Q1 2020 Earnings Call
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Good morning. Welcome to the Kellogg company's first-quarter 2020 earnings call all lines have been placed on mute to prevent any background noise after the speakers remarks. 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 took one question during the Q&A session. Thank you. Please note this event is being recorded at this time. I will turn the call over to John vice-president of faith in corporate planning for Kellogg Company. Mr. Renwick. You may begin your conference call. Good morning everyone and thank you for joining us today for a review of our first quarter results wage as well as our outlook for 2020. I'm joined this morning by Steve cahillane our chairman and CEO and I'm at banati our Chief Financial Officer due to the pandemic and measures to stay safe wage.
We are calling in from multiple locations.
And even time zones so hopefully technology will carry the day and we'll all hear each other clearly throughout the call slide number three shows are forward-looking statements disclaimer as you're aware of certain age. It's made today such as projections for 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 through Thursday, Thursday, May 7th. The call will also be available via webcast, which can be archived for at least 90 days on the investor page of Kellogg Company.
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 a currency neutral adjusted basis operating profit and earnings per share and now I'll turn it over to Steve. Thanks, John and good morning everyone. Obviously, these are unprecedented times and our hearts and thoughts go out to the families affected and life disrupted by the coronavirus pandemic and I sincerely hope you and your families are staying healthy and safe today will share with you what we're doing to keep our employees safe and the market supplied with food and how we are giving back to the community. These are the priorities right now. Obviously, it has been nothing close to business as usual over the past few weeks and is not likely to be business as usual for some time that said we're pleased with the director our business was going prior to the crisis and we're proud of the work we've done to manage the business during the crisis today. We'll discuss how the crisis has impacted our results and give you a sense of how we think the rest of the year could wage.
Out and will reassure you that well managing through this crisis. We are also taking prudent steps to ensure a stable and dependable performance now and in the future, so let's discuss our priorities during a crisis starting with slide number five. Our first priority, of course is to keep our employees safe. We acted quickly to protect our employees taking a global crisis management approach em stood in incremental safety supplies personal protection equipment and cleaning protocols protocols across our facilities. We took measures like temperature checks and social distancing protocols in our plants in a centers. We provided recognition bonuses and hand and enhanced benefits like leave policies for our plan and distribution center employees. We Implement a travel and meeting restrictions followed by wage work from home policies investing in technology to make this possible. I need daily with my leadership team to monitor assess and make timely decisions and we were having regular worldwide updates wage.
A video conferences with all employees safety will continue to be our highest priority. Our next priority has been to ensure we are supplying food to the marketplace has captured slide number six as a food manufacturer. We have a unique role and responsibilities during this crisis our beloved foods and brands are sought by consumers worldwide making it so important for us to find ways to get our products to then fortunately governments of established that food is designated as an essential service. And we've we're collaborating closely with them as a result since late February. We've been able to run our plants at full capacity in most markets around the world increasing production by focusing on key items. We are working closely with our retailers to get them what they need. We've invested in additional warehouse space redeployment of inventory and increased access to Transportation. We've deferred certain commercial activations and product launches. Yep.
we've invested in technology to
Word critical business and finance systems. I couldn't be more proud of the way our supply chain has responded to these challenges. It hasn't been easy. This is what required a lot of extra plan a problem solving and investment in execution. Another priority during the crisis has been aiding our communities as depicted on slide number seven. We pride ourselves for being a company with heart and soul and we have stepped up are giving during this crisis helping our food bank partners and Neighbors in need during this pandemic local governments have specifically called out food secure as a top priority in their fight against covid-19 and so aligned with our Kellogg's better days program to address food insecurity around the world Kellogg and our charitable funds donated more than ten million dollars so far in food and funds to fund Global covid-19 Food relief relief efforts around the world were donating to everything from local food bank.
School feeding programs the child care centers hospitals and Senior Care Centers. All of this is completely consistent with Kellogg's Heritage and values which makes this company truly special offer. So let's turn to slide number eight and put this into the context of business performance and financials prior to and during the accelerated Global spread of the coronavirus our base business is performing very, well. We accelerated or organic net sales growth even excluding the estimated impact of the pandemic in March and we had continued to make progress toward off-setting mix headwinds and sequentially improving our gross profit margin and as promised. We had boosted our brand-building investment behind targeted Brands and categories around the world. I feel as strongly as ever that are deployed for growth strategy is working wage.
Then of course the crisis-hit and redirected our focus and plans. You've all seen the scanner data notably for the United States and Western Europe which showed a sharp acceleration and construction growth beginning around the first and second weeks of March since that time. We have been focused on producing and shipping food. Most of our plants have ramped up their production off some emerging-markets restrictions and logistical challenges prevent us from running at full capacity while shipments of accelerated so has our investment in our plans for safety and for our place appreciation and benefits and in our logistics for incremental warehouse space and transportation from a brand investment standpoint many of our second quarter commercial activities as well as products changes have been delayed to the third and fourth quarters. So where does this put us for the rest of the year how long the crisis persists and how quickly we can return to business as usual operation.
And Commercial activities is obviously unknown at this point so far in Quarter Two we're seeing elevated if slowing at home consumption partially offset by severe sickness in a way from home channels a slowing in certain Emerging Markets. Hi investment and utilization in our supply chain to get food to the marketplace and less commercial activation and Innovation activity as we in our customers focus on getting food on the Shelf. Obviously the third and fourth quarters are harder to predict for now though. We are prudent. I'm assuming economic softness and investment shifts to create a profit off set to the first half beyond the factors. We cannot control. We are prepared to weather the crisis off. Our employees are engaged and working to stay safe. We are supplying the market as best we can and our financial health is solid. We're also taking a very close look at our plan. Yep.
in the event of a prolonged Global economics
Slow down we've studied what worked well and would did not in past recessions and how this one could be different for the globe and for our portfolio. We strongly believe that are deployed for growth strategy with its focus on occasions growth portfolio world-class Brands and service has us well prepared for making any necessary adjustments with that. Let me turn it over to Ahmad who will take you through our financial results and Outlook in more detail.
Thank you, Steve and good morning. Everyone clearly our financial results and Outlook have been affected by the pandemic. So I'll do my best to sort through the final reports and dates outlines of financial approach since the Crisis began employee safety is the top priority and we have invested in this area in safety supplies temperature checks and incremental cleaning protocols. Additionally, we invested in information technology to facilitate working remotely month supply the market with food we've had to increase production quickly focusing on priority excuse and rewarding are people with bonuses and benefits in addition. We've invested in logistics to get food to our customers as quickly as possible.
We want to work to ensure Financial flexibility as you know, we had already been focused on reducing our debt leverage this year and this becomes even more important than the environment of economic recession and volatile financial markets. We continue to have good access to commercial paper markets and we have built up our cash balances around the world. We've also been proactive about logging into lower interest rates reducing a long-term cost of dank mean while we remain committed to investing in the future off the crisis has four starts to default some commercial activity and Investments to the second half, but excluding the divestiture. We did increase our brand building your own urine for one month. Mostly before the crisis really hit us in March.
Now turning to slide number eleven. Let's look at our financial results for the quarter. Obviously. There are a few moving parts. So I'll do my best to Market them most are based business continues to perform very well, even before and excluding the pandemic impact organic net sales growth was strong even ahead of expectations. We were also making progress toward our twenty-twenty objective of stabilizing gross profit margin in spite of accelerating a makeshift towards emerging markets and importantly we had kicked off the incremental advertising and promote promotion Investments that we had announced a few months ago.
The second major factor is something that was already.
Behind us at the end of July 2019 as we are indicated previously quarter one is the seasonal outlier for the domestic business. I'm going to a girl scouts cookies. So in q1 the divestiture impacted our you're on your net sales growth by -9 to 10% and our operating profit growth by about 12%
The next factor is the pandemic the surging demand for packaged foods from increase at home consumption started in early March this probably contributed approximately half of our organic net sales growth in quarter one, the additional sales growth drove profit growth at low margins due to increased costs and Investments around safety Logistics and I T as well as decisions made that affected our base business.
As you know, the crisis did trigger a sharp strengthening of the u.s. Dollar against foreign currencies creating a much larger than expected negative impact on our results.
Loxley's on earnings per share are the expected pension expense benefit from a higher your on your pension fund at this valuation at the beginning of the month and while our decision to prioritize debt reduction decrease our interest expense as planned our shares outstanding did float higher.
The result of all of these is an earnings per share that came in well ahead of pace but that we feel is largely timing related as we discuss in a moment with importantly cash flow is also well ahead of pace which is important as we prioritize Financial flexibility going into an economic slowdown.
So the results are affected by the pandemic and other factors, but we'll walk you through them in a bit more detail. Let's start at the top of the p&l with net sales growth and slide number net sales growth search to 8% You're on you're in the bottle. We estimate that the pandemic impact drove about half of this game suggesting a base business group at a rate of about 4% In other words, even excluding the pandemic impact based business was accelerating its growth sequentially off yet again.
Volume growth search to more than 8% net by depend emack related orders as well as by a particularly strong quarter for multi-pro the distribution office of our business in West Africa.
This mixture is towards multipro is a big reason a price makes was slightly negative in the quarter. In fact while the mix for the total company was negative pricing remain positive.
And internet sales growth was across all four regions and across all four category groups within each region Max serial frozen foods.
The device which are impact. We already discussed now that we are past mapping Girl Scouts season. This device divestiture impact will be less negative with quarter tools impact looking like twenty nineteen s 404 -5 to 6% impact and quarter three only a partial quarter of impact more like -1 month 2%
As I mentioned currently also turned more negative on us in quarter War one as the dollar strengthened against key currencies as a pandemic head back and forward rates we can expect this to be even more of a heroin going forward.
Now, let's start the profit margin on flight number 13.
Have you discussed previously? Our goal is to continue to sequentially improve gross profit margin finishing 2020 at a stable level. You're on your
This requires offsetting underlying input cost inflation as well as some natural mixtures in our portfolio. Most notably a mix shift towards emerging markets and within those markets towards the distribution arm of our operations in West Africa. These mixtures are not as concerned as they do not cannibalize any of our developed markets businesses.
Lost the impact, you know that we've been working on several levels price realization to revenue growth management productivity through a variety of initiatives building in emerging markets and addressing margins in specific product lines. Most notably on the go back for months.
Once you one was anything but business as usual we did continue to make progress in this area. As you can see a gross profit margin was near Dead flash your on your edit by the absence of the devices businesses as well as the actions are just listed some of these progress was offset by increased input cost inflation. Remember, we ahead of most of the year and costs and Investments related to safety and cleaning employee benefits food donations and Logistics during the pandemic.
This crisis will create some variability around gross profit. Margin as we incur incremental production and incremental costs, but we will continue to make money towards your goal.
Let's start the cash flow and capital structure on slide number 14 as shown on the slide cash flow was strong in quarter one up significantly you earlier about the absence of businesses. We divested last July some of this was coming from choraphor and some of it was inventory depletion and delays of capital investment during the day, but it also reflects strength in our underlying profit performance good working Capital Management and reduced cash outlays related to restructuring.
The next chart on the slide shows our net debt position. You can see that a combination of last year's divestiture proceeds and durable cash flow have enabled us to pay down and carry higher than usual cash balances. In fact, you'll see that our cash position was over the over a billion dollars at quarter-end. This is simply a practical approach to financial flexibility in an uncertain operating environment.
Liquidity is good. In addition to our high cash balances. We retain good access to commercial paper and we have two point five billion dollars off of backup funding facilities. We are in solid Financial shape with sufficient flexibility.
Let's now discuss a fully Outlook starting with slide number 15.
I'll look really should be viewed in three time periods first there are the actual results of water one nearly. These results came in better-than-expected off both because of how underlying business is performing and because of the surge in actual demand brought on by the pandemic next there is for two months depending make has obviously persisted and so far in April we have seen continued elevated levels of at home consumption.
they may be less Nexus lift as consumption growth has moderated even as food away from home channels remains very soft
you should see positive operating leverage from running up Lance at high utilization partly offset by incremental labor and Logistics costs to do so long and then there is water trees and water for the second half of the of course no one knows how long the pandemic and related lockdown will persist at this time the best we can do is prepare for a correction back to normal rates of consumption and develop markets I'll leave with away from home channels that will take some time to recover in addition will have increased brand building and other Investments that have been delayed from the first found dead
and we have to be ready for potential softness in Emerging Markets, which tent
To be more vulnerable to recessionary impacts and whose currencies have already weekend. In fact, we saw slow down and currency devaluation in certain Emerging Markets already in late q1.
We expect to see a shift or sales and profit into the first half and out of the second half.
You'll see on slide number 16 that we are forming a full year guidance today. We think this guidance is The Prudent way to plan right now as we manage through the crisis organic net sales growth will slow in the second half. The question is how much and whether it's close enough to offset the unusually strong growth of the phone. No,
Apparently neutral adjusted basis operating profit has the additional variables of Shifting investment from the first half and our desire to retain some flexibility to invest more in business opportunities as they present themselves.
Because next sales and profit are now first have waited and well ahead of our fully obeyed through 41. It would suggest some bias to the high end of October in neutral sales and profit guidance ranges.
As you would expect however, this guidance does not include to an certain elements first. It does not include any major Supply or economic disruptions. This would be something like a plant aware of shutdown related to the panda made or it could be any significant macroeconomic volatility beyond what we've already experienced. We are in unprecedented tires, and we can only guys based on what we know right now.
And second remember that all of our guidance is on a currency neutral basis the pandemic and oil shocks triggered or Mast strengthening in the US against major foreign currencies encoder one in both emerging and developed markets this impacted growth in net sales operating profit off. I need to get his growth by negatives one to one and a half percent in the quarter and that's really only reflected less than a month of impact or quarter of these exchange rates would have had that much more negative impact. Obviously, we can't predict where the dollar will go from here, but this can give you an idea of that magnitude of this recent currency moves.
And with that, let me turn it back to Steve for a review of each of our major businesses.
Thanks heimat. Eventually. This crisis will pass and we are doing everything we can to ensure that we emerge right where we thought we'd be our strategy is working. Even as we have to modify commercial activities and what has been essentially a supply driven Market in recent weeks. In addition. We're doing a lot of thinking and analyzing about how the crisis is generating trial and reappraisal of some of our Brands and Foods including for example, Ready-to-Eat cereal. Let's begin with North America and slide number 18. Last July's divestiture is what pulled down adjusted basis net sales and operating profit by roughly 15% each excluding that this region posted very strong growth in net sales and operating profit North America had recorded organic net sales growth through the February. Against the the earlier growth and was on its way to a good first quarter with another quarter of sequential acceleration, then came March when the stay-at-home mandates went into effect and we saw Market acceleration.
In this growth in the end. We estimate that this
Pandemic related Surge and demand accounted for about three-quarters of our North American regions organic net sales growth in q1 our consumption growth. Well outpaced our net sales gross March and the quarter overall suggesting meaningful depletions of retailer inventories. Not everything is seeing a lift during the pandemic our business and Food Service vending and convenience package experienced sharp and sudden net sales declines in March as schools and restaurants closed and travel came to a halt and that softness continues. Nonetheless The Accelerated net sales growth drove up operating profit in our base business which excludes the impact of divestiture and this was despite increased brand-building investment in the base business and incremental costs and Investments related to keeping them safe and enabling our supply chain to keep up with demand. Let's take a quick look at each of our three major category groupings in North America starting with our largest snacks on slide number.
This is the business affected by the divestiture. But on an organic basis, it's net sales Rose almost 11% year-on-year snacks organic growth was already strong going in March driven by solid commercial programs in year to support for Cheez-Its snapped and then the business got an extra boost from accelerated consumption growth during March us consumption fiber crackers jumped almost 40% year-on-year and are salty snacks and portable. Wholesome snacks were both up nearly 30% This consumption growth has been broad-based across our portfolio of brands from an occasion standpoint. We have seen less lift for on-the-go items and more growth for Pantry packs, which makes sense. We feel good about the positioning and string of our North America snacks business as we work daily to keep up with demand. Now, let's turn to North America cereal and slide number 20 here, too. We saw Market acceleration in yep.
Consumption growth in March plus 43% year-on-year beneath that category wide and portfolio wide acceleration where the early stages of our step up and brand-building investment to see the results of these efforts particularly during March is acceleration, but we're pleased to see share growth in The Taste fund segment importantly serial is one of the three categories whose consumption has remained at very elevated levels, even after the couple of weeks of consumer stock UPS. An interesting thing to watch will be how this stock up and elevating cash option is driving trial and reappraisal of this category. Take a look at slide number 21 us household penetration data showed that are cereal brands collectively gain three points of penetration in March versus February and did this against all cohorts whether by age group income level or households with or without kids as dead.
This is something we're studying closely and looking to build upon.
We know that our cereals are getting into the pantry and that they're getting consumed their iconic Brands great food versatile across occasions and a great value for money consumers Rock covering. These benefits could be very positive for this category and we plan to seize this opportunity. Now, let's turn our in North America Frozen Foods business and slide number 22 should have been generating strong consumption growth and share gains through February and then sought consumption accelerate to over 45% in March. The same is true for MorningStar Farms in our Frozen veggie business off. This on-trend brand was already showing strong double-digit momentum in consumption in the US and then it's consumption growth. Shut up to over 66%
As a Retail Partners worked to keep shelves filled many have delayed resets. So we have delayed the first wave of our launch of incognito. The MorningStar Farms sub line of refrigerated meat Alternatives month instead of launching the burger products at the end of q1. We now plan to launch them along with the previously planned sausage products sometimes later this year.
North America had an unusual month to say the least and this unusual environment continues we've shifted investment out of the first half given the current situation and into the second half and four now, we remain focused on supplying the market with food and keeping our people safe. It will be sometime before condition stabilized nonetheless. We feel good about the underlying direction of this business years delivery. Just got much more front waited to the first half. Now, let's discuss our International businesses starting with Europe on slide number 23, Europe got out of a gauge strongly in 2020 reporting solid organic net sales growth through our February. Both in snacks and cereal with a pandemic stock ups and elevated consumption in March wage an additional lift probably accounting for half of its growth in the quarter interestingly. The lift was far more pronounced on cereal than it was on snacks probably because the foods consumers were dead.
Stocking up on where meal related but it could also have to do with the fact that Pringles had such strong momentum already regardless the quarter began and finished with growth across the region in serial, we generated particularly promising consumption share and penetration gains through February in the United Kingdom and equally strong momentum in Russia and Pringles record notably strong consumption in Germany, Spain and Russia. We still have some work to do on our smaller wholesome snacks businesses, but overall Kellogg Europe has good underlying fundamental. We do expect much of this quarter one growth to reverse itself in the second half the cancellation of major sporting events has taken away large promotional activities for us starting in the second quarter and we were having to revise commercial plans particularly around Pringles. Meanwhile, we have to be wary of the currency and economic impacts on markets like Russia dead.
and the likelihood of prolonged
Softness in a way from home channels. So this is the region with the most substantial shift and delivery to the first half but that shouldn't take away from what is a very strong performing region for us off. Let's now turn to Latin America and slide number 24 Latin America is a business that underwent some transition last year and we are pleased to report that it continues to progress well on its dead video Transitions and it's ramped up of new cereal and Pringles production facilities in Brazil Latin America's organic net sales growth pre pandemic was quite strong as long as it's consumption growth notably for Pringles in Mexico and Brazil then like our other regions albeit a bit later in the month Latin America saw a surge in that sales in March off the pandemic stay-at-home guidelines. The lift was probably about a fourth of Latin America's organic net sales growth in the quarter. The uplift in March was more pronounced in serial dead.
Then it was in snacks similar to what we've seen in Europe and it is continued in April amidst an uncertain economic environment. We have a Latin American Business that has managed managing well through the challenges.
And finally, we'll discuss Amiya shown on slide. Number 25. This Region's organic net sales growth was exceptional led by Africa multipro experienced a noticeable double-digit gain accompanied by strong growth in our Middle East North Africa and turkey sub region and an encouraging share gain in South Africa from a pandemic standpoint, though wage, Mia had less of a net positive impact than our other regions. We saw a sizable net sales lists and develop markets like Australia, Japan and South Africa particularly in serial. However, we experienced production and distribution challenges in Emerging Markets mainly in Asia and Africa. So for the quarter that pandemics impact on net sales was probably less than 1/4 of the Region's overall organic growth and it also added to costs these challenges have actually gotten more severe in the second quarter with certain plants in the region.
Only able to produce at partial capacity according to local restrictions and distribution challenges. In other markets in addition multipro is experiencing a meaningful slow down already in the second quarter feeling the economic impacts of the pandemic the oil shock retail closures and soft demand for non-food products that it distributes for other companies wage. So while temporary and partially offset by good growth elsewhere in the region Amia may see some pressure on its sales and profit during the remainder of the Year, nevertheless this business operating well and has outstanding growth prospects. Once we emerge from this pandemic and related economic slowdown. Let's wrap up with a brief summary on slide number 27 off. None of us has ever seen the likes of this pandemic. There's left us in a state of uncertainty with A continuous flow of heartbreaking infection statistics and also dead.
rendering acts of courage and selflessness we can only hope that
This crisis passes quickly and that we can all get on with our normal lives.
As a company we can only manage through the crisis in the right way keeping our employees safe to Flying food to customers and consumers and giving back to our communities. I think we're managing these priorities well,
And we feel good about our underlying business. We got off to a good start to the year even before covid-19 sustaining our top-line momentum progressing towards stabilization of gross profit margin investing in key Brands and delivering strong cash flow. We're confident that when the crisis abates will be on solid footing to resume with our strategy and plans.
From a financial standpoint our earnings are now more weighted toward the first half than originally planned as the crisis has shifted sales into the first half and deferred Investments to the second half. That's a better shape from a planning stance. Even if the second half business environment is anything but clear mean time with economic recession looming. We are making sure that we have that solid Financial flexibility.
We may be managing through an unprecedented crisis, but we remain committed to our strategy as the world emerges from this crisis. You can be sure we will continue to build our plans around a balance between sales growth profit growth and cash growth over time always looking to make Our Brands and our companies stronger.
In closing I want to thank our employees for their dedication and hard work. There is nothing normal about the situation in which we find ourselves today and our employees have risen to the challenge taking the extra steps necessary to keep each other safe to supply the world with food and to give back to our communities. I could not be more proud to be a part of this great company and with that will open it up for your questions.
We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two again, please limit yourself to one question during the Q&A session at this time. We will pause momentarily to assemble our roster.
Our first question is from Michael Lavery with Piper Sandler, please go ahead morning. Thank you. Can you touch on the promotional firemen and trade spending and how how much if any benefit are you getting you know clearly there's such strong consumer demand. It doesn't seem like the time to price promote or you do you have flexibility around that and then if so how much of that just gets deferred or is there an opportunity for for calendar year savings to come from that Michael? Thanks for the question a couple of things I would tell you first bought stuff for competitive reasons, you know, we don't talk about promotional activity. But what I can tell you is in the first quarter because the pandemic hit so late. It was really an office environment in terms of pulling back of promotions, not executing commercial activities and so forth. Obviously that changes as we get into the second quarter, which is why we're saying that the second half
after the year, we'll have some of the Deferred investments from the first half of the
Year, but the first quarter looked a little bit more normal through really the first completely normal through the first two months and it was really the last two weeks of March. That's the incredible changes which was really too late to change the you know, the commercial activities that we had in place. We did increase brand building in the first quarter again for the same reasons we committed to doing so January and February, you know, we were seeing good organic growth good commercial activation good pull through from our programs, but obviously everything changed once the pandemic happened.
Okay. Thank you very much.
The next question is from David Palmer with evercore is I please go ahead.
Thanks. Good morning question on how you think things are really going to be impacting your business on going into Twenty-One. If you were to think about 21 earnings and then now after the crisis, you know, how are you looking at that year differently than you did before in terms of say earnings power. I would imagine that you're going to have some opportunities to do some brand building Investments this year that you might not have had there might even be some positives in terms of the ongoing restaurants declines into that year, but obviously, you know what, it's some other weaknesses out there like emerging markets and they have a negative hangover. So any thoughts about broad Strokes impacts 221 Beyond thanks. Yeah Dave. Thanks for the question. You know right now during this pandemic. We're really focused on our employees safety supplying food to the marketplace and hating our communities, you know, when they need it most this has created an opportune.
Unity to invest in our business in the second half how that affects 20-21 is far too early to tell but we do see opportunities where you know, our our products are getting into age homes penetration is going up consumption is going up. So we're going to continue to invest in Our Brands invest in our people invest in our business invests in our company always the goal of coming out of this pandemic with a stronger company that we go into it. But as far too early to really talk about what the 20/20 environment might look like.
Okay, thank you. The next question is from Ken Goldman with JPMorgan, please go ahead.
Hey, good morning. Everybody. I'm wondering if you can help us. I know it's not easy but maybe estimate the dollar cost of your direct covid-19 things like bonuses am cleaning et cetera and how that looks heading into two q and I'm really curious how much of that is one time versus ongoing because you know, very clearly I think across the board versus what some people expect in a month ago in food, you know, maybe the flow through from sales to eat but has been a bit more restrained than what some people had modeled a few weeks ago, you know, obviously efficiency efforts are put on hold is critical to produce volume with I guess less regard than usual for margins, but I do think investors are sort of asking for a better sense of how much of these current incremental costs are truly one time and fade as we get into the back half versus things that are going to be on going for a little bit of time and I know it's a hard question to answer but at least with the visibility you have phone number.
Is it would be useful perhaps?
Yeah, Ken. Thanks for the question, you know, obviously there are one-time direct costs that you know hit us as we you know started to prepare, you know ourselves for the pandemic things like employee bonuses and benefits, you know to Our Heroes on the front line to make sure that they're safe and that they're being rewarded for what they're doing, you know for their communities and for our customers and so forth warehouse and Logistics costs obviously going up when you're you know, when you see demand spikes like this, you have to invest to make sure that you know, our customer service is as high as we can possibly make it and you know a shout out to our customers. I mean the environment and customers in the way that they've leaned in and almost what I call the Esprit de corps among the whole industry has been really inspiring to tell you the truth and then safety just you know, just safety protocols that are different than what they've been, you know PPE equipment and so forth operating in environments with social distancing, you know changing the way the shifts go in and out, you know all this month.
Things are costs that many will be you know, one time in nature, you know as in when this pandemic is over when a vaccine is in place when you know, when we're back to a normal environment said so, you know to be a little bit more direct with your question, you can think about you know, round about ten million dollars in the first quarter for us indirect costs related to the things that I just described. Obviously that was the end of the you know, just just the end of the first quarter so that would be higher in the second quarter. And so, you know, that's the way we're looking at it. We're not going to make any compromises will make the right level of Investments to keep our people safe. That's that's the most important thing.
I think if I could just ask from a from a Forex standpoint, you know, most of the transactional Forex we were covered. So I think from a transactional standpoint the impact of Forex am limited however from a translation translation and standpoint as you well know the dollar strengthen sharply and that was right towards the end of the portal. So that's something that you know, we'd expect to have more of an impact as we go through the
yes, that's helpful. Can I ask you a very quick follow-up? I think I think, you would said that you're assuming that in the second half away from home is weaker still but food at home is just back to normal. So first, is that correct and second. I'm not I'm not sure why that would be the case. I guess it feels a little conservative to me to assume that away from home is weak or but food at home is just back to normal. Wouldn't it? Wouldn't it? Maybe stand to reason that food or home would be a little bit better if people are eating at home a little more.
I think I think it's fair to assume that food service would take longer to Ram back up. So I think you know that's an assumption going into the second of I think you know Emerging Markets. We're starting to see how the softness in the Emerging Markets. So, you know, there's an assumption that emerging markets in the second half would be impacted and that you know, they'd be a moderation in the at home consumption. Now, you know things are uncertain. So it's hard to you know, we've done a range of scenarios and it's hard to kind of pinpoint on one particular assumption, but that's those are the headline assumptions that we've used as we've looked at the second half.
Okay. Thanks so much.
The next question is from David Driscoll with d d research, please go ahead.
Good morning.
Good morning, David. I want to follow up. I want to follow up on on a good question. I think this is the big one in the second half of the year when you say there's the give birth mean it really does seem that in-home consumption is is up. It's going to stay up at some level versus whatever the bass lines were for 2020 is, you know, including the second half. Um, why is it that you think that profits are going to be, you know so much lower that you're just keeping the the guidance consistent. I mean, I guess I just want to say it directly. Are you just trying to take a conservative approach cuz it's just so hard cuz it really feels like on balance, you know your food service business and he's away from home channels are a smaller portion. If you're at home consumption is elevated in the second half. You should have a net positive but it could just be you don't really know when you're taking the conservative view, but I'd really like to test the strength of your conviction on that comment. Yeah, David. Thanks for the question and Thursday.
You know wouldn't disagree with anything that you're saying but you know, the real answer is who knows who knows how long this change persists um, and the magnitude of it. And so I I think we can be, you know characterizes taking a prudent approach here and we think Prudence In This Very uncertain environment is the right way to go and I give you really for reasons why you know, we're thinking about this one is what I just said, the the environment is incredibly uncertain. In fact, most companies are actually withdrawing guidance because of this uncertainty and you know, we're affirming guidance off. The second is lost activities in the second and third quarter. So you have things like the European championship in Europe, which is a big event for Pringles that's not going to happen. You may impact of Investments that we're going to make in the second half that are not in the first half. So there is a big shift from the first half to the second half in Investments and there's some volume that's going to come down.
In the second half because these promotional activities around Sports and other things are not going to happen. The third is Emerging Markets slow down, you know, we're already seeing it in large markets like Nigeria Thursday. We have a big business, you know, you'd think about oil-based economies and nobody ever imagined oil would be where it is right now. Well that's going to impact these economies. And so, you know, we think we can manage through it. We've got the right page book. We've been here before but it's it's going to have an impact Emerging Markets are going to slow down and then finally and you touched on this, you know, we will have the flexibility to reinvest in the business to make this company stronger and stronger and come out of this pandemic with, you know, very good share of positions very high, you know brand Equity scores of you know, people who we've invested in Iraq and just a better company. And so we think that this is the right approach like to think we get some credit for affirming guidance and not withdrawing it but you know, we think this is the right approach a prudent approach and and yep.
Right approach for us.
To reduce your SK use and and will this have any significant impact on the business going forward? Yeah David the answer to that is yes, you know, we need our plans to operate at The Highest Potential, you know potential possible in terms of through puts. So that's meant really focusing on core SK use and if you look at the syndicated data and you look at things like Joe's Ready-to-Eat cereal you look at Blue Box Frosted Flakes, you look at Redbox Fruit Loops, you look at Orange Box frosted mini-wheats, you know, what brands are doing very well and growing and we're really focused on them know core items and cheese that same thing, you know how this manifests itself post-crisis. We'll see but I would suspect that, you know, this is not get 21 guidance, but I would suspect in 20 21 grocery stores retail outlets will probably have less SK use than they had going into the pandemic, but we'll just have to wait and South
Can I just do a quick follow-up on your SKU count? And are you taking this opportunity?
Thank you. The next question is from Robert Moscow with Credit Suisse, please go ahead.
All right. Thanks. I think the guidance implies a stronger North America performance this year than than you previously expected and I think that that's rational. I hope I'm correct because the offset is really in in the emerging markets and maybe a little bit of Europe. So I just want to make sure I'm right on that. And also when you mentioned these jobs that are declining like like food service c-store travel, is that about like ten or 15% of North America. Is that a fair assessment with the last question was you mentioned before a d loading at retail? Is it possible that that comes back into qsa? Yeah. Thanks for the question wrong. First off North America. The answer is yes, you know, they they're performing at a very high level and you know driving a lot of excellent performance as I mentioned in the prepared Muammar Club.
Europe is really the business that was you know benefited from the first half and because of Euro championship and other things I mentioned, you know will not have the same strength in the second half and then obviously the other two regions are very emerging-market focused and you know, just talk you through some of the concerns around Emerging Markets. So you've got that right in terms of the away from home business in North America. Well, let's talk globally. It's about eight to ten per-cent of our business globally, you know Food Service vending c-stores you College University that the schools obviously, you know, this business was obviously significantly impacted as everybody knows and how that comes back when that comes back how quickly it comes back, you know, you know, we'll just have to see the teams have done a phenomenal job at you know, things like delivering food to Children, you know who are out of school and so the, you know, they're they're very hard at work at home.
community-based things, but you know, the business is really
Changed as you know in terms of North America though. It's less than 15% of North America business internationally. It's less significant. It's kind of less than 5% off that channel of our International businesses.
And and the retail inventory dloading. Yes, sorry. So so yeah, if you look obviously our consumption dramatically outpaced our shipments and so you could think about inventory in the system being down how quickly we can rebuild inventories will be a function of what happens with ongoing consumption. And right now we're home consumption continued quite strong. So the ability to rebuild inventories again, we'll we'll have to wait as we just continue to run flat out to supply the demand that's in front of us.
All right. Well, the Moscow family is going through a box of cereal every two days. So we appreciate it. Thanks Rob. The next question is from Alexia home with Bernstein, please go ahead. Good morning, everyone.
Good morning, Alexia 1 8 question I have is around the share Trends and it looks as though it has has the time demek except you lost some ground there and I I'm just curious about whether that strange or pricing Dynamics or whether you whether you plan to make that or you hope to make that up open a few weeks and months. And then just a second question quick for a lot mentally prepared remarks that you've been studying what works in previous recessions and what might be different this time any sort of color commentary you got on what those insights were and how you think things like a difference? Thank you. Yeah. Thanks Alexia. So starting with the cereal and share a question, you know right now we're we're really in a supply driven Market, but we have lost share and so, you know admittedly that's the case what's happened though is you think about Thursday?
The demand that this pandemic has created. It's really been especially most recently. If you look at the Nielsen, you know, which is characterized as the The Taste fund the kids segment am having the category secondarily the all family segment, you know slightly behind that and trailed by you know, the adults segment and so the structural make up a portfolio is what's creating that share loss because it's happening in the adult segment which is up less than the rest of the categories. We're making progress and gaining a share in the kids segment, you know, Brands like Frosted Flakes and fruit loops. And so, you know, we're not as you've heard me saying the past we're not in the business of donating share, but right now we're doing everything we can to Satisfaction by the orders that are coming in and so will stay mindful of you know, the health of Our Brands. That's what I talk about investing in Our Brands and making sure that we come out of this stronger than we then when we well
Do it. And so that's kind of the case with U.S. Ready-to-Eat cereal in terms of the recession's, uh, you know in a softer economic.
I'm an environment which obviously, you know, we just saw the uh, you know, the results or you know, the the GDP numbers yesterday the just heartbreaking unemployment figure that continue to come out, you know in the United States Thirty million people unemployed just shocking numbers and so we're preparing ourselves. And so some of the learnings from past recessions are you know, entry level price points are important family size is important being mindful though of continuing to invest in your Brands is really important because it's about value for money off and maybe one of the most important things is don't stop innovating and so some of the mistakes made cross categories in recessions is a hunkering down mentality which takes away and building and you know slows up on Innovation and people still want good news people want fun. They want to try things in an affordable way and you know, our brands are icon ma'am.
They bring joy and so will be bound and determined to continue to invest to innovate but to be very mindful of the price value relationship and you know, making sure people understand how economic for example Ready-to-Eat cereal is in terms of Emil solution. It's an incredibly economic way to feed your family.
Great. Thank you very much. I'll talk to the operator. We're going to have to cut it there. We gave a few extra minutes because of the Technic delays up front. But thank you everyone for your interest. And if you do have follow-ups, please please by all means. Give me a call. Thanks for your participation. Thanks everybody, This is now concluded. Thank you for attending today's presentation. You may now disconnect.
I don't think so. I've tried I still better off in a couple snacks. Never take could deplete our cheese Supply. Thursday will be over in approximately eight, Mississippi 7, Mississippi 6, Mississippi 5, Mississippi for Mississippi
Tasty wage. Hey Pop-Tart Sam's yeah. Yeah. Did you know about pepper bites? Yeah.
You know, oh cool off all going for something more than a few Special K protein has more with 15 grams of protein plus extra nutrients to help that protein could do more.
There's this magical world where they break Rice Krispies treats you a bajillion bite-sized pieces Denver covered in chocolate goodness in the bathtub poppers our Main Street New Pop-Tarts crisp and delicious feeling better than a hundred birthday presents. Do they have frosting and delicious family. I don't think so. I've tried I still that snapped snapped off snackable snack ever take could deplete Archie's Supply.
Concerned we may run out of cheese. This makes Barry RX bar commercial will be over and approximately 8 Mississippi 7, Mississippi 6, Mississippi 5, Mississippi for Mississippi
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Hey Pop-Tart, Sam's. Yeah. Yeah, did you know about pepper bites? Yeah.
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