Q4 2019 Earnings Call
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Good morning, welcome to the fourth quarter 2019 earnings call all lines have been placed on mute to prevent any background noise after the speakers box. There will be a question-and-answer. If you would like to ask a question during this time, simply, press star and the number one on your telephone keypad. Please limit yourself to one question during the Q&A session. Thank you.
Please note that this conference is being recorded. And at this time I will turn the call over to John Renwick vice president of investor relations and corporate planning for the catalog company Mister Renwick. You may begin your conference call back. Thank you Gary. Good morning. And thank you for joining us today for a review of our fourth-quarter and full-year 2019 results as well as our initial outlook for I am joined this morning by Steve Jobs are chairman and CEO and Ahmad sanati our Chief Financial Officer slide. Number three shows are usual forward-looking statements disclaimer. As you are aware of certain statements made today such as directions for colored company's future performance are forward-looking statements actual results could be materially different from those projected for further information concerning factors that could cause these results to differ, Please refer to this third slide of the presentation as well as to our public SEC filings a replay of today's conference call will be available by phone Thursday, February 13th. The call will also suck.
available via webcast which will be our
Time for at least 90 days as always when referring to our results and Outlook unless otherwise noted we will be referring to them on a currency neutral basis for net sales and on acreage ingested basis for operating profit and earnings per share additionally. Please note that we discuss the impact of last July's divestiture. We will be referring only to the absence of the affected businesses net sales and profit and now I'll turn it over to Steve. Thanks, John and good morning. Everyone 2019 is now in the books and we're pleased with the progress we made wage. We stayed on strategy and on plan all year long and we did what we said we would do right through Q4. And this was in spite of significant changes in Investments made throughout the year off in that building a solid foundation for steady, Dependable Financial delivery. The primary goal of 2019 was returned to organic net sales growth and we did that in fact slide number 5 Jersey.
Did we sustained are excelling?
To growth right through the fourth quarter for the quarter and for the full year. This was our best organic net sales growth in several years and this return to organic net sales growth is the strongest evidence that are down for growth strategy is working. We grew in all four quarters with full year growth in all four regions. We utilize Revenue growth management to restore positive price realization in all Regions Bank, and we improved our end market performance in key countries and categories even as we were delivering on our 2019 plans. We were busy driving important changes intended to build a foundation for the future some of these changes and Investments are shown on slide number six, we significantly restructured our organization in 2019 starting with North America at the beginning of the month followed by corporate and then the international regions with reduced layers and fewer business units silos. We can now assess resource allocation more holistically and make faster decisions dead.
from a portfolio standpoint
We divested for businesses in a single transaction this divestiture improves our portfolios underlying growth rate and its profit margins while enabling our organization to sharpen a focus on our core businesses. We also enhance our financial flexibility by using the divestiture proceeds to pay down 1 billion dollars of debt and from an investment standpoint. We continue to expand and build scale and emerging markets in addition to Growing our existing businesses. We rapidly built up distribution of Kellogg noodles in Africa. We establish local production angles for the first time in Africa and Latin America as well as noodles in Egypt and South Africa, and we shifted production of cereal in Brazil to a new more efficient facility. There was something from capital and costs related to these moves, but they will facilitate profitable growth well into the future all of these business and portfolio realignment actions were large and important ma'am.
To contribute greatly to the foundation. We are building. It's also important that we deliver the results.
That we had guided to vomit will go into more detail in a moment, but I want to emphasize that are returned to dependability starts with doing what we said we do and this includes delivering on our financial we plan to sustain this Dependable performance in 2020, including a more balanced Financial delivery again, we'll walk you through the specifics in just a month but the key elements of this balance plan are depicted on slide number seven first. We plan to continue to grow our net sales organically in 2020 in the one to 2% sure that we think is sustainable. It should feature a little more balance between volume and price mix and again, it should be broad-based and it should be led by our biggest most differentiated Brands June 2nd, we plan to improve our underlying profitability swinging to operating profit growth, excluding the divestiture impact will continue to gradually improve our gross profit margin.
As we continue to utilize Revenue growth management generate productivity Savings in our supply chain and complete the restoration of on-the-go margins will also continue to make sure our overhead tightly third. We will increase our investment behind Our Brands some of this increases related to specific pullbacks we had to do in the first half of 2019 such a long pause RX advertising during during its supplier related recall and paused investment in u.s. Serial, as we harmonized pack sizes. And most of the increase is around New Opportunities. For example, our launch of incognito ready to cook meat Alternatives and are Pringles and Pop-Tarts commercials during the Superbowl in u.s. Serial, we're not just laughing the harmonization related pullbacks. We're going all-in on a comprehensive plan and internationally, there are other promising product launches and expansions. These are all ye
opportunities and we we
Are reinvesting the prophet of a 53rd week this year to help offset this increase in investment and finally will continue to enhance our financial flexibility not only by improving on cash flow. But also by using that cash flow after dividends for paying down debt in short we're planning for a more balanced delivery with prudent forecasts as we build a foundation for sustainable growth. So with that let me turn it over to Amit will take you through our financial results and Outlook in more detail, Thank you Steve and good morning everyone 4,000 for your 2019 results are summarized on slide. Number nine. We finish 2019 with a quarter for that again featured sequential acceleration inorganic net sales growth and sequential Improvement in gross profit. Margin.
It also featured increased investment in A&P and effective overhead management, excluding the your on your impacts of the divestiture. We deliver another quarter of operating profit growth and we delivered good cash flow all in it was a solid finish to the the results were obviously affected, which closed at the end of July the absence of these businesses results in quarter for had a negative impact on reported net sales and it more than offset are based business growth in operating profit and earnings per share.
We'll go into.
Detail on net sales and operating profit in a moment.
Awnings push a finished in line with a year ago fourth-quarter as the negative impact of the divestiture was offset by based business profit growth and favorability in some items below operating profit.
Interest expense decreased in quarter for as expected going to using divestiture proceeds to pay down debt.
Other income in quarter for was similar to recent quarters in absolute dollars, but here on your it was very favorable because of lapping the impact of the quarter 4018 soon in financial markets which impacted our insurance Investments.
our effective tax rate benefited from a modest tax benefit
Our cash flow was also affected by the divestiture specifically specifically by almost $500 as discussed previously. This was not just Faith absence of the domestic businesses profits. This impact also included upfront costs and working capital timing differences as well as most significantly taxes on the divestiture proceeds. Remember the proceeds are not in the cash flow, but the taxes some 255 million dollars are included in the cash flow.
excluding this
Device that you're impact are based business cash flow was quite stable.
It's important to note that we finish 2019 on our guidance for each of the four guided metrics who's only changed during the year had been to incorporate I mentioned we're aiming for improved predictability and dependability and we demonstrated that in 2019 even despite reorganisations investment shifts and some near-term macroeconomic challenges particularly in the second half. Let's now go into more detail.
We start at the top of the p&l with net sales growth and slide number ten.
We continue to post strong organic net sales growth coming in at 2.7% in the quarter and bringing our full-year growth to 1.9% off the high end of our guidance range. Once again, all four regions grew net sales organically in quarter for importantly we continue to realize price reflecting Revenue growth management actions, and we saw in quarter for a much better balance between price mix and volume both of which grew more than 1% You're on your
among
Globally snacks again lead the organic net sales growth in quarter for increasing in all four regions Frozen Foods had its best quarter of growth of the and noodles and other products continue to post solid growth serial sales were flat in the quarter on continued International growth and a meaningful moderation in North America's decline.
And it's first full quarter out of our results. The divestiture negatively impacted net sales growth by about 5.5% for the folio impact was directly offset by the positive acquisition impact of consolidating multipro West Africa distributor, which anniversary back in court lastly after running negative. All U currency translation was neutral in the fourth quarter. It finished the year as a negative a 1.7% impact.
Now let's turn to our gross profit. Margin on slide number 11 our goal this year was to sequentially improved gross profit margin performance every quarter month and that is exactly how it played out looking at the buckets. We have been using to explain this Improvement. Let's start with the mechanical impact of Acquisitions and divestitures off the consolidation of multipro created a headwind until it anniversary during war two and then the divestiture created a small Tailwind beginning in quarter three months. No surprises here and we'll have this divestiture Tailwind for two more full quarters as well as a month in quarter three.
Next the ongoing bucket remained modestly negative.
This is input costs net of any productivity and savings. There was no major changes in our underlying cost inflation rate. So we had expected to see at least a little moderation and while cost inflation should moderate I will go potatoes and various types of packaging that have done more inflationary.
and lastly
Where is the growth related bucket which continued to moderate during quarter for as we had anticipated? We still had some negative country and category mix shifts and we didn't start up costs on your plans. However, we were able to offset much of this with price realization and sequential restoration of margins on a on the go back for mats.
We expect this bucket to continue to get less negative over the course of twenty twenty as we get past plan start ups and other costs and has productivity programs gain traction.
Onyx on SG a expense we continue to realize benefits related to organizational restructuring dating back to early in the year off partially offsetting this overhead favorability in quarter for was an increase in A&P investment Not only was some of this increase related to Chef Geoff's from prior quarters, but we also elected to add investment during the quarter.
The result of a good organic net sales growth moderating gross margin Decline and you're on your decrease in overhead was another quarter of growth in operating profit off before the impact of the divestiture. So to wrap up 2019 Financial results. Let's turn to slide number 12. We returned to organic net sales growth the top Financial priority and it's important to see that we grew in all regions and across most of our important Brands and categories. We made steady Improvement in gross profit margin performance each quarter as planned and will continue to make progress in this important area.
We invested in the future. We invested in capacity primarily in fast-growing Emerging Markets, but also for certain foods and packed formats in developed markets would be invested in Innovation. And while our brand-building levels were lower in the quarters that left 2018 large infusion of incremental investment. We supported Iraq key Brands Olio's increasing NP. You're on you're in the fourth quarter.
we delivered on a
Guidance Burnett sales operating profit earnings per share and cash flow and we strengthened a balance sheet using the proceeds of the divestiture to pay down debt off. This gives us added Financial flexibility.
Now let's turn to twenty-twenty with our initial guidance shown on slide. Number 13 as Steve mentioned, we believe we have a prudent Outlook that delivers off-balanced Financial results while providing the flexibility. We need to step up investment behind some specific opportunities and to contend with some less favorable microenvironments.
We expect organic net sales growth to continue to run in the one to 2% range. Some businesses will do better than they did in 2019 while summer with unusually strong performances of 2019 and others like Brazil and Nigeria will continue to face challenging macro conditions in the near-term.
on the whole
This growth rate represents solid sustainable performance, excluded from the organic growth, of course is the impact of the divestiture the absence also of those arrested businesses negatively impacts net sales by about four percentage points in 2020.
The organic growth also excludes the benefit of a 53rd week at the end of 2020 which based on prior experience typically amounts to about one and a half percentage points.
Currency neutral adjusted operating profit is expected to decline by about 4% as the absence of the domestic businesses has a mechanical impact took approximately -6 per cent more than offsetting or return to operating profit growth for our base business.
It's based business growth includes a sizable increase in investment in Brands and initiatives, which is only partially covered by the benefit of a 53rd week.
This projected underlying growth in operating profit, even with the increase investment is a big positive swing from 2019. And right in line with our plan was steady gradual Improvement.
Currency neutral adjusted EPS is expected to decline by three to four percent again growth in the base business is more than offset by the roughly 65% negative impact of the divestiture after considering the defense teachers full your benefit on interest expense from using the proceeds to pay down debt off deal.
Below the operating profit line. The various items are fairly mixed interest expense will be lower because of a full year of debt off reduced by the divestiture proceeds and other income will be higher because of the positive impact on pension assets of last year's strong financial markets month Bill partially offset by a recent decision to reduce risk in a pension portfolio and decrease are expected return on assets.
on the
Friends are effective tax rate will be higher. Mainly you do lapping 2019 discreet benefit and average shares outstanding wage likely drift higher as we prioritize debt reduction over share repurchases and finally cash flow should increase strongly urge to flee nine hundred million to a billion dollars. This is close to our base business based businesses normal run rate.
Even less even after the absence of a device State businesses Cashflow.
There are a couple of factors that definitely alter the shape of a quarter of this year. The first is the year on your impact of the divestiture. In other words the impact of the name of the device State businesses net sales and operating profit.
This is shown on slide. Number 14. Remember the device teacher has seven months of impact in 2020 as opposed to only five months in 2019. And it also includes the highly seasonal Girl Scouts business which happens almost entirely in the first quarter of the year. That's why you'll see a much larger your on your impact in quarter one. Then the second quarter should be similar to what we saw in quarter 4 and quarter three only has six weeks of impact as a divestiture laps at the end of July.
this is
Contracted to consider its timing of investment as mentioned. We're increasing investment meaningfully in 2020, even reinvesting the extra profit from or fifty third week to help fund it. There are some good reasons why the bulk of this your on your impact is heavily weighted to the first two quarters.
First there are some businesses that are lapping deliberate full-backs. For example cereal had its pullback last year in quarter 1 and quarter to during the pack size ization.
RX had to pull back during the first half following it Supply related recall.
Second there is simple calendar timing for instance Pringles and Pop-Tarts Super Bowl ads obviously had to be in quarter one and our initial launch of incognito meet. All she lives is scheduled polite quarter one and early quarter to so the divestiture impact and the investment increases our first have waited and then there's a third week which only benefits quarter for so to wrap up a financial section. We feel good about improved Financial results in 2019 month and we enter 2020 in solid Financial condition and with plans for continued gradual Improvement in 2020.
our goal
Steady, Dependable Financial delivery and we are clearly on the right track.
And with that, let me turn it back to Steve for a review of each of our major businesses examine. Let's begin with North American slide number 16 North America continue to age Improvement in Q4 completing a year of progress amidst tremendous change both to our portfolio and to our organizational structure on the face of the p&l the results get a little drowned out the absence of our recently divested business. The impact of the divestiture was about nine percentage points on net sales. We grew sales organically in North America by more than 1% wage in the fourth quarter and slightly for the full year.