption, % Growth
7/2/2016 7/2/2016
YTD Q2
4.8 5.4
0.8 1.9
2.9 2.0
(1.5) 0.4
2.8 1.6
(0.5) 5.4
1.9 4.5
U.S. Snacks
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Expanding On‐the‐Go
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
• New formats
• Additional offerings
• Expanded capacity
• Increased distribution
Kellogg Company
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August 4, 2016
U.S. Snacks
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Stabilize Special K
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
• Transition to new brand positioning
• Launching on‐trend nut‐based bars
• Renovating other foods – where possible
U.S. Snacks
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• Improved Operating Profit Margin*
• Investment and on‐the‐go driving growth in core brands
• Weight management, off‐trend SKUs were a drag
Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
* Currency‐neutral, comparable basis. Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
Kellogg Company
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August 4, 2016
U.S. Morning Foods
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Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
• Strong improvement in Operating Profit Margin*
• Core 6 cereal brands holding share, Pop‐Tarts strong growth
• Sales held back by timing of promotion, exit of non‐strategic businesses
• Kellogg’s NYC restaurant –one billion impressions!
* Currency‐neutral, comparable basis. Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
U.S. Specialty Channels
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• Continued net sales growth in core channels
• Margin expansion* through price realization and mix
• Strong innovation performance
• Expanding reach in emerging channels
Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
* Currency‐neutral, comparable basis. Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
Kellogg Company
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August 4, 2016
North America Other
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• Kashi completed non‐GMO verification across North America
• Innovation off to good starts in Canada, Frozen and Kashi
• Portfolio management, packaging transitions, and price elasticity
• Kashi investment in food and packaging; adverse cost impact of transactional FX in Canada
Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Europe
22
• +DD net sales growth in Pringles
• +MSD net sales growth in Wholesome Snacks
• Cereal held down by Special K, challenging retailer environment in U.K.
• New innovation and support planned in Cereal business
Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Kellogg Company
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August 4, 2016
Latin America
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• Managing well through volatility
• Sequential improvement in top‐line, despite price elasticity, challenging economic environment
• Good Operating Profit Margin*
improvement ex‐Venezuela in Q2
• Continuing to gain share in key markets
Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
* Currency‐neutral, comparable basis. Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
Asia Pacific
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• Strong Pringles net sales growth, including initial waves of Tortilla
• Regained share in Australia cereal
• Strong net sales growth in Sub‐Saharan Africa, Southeast Asia
• Our JVs continue to perform well
• Improved Operating Profit Margin*
Second Quarter 2016
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
* Currency‐neutral, comparable basis. Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
Kellogg Company
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August 4, 2016
Summary
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• Q2: Better earnings, progress on priorities
• 2016 Outlook: Higher margins
• Longer‐Term Outlook: Visibility into increased savings and efficiencies
May 5, 2016 KELLOGG COMPANY | Q1 2016 EARNINGS
August 4, 2016
Kellogg CompanySECOND QUARTER 2016 FINANCIAL RESULTS
Q&A
Kellogg Company
Page 14 of 14
August 4, 2016
APPENDIX: 2016 EPS Guidance
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(a) 2016 guidance excludes the impact of currency translation, differences in the number of shipping days, mark‐to‐market adjustments, integration costs, costs related to Project K, Venezuela remeasurement, VIE deconsolidation, and other items that could affect comparability. Does include the impact of prior acquisitions and investment in JVs.
August 4, 2016 KELLOGG COMPANY | Q2 2016 EARNINGS
Guidance from Q4 2015 Call Guidance from Q1 2016 Call Guidance from Q2 2016 Call
2015 Reported earnings per share $1.72 $1.72 $1.72
Items affecting comparability 1.81 1.81 1.81
2015 Comparable earnings per share (EPS) $3.53 $3.53 $3.53
+6‐8% +13‐15% +16‐18%
Currency‐neutral comparable 2016 EPS (a) $3.74 ‐ $3.81 $4.00 ‐ $4.07 $4.11 ‐ $4.18
Current estimate for impact of currency ex. VZ (≈0.06) (≈0.06) (≈0.12)
(≈0.04) (≈0.30) (≈0.41)
(≈0.10) (≈0.36) (≈0.53)
Comparable 2016 EPS $3.64 ‐ $3.71 $3.64 ‐ $3.71 $3.58 ‐ $3.65
Integration costs $(0.02) ‐ (0.03) $(0.02) ‐ (0.03) $(0.02) ‐ (0.03)
Upfront costs $(0.40) ‐ (0.50) $(0.40) ‐ (0.50) $(0.40) ‐ (0.50)
Current estimate for impact of VZ currency
Total Impact of currency
* Please refer to appendices for reconciliation of non‐GAAP measures to the most directly comparable GAAP measure.
*
*