Fitch Upgrades Kellogg's IDR to 'A-'; Outlook Stable

2008-07-18 20:59:06 -

- Fitch Ratings has upgraded Kellogg Company's (Kellogg) long-term ratings as follows:

Kellogg Company:

--Long-term Issuer Default Rating (IDR) to 'A-' from 'BBB+';

--Senior unsecured debt to 'A-' from 'BBB+';

--Bank credit facility to 'A-' from 'BBB+';

Kellogg Europe Company Limited:

--Long-term IDR 'A-' from 'BBB+';

Kellogg Holding Company Limited:

--Long-term IDR 'A-' from 'BBB+';

Concurrently, Fitch has affirmed Kellogg's short-term ratings as follows:

Kellogg Company:

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Kellogg Europe Company Limited:

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Kellogg Holding Company Limited:

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

The Rating Outlook is Stable. Total debt at March 29, 2008 was $5.9 billion, including $1.3 billion of commercial paper.

Kellogg's ratings incorporate its leading market share positions, strong brand equity, solid top-line growth and rising operating earnings. The ratings are also supported by the company's clear and balanced financial strategy, as well as its significant liquidity and high margins for the industry. Kellogg holds #1 or #2 market positions in all the major categories in which it competes.

Net sales growth in the first quarter ended March 29, 2008 was 10%, which built upon solid 8% sales growth in 2007. First quarter sales were generated 1% from volume growth, 4.4% from price/mix, 1.4% from acquisitions, and 3.2% from currency. Operating profit rose 9.2%, or 6.4% excluding the impact of currency and acquisitions. Kellogg's margins are expected to remain among the highest in the packaged foods sector, despite modest margin deterioration in the near term primarily as a result of input cost inflation.

Commodity input cost inflation is prevalent across the packaged foods sector. Kellogg continues to identify cost-reduction initiatives, which along with higher pricing and mix improvements, lessen the impact. Positive top-line trends are likely to continue. Fitch expects that the principal use of free cash flow will be for net share repurchases. Kellogg also has the financial flexibility to pursue modest sized bolt-on acquisitions.

Total debt-to-operating EBITDA was approximately 2.4 times (x) for the last 12 months ended March 29, 2008; operating EBITDA to gross interest expense was 7.5x, and funds from operations (FFO) adjusted leverage was 3.4x. During the first quarter of 2008 Kellogg completed its entire $650 million share repurchase authorization for the year and also issued $750 million of 4.25% notes due March 6, 2013. These actions caused leverage to temporarily increase above the company's historical range. In June, Kellogg repaid its $465 million 2.875% notes that matured. As cash flow is generated during the year, Fitch expects further reduction in short-term debt and improvement in leverage credit metrics to maintain total debt/EBITDA in the 2.1x to 2.3x range over the near-to-intermediate term.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Fitch Ratings
Judi M. Rossetti, CFA, CPA, +1-312-368-2077
Wesley E. Moultrie II, CPA, +1-312-368-3186 (Chicago)
Media Relations:
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