OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BBB' to Kellogg Company's (Kellogg) EUR600 million senior unsecured notes due 2024. Proceeds from the notes will be used to refinance the $750 million senior unsecured notes due May 2016. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS
The rating reflects Fitch's expectations that core volume driven growth will be modestly positive at best through the medium term. Volumes have been negative in the -0.5% to -2.6% range on a consolidated basis in four of the past five years. Further, U.S. Morning Foods (mainly ready to eat cereal) and U.S. Snacks, which represent $6 billion in revenues and roughly 45% of the portfolio, have had negative organic growth over the past several years. Positive growth in some categories such as the high single digit levels for the Pringles brand with nearly $2 billion in revenues have been offset by negative organic growth trends in other brands.

The company should have some modest price driven growth going forward similar to historic performance over the last five years but there is uncertainty around volume growth as a long term driver of top line improvement. Revenues have been hampered by significant exposure to slow growing mature markets and this has been further challenged by recessions in key emerging markets. U.S Morning Foods, which is mainly cereal, and more than 20% of the company's portfolio has had 11 consecutive quarters of negative organic growth through the first quarter of 2016 (1Q16), besides the +1.5% recorded in the 4Q15.

Fitch expects leverage to remain in the 3x range over the next two years, above the 2.75x average seen from 2011 through 2014. Fitch expects EBITDA to be increase in the low to mid-single digits over the next two years to $2.6 billion in 2016 and $2.7 billion in 2017. Debt is expected to remain essentially flat and Kellogg will continue to allocate $1.4 billion towards share repurchases and dividends annually.

Substantial Restructuring Costs: In November 2013, Kellogg announced Project K, a global restructuring program with savings expected to reach an annual run rate of $425 million to $475 million by 2018. Most of the savings are expected to be reinvested back into business for brand support.

The restructuring costs are expected to be in the range of $1.2 billion to $1.4 billion and will require about $300 million in incremental capital expenditures. Estimated cash costs are about $1 billion. The project's substantial cash cost to date, which is about halfway through, has been largely offset by working capital improvements. However, free cash flow (FCF) has declined from $603 million in 2013 to $438 million in 2015 due to the decline in EBITDA.

Fitch estimates that FCF will be in the $350 million-$400 million range in 2016, given continued cash costs related to the restructuring program and Fitch's assumption of neutral working capital. Annual FCF should improve meaningfully to the $700 million range as Project K cash costs subside in 2017.

KEY ASSUMPTIONS
--Revenues decline 3% in 2016 impacted by negative F/X translation with organic growth expected to be in the 5% range driven by pricing actions primarily in Venezuela. Volume growth is expected to be modestly negative in the 0.5%-1% range over the next few years.
--Fitch expects EBITDA to be increase in the low to mid-single digits over the next two years to $2.6 billion in 2016 and $2.7 billion in 2017.
--FCF after dividends is $350 million-$400 million in 2016 but improves meaningfully to the $700 million range as Project K cash costs subside in 2017.
--Leverage (gross debt to EBITDA) remains in the 3x range in 2016 and 2017.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:

--A negative rating action could occur if Kellogg's organic growth rate is negative in the low single digit range. Consistently negative trends would signal that the company's renovation and brand support efforts are not effective and/or that emerging markets performance is worse than expected.
--Leverage sustained above 3.5x either as a result of poor performance or material debt financed share buybacks or acquisitions.

Future developments that may, individually or collectively, lead to a positive rating action include:

--A positive rating action could occur with sustained low to mid-single digit organic growth with volume trends turning positive and with overall market shares stable or improving. Additionally, Kellogg would have to maintain leverage in the mid to high 2x range.

LIQUIDITY
Kellogg's $2.3 billion liquidity included its undrawn $2 billion revolving bank facility plus $310 million cash and equivalents at April 2, 2016. While there is pressure on FCF in 2016, Fitch expects this measure to improve substantially beginning 2017.

FULL LIST OF RATING ACTIONS

Fitch currently rates Kellogg as follows:

Kellogg
--Long-Term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured debt 'BBB';
--Bank credit facility 'BBB';
--Short-Term IDR 'F2';
--Commercial paper (CP) 'F2'.

Kellogg Europe Company Limited
--Long-Term IDR 'BBB';
--Short-Term IDR 'F2';
--CP 'F2'.

Kellogg Holding Company Limited
--Long-Term IDR 'BBB';
--Short-Term IDR 'F2';
--CP 'F2'.

Kellogg Canada, Inc.
--Long-Term IDR 'BBB';
--Senior unsecured debt 'BBB'.

The Rating Outlook is Stable.