Strategy

Our Strategy

Grow Cereal. We recognize that the success of our cereal business is essential for our Company to succeed. Consequently, we make significant investments in research and development and brand building. We hold the number one category share position in the U.S. and in most of the countries in which we operate.
Expand Snacks. We also have a strong snacks business. We have the number one wholesome snack business and the number two cookie and cracker businesses in the U.S. (based on category dollar share*). We also have fast growing wholesome snacks businesses in many other countries around the world. The focus for all of these businesses is also innovation and strong brand-building support.

A Consistent, Proven, Process

Sustainable Growth. Sustainable Growth is the initial part of our broader operating principle as it ensures that we remain focused on sustainable, profitable revenue growth rather than volume growth.

We again executed our Sustainable Growth principle across our businesses in 2006. New products that consumers value and the successful support from effective advertising and consumer promotion drive revenue mix improvement. This provides revenue growth and higher gross profit, as consumers value the added benefit from innovation. This, is additional profit that we can invest in continued innovation and brand building. Continuing the successful innovation and brand-building programs is the key to sustaining the momentum of the business.

In 2006, we again increased our investment in brand building and we also invested significantly in innovation. In fact, products introduced in the last three years accounted for 17% of sales in 2006. This is a dramatic increase from the low double-digit rate of only a few years ago. Consequently, price increases and mix improvement added four percent to revenue growth in 2006 while internal net sales increased by seven percent. While gross margin declined due to significant commodity inflation, operating profit increased at a mid single-digit rate. We achieved this even while we significantly increased investment in future growth.

Manage for Cash. In addition, the organization remained focused on Manage for Cash, the second part of our broader operating principle. We are constantly trying to decrease the amount of cash we have committed to working capital. By decreasing the amount of inventories we have, by increasing the speed with which we collect receivables, and by better managing our payables, we use less cash. In addition, we are committed to prioritizing the amount of cash we will spend in any year on capital expenditure. Ours is not a capital-intensive business and we have been successful at eliminating unnecessary expenditures. This vigilance, and increasing earnings, provides cash that we can use for debt repayment, the repurchase of shares, payment of the dividend, or to make small, complementary acquisitions.

Realistic Targets. The major piece of our business model involves setting realistic long-term targets. Only a few years ago, the packaged food industry as a whole had unrealistic targets for revenue and earnings growth. Our Company was one of the first to recognize that unrealistically high targets were unsustainable, and attempting to achieve them, even in the short-term, could lead to disastrous decisions. Consequently, in 2000, we adopted the low single-digit internal revenue growth and high single-digit earnings growth targets that we have used since. Importantly, these are the same targets given to our managers. Our business model can support these growth rates without us having to mortgage future results to achieve short-term targets that are too high.

We believe that consistent, dependable results are far preferable to a couple of years of excellent, but unsustainable growth, followed by a period of dramatic underperformance and distracting restructuring charges. We believe that the earnings and cash flow accumulated over time using our strategy will far exceed the results achieved by chasing unreasonable goals.

The investment that we have made in our business in recent years has been extensive. We made some significant improvements designed to improve our efficiency and we focused on brand building and innovation like never before. All of these actions leave our Company in a much stronger position; a position from which we can grow.

*Information Resources, Inc. FDM Ex. Wal-Mart. Rolling 52-Week Periods, Ended December 31, 2006.