Q3 2020 Kellogg Co Earnings Call
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So your frosty.
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Good morning.
Welcome to the Kellogg company's third quarter 2020 earnings conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session with publishing analysts. Please note. This event is being recorded.
At this time I will turn the call over to John Renwick, Vice President of Investor Relations and corporate planning for Kellogg Company Mr. <unk> you may begin your conference call.
Thank you Gary Good morning, and thank you for joining us today for a review of our third quarter results as well as updates regarding our outlook for full year 2020, I'm joined this morning by Steve K., Helane, our chairman and CEO and honest Banati, our chief Financial Officer.
Slide three shows our forward looking statements disclaimer as you're aware certain statements made today such as projections for Kellogg 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.
A presentation as well as to our public SEC filings.
This is a particular note during the current COVID-19 pandemic when the length and severity of the crisis and resultant economic and business impacts are so difficult to predict.
A replay of today's conference call will be available by phone through Thursday November 5th the call will also be available by webcast, which will be archived for at least 90 days on the investor page of Kellogg Company Dot com.
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 for operating profit and earnings per share and now I will turn it over to Steve.
It's John and good morning, everyone I Hope you and your families are holding up well in these turbulent times hearing.
Here at Kellogg to get through this crisis, we are executing well against our key priorities. During the crisis, we remain vigilant and active in keeping our employees safe, which remains job number one for us and our employees have handled this extremely well.
We continue to supply the market place, where their foods with no major supply disruptions in service levels gradually improving in the quarter. We continue to aid our communities with significant cash in food donations not to mention that time, our employees have generously volunteered to various initiatives and causes and image is very uncertain economy.
He is in financial markets, we have effectively preserved and improves our financial flexibility. These have been our priorities throughout the crisis, and we're executing very well against them.
From the standpoint of financial results, we had another strong quarter with some highlights shown on slide number six first.
First our results came in stronger than we expected we posted another quarter of strong organic net sales growth with a good balance between volume growth and price realization and with growth across all four regions and across all four major category groups cereal snacks frozen noodles, we expanded our gross profit margin as price.
Volume and productivity more than offset sustained high levels of incremental cobi costs and as we said we would we shifted brand building investment from the first half ended the second half, resulting in a double digit year on year increase in quarter, three we generated better than expected profit and earnings in the quarter and particularly important in.
An uncertain economy, we generated better cash flow than we anticipated, allowing us to further reduce our net debt.
Second our emerging markets continued to exceed our expectations in spite of challenging coated and economic conditions, we generated double digit organic net sales growth in both Latin America, and EMEA across all of our emerging markets. We collectively recorded double digit organic net sales growth in.
Cereal and noodles and we grew snacks at a high single digit rate. Despite there on the go orientation their reliance on traditional trade that's been more disrupted by Cobiz and being a more discretionary purchase in difficult economic times, the strength of our portfolio the diversification of our geography and the experience of our man.
Human teams are clearly on display.
And third we've continued to perform well in market as expected at home consumption growth for packaged foods in general decelerated across the quarter and our categories were no different.
The good news is that year to date, we have held or gained share in markets that represent almost three quarters of our annual net sales in measured markets.
Most notable in quarter three was the United States, where we gained share in five of our six primary categories in Europe, where we gained share in cereal across most of our major markets and in EMEA, where we gained share of cereal in 11 of 13 major markets.
Clearly our brands and our brand building are resonating and even in away from home channels, which remained soft during this pandemic we gained share in most of our categories in the U.S.. We also like how were performing in E Commerce, an area in which we've invested in capabilities in recent years and in which we continue to grow rather.
Fiddly outpacing our categories in key markets. So we are winning in the marketplace and delivering better than expected financial results in the process.
Turning to slide number seven this sustained strong performance puts it and puts us in a good position to finish the year not only with strong results and financial flexibility, but also with investment for the future.
Let's take each in turn.
First we are again, raising our full year guidance based on the strength of our better than expected third quarter results as I'm. It will explain we are raising our guidance for full year organic net sales growth currency neutral adjusted basis operating profit and earnings per share and cash flow. It's been a lot of work, but we're headed for a very.
Very strong year second.
Second we continue to invest for the future our brand building investment will be up double digits again in quarter four as we continue to reinvest funds that were delayed from the first half during the pandemic on top of what had been planned for quarter four.
Now is the time to communicate with consumers who discovered our foods during the pandemic now is the time to emphasize new messaging around certain brands now is the time to further develop our master brand approach to advertising multiple brands in certain international markets and now is the time to invest behind the launch of new Brad.
And like plant based incognito from Morningstar farms in the U.S. and market expansion of brands like Cheez It in Canada.
On top of that we are investing in capabilities such as in ecommerce in packaging capabilities and in capacity simply put we are taking actions now to emerge from this crisis, a stronger company and with increased confidence in our trajectory for consistent balanced growth, we're seeking to retain.
Incremental households, we're building on our strength in E commerce, and we're ensuring that our emerging markets remain engines of growth for US. We're also strengthening our excellent financial flexibility and delivering increased earnings this year for our shareowners. So with that let me turn it over to Ahmed who will take you through our financial results.
And outlook in more detail.
Thanks, Steve Good morning, everyone slide.
Slide number nine summarizes our results for the third quarter and first nine months.
Steve mentioned, our third quarter results came in better than anticipated, particularly on operating profit and cash flow net.
Net sales benefited from elevated at home demand during the crisis, though that's clearly moderated across countries and categories over the course of the quarter and was partially offset by continued softness in away from home channels.
An important highlight of the quarter was the strength of our emerging markets what was.
Returning to double digit growth game, despite very challenging conditions, including economic uncovered impacts on the traditional trade.
Operating profit increased on a reported basis because of a reduction in one time charges now that recent years substantial restructuring are largely behind us it.
<unk> declined on an adjusted basis because of the absence of businesses divested long steel as well as higher expense for performance based compensation and a significant planned to increase in advertising and consumer promotion.
Operating profit declined less than we expected in large part because of a positive performance in net sales and gross profit margin.
Earnings per share declined with operating profit along with an effective tax rate that was higher than last year.
Expected.
And cash flow continue to come in better than planned, bringing our year to date cash flow above what had been our forecast for the folio a reflection of our elevated earnings reduced restructuring outlays, good working capital management and capital expenditure that has been delayed during the pandemic.
Let's take a look at these metrics in more detail.
We start with net sales growth and slide number 10.
While moderating from recent quarters currency translation was a negative impact of about 1% in the quarter largely due to a major Latin American currencies devaluation against the U.S. dollar loss.
Lots deals divestiture of our keebler cookies by cross ice cream cones and fruit snacks and he was read at the end of July. So we had one month of impact in the quarter. So pulling down net sales by just under two percentage points.
Organic net sales growth was 4.5% in the quarter, we had anticipated a meaningful deceleration from last quarters, 9% growth and sure enough. We did indeed see a moderation and at home consumption growth across all categories and continued softness in away from home channels.
And on the gold products.
Nevertheless, this quarter three organic growth performance was very promising.
Was driven by organic growth across all four regions and across all four global category groups. It also featured a better balance between volume and price mix and it was supported by consumption growth and share gains in key categories and markets and John Boyd by effective brand building activity.
Now lets turn our discussion to profit margins with slide number 11.
Going into the quarter, where does assume that gross profit margin what contract a bit in quarter three as we anticipated lets needs less net sales growth to carve out sustained incremental corporate costs. However, our gross profit margin ended up expanding slightly as growth productivity.
And price realization more than offset a resumed mix shift towards the emerging markets, including multipro distributor business in Nigeria.
We expect to see gross profit margin to expand modestly again in quarter four and therefore for the full year, despite sustained incremental corporate costs.
Other important impact on our operating profit margin, while the increase in Brighton investment back in July we discuss the postponement of advertising and consumer promotions during the height of the pandemic in the fall itself and our intention to reinvest those funds into brand building during quarter three and portable.
The slide shows that delay in advertising and consumer promotion during quarter, two and how it was followed by a double digit increase in quarter three along with a similar low double digit increase planned for quarter pole.
Along with an increase in expense for performance based compensation was the primary driver of our operating profit decline in quarter, three and will be again in quarter four.
Below operating profit interest expense remained below last year as expected other income, which is predominantly related to our pension plans remain higher year on year also as expected, reflecting the impact of higher asset valuations at the beginning of the show these favorable items were more than offset.
At owning space share by a higher effective tax rate and an increase in average shares outstanding as we continue to refrain from share buybacks to prior financial flexibility during the current crisis.
That brings us to cash flow and capital structure on slide number two as.
A lasting impact of this deal will be the stronger than projected cash flow, enabling a faster than expected reduction in net debt as shown on the top graph our cash flow. This year has significantly outpaced that of the past couple of years, even beyond lapping unusual outlays in each of the prior to Europe.
To date periods.
I mentioned this is the result of higher than expected adjusted basis earnings this deal as well as the fact that we have gotten past the major restructuring and reorganization of the last few years, which has required significant cash outlays, but it also reflects our effective management of working capital and the capital expense.
Joe we've had to pry rise or delayed during the pandemic, so astronauts would be capacity utilization in any way.
This cash flow has enabled further increases in liquidity and further reductions in net debt as shown on the bottom chart strong liquidity and lower net debt against stronger cash flow give us enhanced financial flexibility.
Let's now discuss our rest of your outlook.
Looking at slide number 13, and our planning assumptions around the pandemic for the fourth quarter.
While the direction of the pandemic remains uncertain, we are making certain planning assumptions.
That and we assume that at home demand growth will continue to decelerate was sizable away from home sales declines moderate.
These are simply continuations of trends, we have seen in recent months there.
The reason, we assume are away from home sales will take longer to stabilize is because of our waiting in segments like schools and travel and lodging, which are expected to take longer to Rick Hubbell.
We also assume that growth in emerging markets will decelerate amid covered related economic softness as well as some unusual market specific factors in quarter fall such as school food programs being shut down in North Africa, and the impact of new labeling regulations going into effect in may.
Sickle.
Finally, there is the investment that we delayed from the first off yes.
Just as in quarter three this first off funding will be implemented during quarter full on top of previously planned activity.
There is to be another double digit increase in advertising and consumer promotion and quadruple.
Well 14 shows what this all means for our full year outlook.
As Steve mentioned, we are once again, raising our guidance for you.
This time to reflect our better than expected quarter three results less any timing related factors from that quarter, unless some incremental investment that'd be adding two quarter fall off.
Full year guidance for organic net sales growth improves to just about 6% from our previous guidance of around 5%. This.
This reflects our better than expected, 4.5% growth in quarter, three and a modest increase to our outlook for quarter fall below that still assumes a deceleration for the reasons, we just discussed.
Our full year guidance for currency neutral adjusted basis operating profit improved store growth of approximately 2% from our previous guidance for a decline of about 1%. This.
This positive swing reflects better than forecast operating profit in quarter. Three we had some timing related shifts in cost into quarter full along with the incremental advertising and promotion and other costs and investments I just described.
This drives a similar increase in our full year guidance for currency neutral adjusted basis earnings per share, which goes to growth of approximately 2% from previous guidance for a decline of about 1%.
Our guidance for cash flow increases to 1.3 to 1.4 billion a substantial improvement from our previous guidance of up.
Ultimately 1 billion.
This reflects a stronger than expected delivery in quarter three lets some elements that are likely timing related such as capital expenditure delayed from earlier this year.
Putting it altogether were in position to finish Twentytwenty with a strong financial performance featuring a good balance of growth profitability investment and got generation Angeleno 2021, you know very solid financial condition.
And with that let me turn it back to Steve for a review of each of our major businesses.
Thanks, gentlemen, let's begin with North America, and slide number 16, as we'd expected and as you've seen in the scanner data at home consumption growth decelerated throughout the third quarter, while away from home channels saw some moderation in their steep declines. The result for our North America region was just under 3% organic net sales growth.
In quarter three.
Note, while we experienced a continued though moderating double digit decline in away from home sales as expected the rest of North America business turned in a solid mid single digit growth performance and while our deceleration from quarter to surge was inevitable. We're very pleased with how we performed within our primary categories in Q.
Canada, we grew consumption in all six of our primary categories, including gaining significant share and distribution and crackers with cheez. It in the U.S., we held or gained share in five of our six primary categories at retail as well as in the vast majority of our categories in measured away from home channels will visit these key us cash.
Degrees in more detail in a moment, but this end market performance is a key reason, we're confident that we are strengthening our business amidst this crisis household.
Household penetration and buy rates have increased across our categories. Since the pandemic began and we are focused on retaining as many of these consumers and occasions as we can this relies on effective marketing and sales execution of course, but it is also dependent on our supply chain to get food to the marketplace. Our plants are running well.
Still focused on throughput and still up against capacity in certain categories in food forms requiring tremendous agility, our supply chain clearly has risen to the challenge operating profit decreased as planned in quarter three as brand investment we shifted out of the first half and into the second half and as we had less increase.
Rental sales to cover sustained levels of incremental cobi costs, but North America is on track for a very good year of net sales and operating profit growth let's.
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 17 northern.
North America snacks continued to post strong growth, even if at home demand decelerated from quarter twos highs and away from home channels and on the go pack formats remained in decline.
In the U.S. Pringles continued to post double digit consumption growth holding share. Despite continued softness in on the go pack formats as expected.
In crackers, we continued to outpace the categories solid mid single digit growth in the quarter Cheez. It snap continues to grow strongly in its second year supported by recently added capacity, while accompaniment oriented cracker brands club townhouse in cars have collectively gained share as well and.
Edible wholesome snacks category remains pressured by reduced on the go occasions during the pandemic and while this has impacted on the go brands in our portfolio like Rx in Koshi, we've been able to gain share on the strength of our growing pop tarts and rice krispies treats brands. So our snacks brands business is in great shape.
Great.
Now, let's turn to North America, cereal and slide number 18.
Our North America cereal net sales grew again in quarter, three so reflecting a deceleration in the category in retail channels and continued declines in away from home channels.
But what is so encouraging is what we are doing within the category in us measured retail channels, we again outpaced the category and we did it on the strength of our renewed advertising support and refresh messaging for brands like special K and mini wheats and on innovation like Jumbo snacks and mash ups that have helped us lead the <unk>.
Category in share of innovation this year.
We have added more household penetration during the pandemic and we've held onto more of it than the category and the same goes for buy rates, our enhanced data and analytics give us the ability to target the right consumer and occasion with the right messaging for that consumer and occasion and we're seeing the results. So we're executing well in north.
Americas cereal.
We're also executing well in North America frozen foods shown on slide number 19, our North America frozen foods categories didn't decelerate as much as cereal and snacks during quarter three and as a result, we continue to deliver high single digit organic net sales growth and that is despite capacity constraints.
And declines in away from home channels as well as the phasing out of certain noncore product lines. Our core businesses are performing very well in us retail channels. Our eggo brand grew consumption by almost 13% in the quarter with strong growth in waffles, French toast and pancakes and continuing to gain share.
Our Morningstar farms brand grew consumption by nearly 18% trailing the frozen vegetables and categories exceptional growth as we ran up against our capacity morning.
Morningstar farms meat alternatives sub brand incognito was launched during the quarter. It is early days and we're still building up or distribution, but we have launched burgers sausage brought worst and ground beef into the refrigerated aisle and ended the frozen aisle, we've launched Disney shade chicken Nuggets, the first Kid.
Oriented offering in this plant based category, we are expecting a gradual distribution build and we are confident about our food branding and breadth of offerings.
So like our other north American businesses frozen foods is performing very well.
As we look to the remainder of the year for Kellogg North America, we expect the deceleration in at home demand growth that we discussed earlier, we're focused on restoring service levels, particularly in capacity tight brands and categories and we'll continue to reinvest the funds we deferred from the first half we have no doubt we will emerge from 20.
20, with a stronger North America business.
Now, let's discuss our international businesses, starting with Europe on slide number 20.
Kellogg Europe posted its 12th consecutive quarter of organic net sales growth in quarter three growth.
Growth decelerated as expected as the Covance led surge in at home cereal demand moderated while declines persisted in away from home channels inside.
In cereal, our net sales increased at a low single digit rate in the quarter.
Category growth rates finished the quarter at roughly that range and we added to our year to date share gains in key markets across the region.
In snacks, our net sales were down very slightly in the quarter Pringles growth improved from last quarter led by accelerated consumption and share growth in the UK, even amidst altered commercial plans because of co bid. We've gained share this year in our three biggest markets in the region, the UK, Germany and Russia.
While portable wholesome snacks continued to feel the impact of fewer on the go occasions during the quarter as expected, though its declines moderated from the previous quarter.
Overall in emerging markets, namely, Russia, and Central Europe, we experienced a decline in net sales, reflecting challenging economic conditions, particularly in snacks. The good news is that cereal remained in solid growth in Pringles has gained share as in our other regions Europe reinvested a good portion of brand building.
It had been delayed from the first half this is important for solidifying our competitive positions and we'll see this again in quarter four so.
So we really like how we have been executing in Kellogg Europe.
Let's turn to the Kellogg Latin America, and slide number 21.
Given the challenging macro conditions in this region, we had expected decelerating net sales growth instead, Kellogg Latin America posted double digit organic growth and this double digit growth was broad based across all four sub regions, Mexico, Brazil Pacific and Caribbean Central America the growth.
Growth was again led by double digit organic net sales growth in cereal, whose consumption growth remained elevated in modern trade channels, even if we did see category growth rates decelerate during the quarter.
Snacks, which has been negatively impacted by the pandemics locked down and recessionary environment bounced back in quarter, three with low single digit organic net sales growth.
Leading this growth was our business in Brazil, where local production and a new strategic distribution partner are benefiting pringles and we continued to gain share in cookies.
Higher net sales more than offset adverse transactional foreign exchange and kobin related costs not to mention a significant double digit increase in brand building profit growth also continued to lap last year's costly distributor transitions as well as start up of local production in Brazil.
So are performing well in spite of tough conditions, we expect decelerating at home demand to slower cereal sales in quarter, four and we face some uncertainty in Mexico regarding new labeling regulations, which we've mentioned previously and we'll see another quarter of increased brand building.
Nevertheless, we are clearly executing well in Latin America in a difficult macroeconomic environment, while also reinvesting for the future.
And finally, we will discuss EMEA shown on slide number 22.
Like Latin America, EMEA turned in better than expected double digit organic net sales growth growth was broad based across Australia, Asia Africa, and the middle east and across cereal snacks noodles and other.
As you can see on the chart cereal demand remained elevated in many markets. The result was high single digit organic net sales for cereal in the region, but just as important had been the share gains we realized in key markets like Australia, South Korea, Saudi Arabia, and South Africa.
In snacks double digit organic net sales growth was led by Pringles, which returned to growth momentum as we restored supply.
Category growth rates have moderated, but we gained share in Australia in key markets in Asia Africa, and the Middle East.
And noodles and other products double digit organic growth in net sales reflected expansion of our kellogg's noodles, and the middle East and South Africa as well as a strong sequential acceleration in growth for Multipro. The distributor portion of our business in West Africa. This.
This business showed great resilience in a difficult environment in quarter three.
Like our other regions EMEA increased its brand building at a double digit rate in the quarter, reflecting investment and we shifted from the first half, but the same sales growth and operating leverage was enough to more than offset this investment.
We do expect slower growth in EMEA in quarter, four reflecting not only the deceleration we've been seeing in cereal categories throughout the region, but also the impact of Kobin related school closings, which affect important school programs, we supply in North Africa, and it will be tested further by protests currently disrupting business.
In Nigeria.
But theres no question, we are executing well in EMEA managing through some challenging macro conditions, while continuing to invest for the long term let's.
Let's wrap up with a brief summary on slide number 24.
First of all I'm incredibly proud of the way our organization has rallied to execute well through unprecedented and challenging conditions.
Everything starts with protecting our people and we are indeed, keeping each other safe. We're also doing a good job supplying the marketplace and we're supporting our compute communities, we're preserving and enhancing our financial flexibility to do all this in a time of turmoil and uncertainty as a testament to the character of this organization.
Second we're pleased with our end market performance, even having to Replan, our commercial calendar, we're executing well in the marketplace. We've expanded household penetration we are growing across retail channels, notably in ecommerce and we're finding ways to adjust the difficult conditions in away from home channels.
Importantly, we are holding or gaining share in most of our markets, notably in the us where we held or gained share in the majority of our retail categories and our categories in away from home channels. This reflects how we are competing.
Third we're pleased by our performance in emerging markets in spite of challenging conditions. We've continued to grow in these markets with much less slowdown than we anticipated. This is a credit to our experienced management teams are diversified geographic footprint, our local supply chains, and the strength and breadth of our portfolio.
And fourth we are happy to be over delivering our financial plan. This year. We are again, raising our full year guidance for net sales operating profit earnings per share and cash flow, which has us getting ahead of our plans for enhancing financial flexibility and we are doing this without cutting back on reinvestment in brands and capabilities.
In fact, we've stepped up our investment which will help us long into the future. In summary, we are confident that we will emerge from this crisis, an even stronger company Weve reached new households, and supported our most powerful brands, we've enhanced capabilities, such as data and analytics ecommerce and revenue.
Growth management, we strengthened our supply chain and Weve optimized SK use and we've strengthened our portfolio and operations in emerging markets.
Our goal is sustained balance between top line and cash flow growth, we're on firmer footing now more than ever and with that we'll open it up for your questions.
We will now begin the question and answer session with publishing analysts analysts may enter the queue by pressing the star key and the number one other telephone keypad if.
If you are using a speakerphone. Please pick up your handset before pressing the keys as a courtesy to your colleagues. Please limit yourself to one question.
Our first question comes from Nik Modi with RBC capital markets. Please go ahead.
Yeah, good morning, everyone.
Steve I was hoping maybe you can help us get a little more granularity on what you are exactly doing in terms of the customer retention.
Obviously every company is talking about have we recruited all these consumers and we're spending behind it but can you just talk about specifically what you're doing.
Because it seems like this is going to go on for at least another six months, if not longer and so it seems like you have a good window here and it does influence consumer behavior. So any thoughts on that would be really helpful.
Yes, thanks for the question Nick.
First of all.
You can see what we've done in terms of our marketing and brand building investments. So we're concentrating that in the back half of the year as we said we would so we've got lots of funds directed exactly at that the second thing is we have really enhanced our data and analytics. So we have a better understanding now more than ever about consumers and occasion.
At a very granular level, so the messaging that we're getting out their digital social.
Otherwise is directed more micro way against consumers and occasions that drive the type of behaviors that we want and we're seeing real results. So if I give you just a couple of examples in terms of penetration. The R. Tech category is growing penetration not quite at 1% and were more than double that.
Nearly 2% Artek penetration and were also retaining those households same thing in salty snacks. So it's really about understanding the consumer the consumer occasion, what drives behavior in getting that message out there and we've got a lot of investment behind that so more to go we're pleased with where we are but it's really based on the fundamental.
Improvements in data and analytics and our ability to micro target against those consumers supplemented with the right level of investment behind it.
Great. Thanks, I'll pass it on.
The next question is from Steve powers with Deutsche Bank. Please go ahead.
Yes, Hey, good morning. Thanks, So I wanted to talk about the strong emerging market performance, which was clearly call out in the quarter. I guess can you talk just a bit more around how much of that.
Do you think it was isolated to the quarter versus something that's more structural that you can build upon in the future I know you called out some specific headwinds in the fourth quarter in North Africa, Mexico, maybe you can quantify those but really asking the question more in terms of.
The medium term on a normalized basis.
Yes. So thanks, Steve we were very pleased with the performance in emerging markets in this quarter. Obviously it was led by cereal, which saw elevated demand based on some of the Lockdowns. We continue to expand our noodles business very successfully so we're pleased about that.
But you know in quarter four obviously, we see the potential for some slowdowns, which is what we talked about we've got.
Unusual situations to school closings in North Africa, that's a big bit of business for us the labeling regulations in Mexico uncertain, how if and how that will impact the business. It's across really all consumer packages. So hard to say and then Nigeria, obviously in the news very much as you can see with.
Protests and disruption, which disrupts our business has disrupted our business. There so always watch outs in emerging markets to be sure and when you have this type of environment, coupled with the recessionary environment, you always want to stay close and watch it but im very proud of the way the organization in quarter three came through in emerging markets and delivered a better.
Her than expected performance.
Great. Thank you.
Thanks, Steve. The next question is from Ken Zaslow with Bank of Montreal. Please go ahead.
Good morning, everyone.
Good morning, Kevin.
You made a comment and I always like to hear this comment is you know you're going to emerge stronger out of the total 19 experience can you talk about how that would affect your financial outlook in terms of what that really means in terms of qualitative and as well as quantitative outlook of what you think what does it mean to emerge stronger.
A higher growth rate as you mean higher margins is it just mean more spending how do you frame that and just for context and that would be very helpful. Thank you.
Yes. So thanks for the question can obviously, we're not going to get into any 2021 guidance at this stage, we're still working through our plans, but when we talk about emerging as a stronger company, we're making lasting impact to the business you see that in the financial flexibility to type of cash we've been able to generate you see that especially in the investment in.
The brands and capabilities that we're putting into the marketplace to drive penetration to drive retention to keep those households, you see that in our digital and E. Commerce capability that we're continuing to invest in and then our supply chain as I said very proud of our supply chain and the way they have been able to be agile and meet this on.
Heard of kind of surge in demand and is this a lengthy.
The length of which has occurred and so we're investing in capability and capacity in the longer term and our supply chain as well, which we mentioned so all of those things give us very good confidence that we are emerging stronger and when we get to February we'll talk about in more detail what that looks like I'm and you want to add anything to and I think just to add to that I think you know you look at the.
The strength of our cash flow I think thats allowed we always said that in all prior to the sale would be to reduce our net debt and I think the strength of our cash flow is allowing us to accelerate that net debt reduction.
So I think you know that allows us so much.
Much more financial flexibility as we emerge out of this crisis.
Okay, and just to be clear I wasn't looking for next year's guidance I was kind of thinking more about like bigger picture.
Longer term guidance your growth algorithm or anything like that that would be quantitatively different that was kind of what I was looking I wasn't trying to.
Get that next year's number just any other bigger.
Bigger picture financial outlook.
It seems like the.
Function of that but is there more spending that goes into data analytics is there anything else and then I'll leave it there and I appreciate it.
No I think I just exactly its confidence in the trajectory based on the investments that we just talked about and it's.
As you know Ken there's so much uncertainty right now how long this goes what consumer behavior really changes and how it lasts and so we're leaning into it we're very much leaning into it but we believe that this crisis is terrible it as it's been has given us an opportunity to really engage with consumers and meaningful and lasting ways.
And then make those investments to emerge stronger.
Thank you.
The next question is from Ken Goldman with Jpmorgan. Please go ahead.
Thanks.
Your guidance assumes that at home demand continues to decelerate.
Millen, those discrete seeing consumer stock up behavior actually rising.
In certain areas.
I guess I'm curious are you seeing any indication that your larger customers are preparing for a wave two of pantry loading.
Or is it really not anything you're anticipating at this time.
Yes, Thanks, Ken again, if theres. So many things that are unknowable right now and so it's really our planning assumptions and the best to the best of our ability over thinking of is the away from home channels as we talked about not really recovering very quickly were weighted towards schools.
Schools and travel and leisure. So those are the ones that are recovering convenience.
And so forth your QSR, you're starting to see stabilized, but not where we're weighted and then in terms of retail channels.
We were talking about in the third quarter about a deceleration it did decelerate.
It continues to decelerate at what level it stops and starts to go back up again is an unknowable. We see the same news reports, we obviously see the same terrible trends in the cobot virus and so this is our planning assumption and.
We hope.
We hope for a recovery obviously as everybody does in terms of these lockdowns and so forth, but to the best of our ability. This is what we see in at a point in time, we just have to make a call and say the continuation of the deceleration is what we see but you have to be agile just in case that changes.
Thank you.
The next question is from Bryan Spillane with Bank of America. Please go ahead hey.
Hey, good morning, and thanks for taking the question.
Steve I wanted to ask about incognito you know it.
We've noted theme you know the the the.
Advertising presence as you launch the product.
And so I guess a couple of questions. One just as you look at the strategy tactically as you.
We launched the product do you think there's an opportunity there in terms of just having a better specialty traditional media presence versus.
The existing kind of established brand and then second if you can talk a little bit about.
Shelf space and.
Just how far along you are in terms of distribution and then and then finally, just you touched on capacity constraint. So.
Just what the plans are there to expand capacity as you build up distribution.
Yes, thanks, Brian So the first thing I'd say is it's early days, obviously and we're all learning what it means to launch a new brand in a pandemic environment, where shoppers behaviors are different right and so we've talked about how big brands are resonating people Trust big brands, they get in and out the shopping experience as quickly as they can.
But and as we enter 2021, we do have plans for additional lines and so a more significant capacity coming on so it's short term, it's about crewing and throughput and the longer term or the medium term, which is really next year. It's about additional lines to really add to capacity because we see this as a last thing and you're not going to see this type of elevated demand I would suspect.
Fact going forward, but plant based is a real megatrend. It was before the pandemic and the type of trial that you're seeing is really going to think we think accelerate what was already <unk>.
[noise] meaningful trend in the space.
Thank you.
Yeah the.
The next question is from Erik Larsen was sea Port Global Security's. Please go ahead.
Yeah. Thank you. Thanks for the question, everyone and hope all is well I.
I just want to drill down a little bit more on your cash flow.
That's sort of the important metrics that I'm focused on it so.
It looks like you've maybe differed piece of your capital expenditures, which will obviously come back next year.
Curious also if if you're running your plants, yet to just meet demand or a few now have enough capacity to kind of rebuild.
Maybe some inventories here.
In that difference in your guidance of a billion 2 billion 3 billion for how much of that goes away with.
Increased cap X next year, and maybe some working capital rebuild so what does sort of the net.
Cash flow improvement that we can look for.
Yeah. So I think just on the cash flow right. There are a number of factors that are driving I improve cash flow right. So part of it is driven by just higher earning tyre adjusted earnings.
A significant reduction in restructuring outlays are good working capital my good working capital management that we've seen across all our businesses.
And then the capital expenditure some of which has been delayed now we're hoping to catch up on capital expenditure and quarter for.
And that has.
Being reflected in our outlook with planned downtime to get some of the Capex away.
And some of it will be delayed.
I think Steve mentioned ride from a Capex standpoint, I think I'll focuses on.
Getting the capacity in all are constrained platforms as quickly as possible.
So I would say.
Part of it part of the cash flow is timing and phrasing.
But equally.
A part of it is as well just sustained improvement.
In our earnings.
In a reduction in restructuring as well as working capital, which we would expect to the state.
Yeah, just so so to finish up on the one part of the question. This will all be done with this after this so.
Are you able to run your plants today to help build some of your inventory and maybe some retail too. We know those inventories are depleted or are you still just running to kind of meet current demand.
I think it depends on the on the platform and you know I think it depends.
And some platforms were running flat out the service.
<unk> elevated demand.
All of those way we can.
Taking the opportunity to catch up on capital expenditure. So I think I know it varies across the across the platforms.
Understood. Thank you.
The next question is from Michael Lavery with paper Sandler. Please go ahead.
Good morning, Thank you.
I just want to actually go back to Morningstar farms Ah clearly Scott.
Outstanding growth and stands out against your other categories.
How do you think about the the opportunity outside the U S. We've seen competitors.
Make a push there certainly there's there's some scale that's not the same as you have in the U S. But what are your ambitions to launch internationally.
Yeah. Thanks for the question, Michael what I'd say is right now the priority is the United States. It's a huge opportunity Morningstar farms is it very big brands. So clearly winning in the U S is and competing in the U S. As a number one priority one we are outside the U S in Australia New Zealand.
Currently and so we are experimenting and we'll see what the opportunity.
Is and how it presents itself, but we believe that priority one is the United States because of the size of the market and because of the advantage. We have having morningstar farms is a very established brand.
Okay, great. Thank you very much.
Thanks, Michael.
The next question is from David Palmer with Evercore ISI. Please go ahead.
Thanks, and good morning, Steve You you mentioned investing for future in your summary, slide and and certainly that's not new to Kellogg's. This year, it's seems three.
Three plus years, you've been doing you know a lot of heavy lifting in your business, particularly in the U S C.
The rolling Thunder of investments and snacks, and cereal and frozen this year and it.
It seems like you've done some good repositioning that make you. An addition to Kobe related demand, maybe creating additional room to invest reinvest so I'm wondering how you're thinking longer term about the need to reinvest versus the investment rates you've been doing in recent years and what have you reviewed.
<unk> as you get through Covid too for the to assess that need to reinvest thanks.
Yeah. Thanks, David So we have put money behind our brands, we put investment behind our brands and we've seen the benefits of that flowing through.
And we are singularly focused on balanced growth. So we're pleased with the top line performance pre Covid and obviously, we get the bump from Covid and when you look at the financial results of this year based on the the new guidance that we just updated today you see a P&L that looks very solid.
And very balanced with good topline growth.
Margins.
Improving and a nice bottom line performance and so we also like the type of investment that we have currently behind our brands. When you think about as a percentage of net sales for example, and so as we as we think forward, we like where we are in terms of our brand building spend.
And we would see that continuing so we don't see any great need for a big insurgent into.
Into any particular area, we benefited from being able to invest.
This year in particular, when you think about the level of investment in the second half of the year because of the Covid crisis. We had this concentration of lots of consumer messaging going into the back half of this year into the fourth quarter. We believe will allow us to enter 2021 with lots of good.
Momentum and lots of brand building an equity that's been invested into our brands and so we like where we stand today in terms of the health of our brands and the momentum of our brands.
Thank you.
The next question is from Chris grow he was Stifel. Please go ahead.
Hi, good morning.
Hi, I just had a question for you in relation to the progress you've made towards that $60 million spending that you talked about from the first half shortfall I know Europe double digit this quarter and you're supposed to be in the fourth quarter as well could you say how much of that you got done in the third quarter and I'm curious if that maybe not so much that figure, but if you're ready to spending overall has has changed has it gone.
[noise] up at all by chance just given the rate of elevated demand and the returns you're seeing from that investment.
Yeah. Thanks, Chris So roughly speaking we got about a third of it off in the third quarter and so we're obviously planning on two thirds of it off in the fourth quarter, which leads to double digit brand building.
Against various platforms, that's on top of what we had already planned and so that's what I was just saying in the previous.
Question. That's why we've got this concentration of really good brand messaging happening in the back half of the year and with good Rois and so we're very pleased with the type of performance, we're getting from it but remember too that these are a lot of this is to build the longer term equity of our brands and enter of 2021 with good momentum.
Now having said all that there's all this uncertainty right and so what happens with everything from movie releases to college football bowls in the fourth quarter remains an uncertainty. So we will continue to have to be agile and how we think about where the right places to invest are but we are determined to invest against our brands to continue to be.
The equity to drive the right Rois and to enter 2021 with real solid momentum.
Thank you.
The next question is from Robert Moscow with Credit Suisse. Please go ahead.
Hi, Thank you.
C. Four ahmet I was wondering if you could give us a sense of what total advertising will be for the year is it gonna be up a lot or.
Because you're getting first half second half highest information, but it's hard to put in context for the for the whole year.
And and also you know when you look at the 10-K, you advertising was down 10% last year. So.
As a percentage of sales basis can you give us some color on on what you're thinking like level is.
Yes, and thanks, Rob so for the full year will be up mid single digits X. The divestiture right and will be up as I just mentioned double digits in the second half of the year and so that's why I talk about 2021 entering with real momentum and we believe that that gives us the right level from.
Percentage of sales roughly speaking of where we want to be now we always reserve the right with great Rois and great ideas.
To go plus or minus but when you look at the momentum that we've got in our net sales pre covid and what we built last year. We felt like we were getting significantly good returns on our advertising spend last year and if you'll recall, we exited fourthquarter with two 7%.
Rose and that was pre covid. So we were clearly getting the benefit of the type of investments that we're making over the course of the last three years really and so and it came with some searches and some some tactical movements around but if you just go back to the top line and see the top line momentum that was building over the course of last year, we feel.
Like we were deploying that advertising spending in very good very good ways with good returns that we're getting us exactly what we wanted and obviously this year everything went complete.
Completely into re planning after covid, but again, we will finish the year with mid single digit advertising spent X divestiture with real momentum in the back half of the year because of the concentration in double digit nature, the investment and quarter three quarter for.
And just to follow up it's Matilda digit pretty much what you were expecting to do or did you increase beyond because you can get a lot of comments here about now is the time so.
Is this an increased person to your original plan.
It's a slight increase arrived to the original plan, but pretty close and so if you recall last quarter on our earnings I talked about how we were bound and determined to spend what we had planned on spending and that gives us the type of concentration in the second half and the momentum so up slightly from from even that but just slightly but you can think about it.
Kind of in terms of spending our full year allocated budget against their brands.
Thank you.
The next question is from Jason English with Goldman Sachs. Please go ahead.
Hi, Good morning books, congrats another strong quarter.
A couple of quick questions. A couple of quick questions for me first the we've obviously seen cereal sales decelerate corner, where last quarter, but Ah sub 1% growth figure from you. This quarter did surprise me.
Does that reflect what maybe some inventory that had come down after you restock last quarter or is it isn't foodservice now or the education facilities, becoming a bigger part of the business what exactly is driving that that weakness yes.
Yeah. Thanks, Jason It really you can point to the double digit declines and away from home channels and that's a sizable portion of our business.
As well as the on the go pack formats, if you take away those declines away from home in particular, the rest of the business was up mid single digits right and if you look at our consumption you can see that as well up mid single digits. So it really is the away from home channels that drove that.
And is away from home a bigger piece of the business as we get into the school year.
Yes, the answer to that is yes, and now there's a great deal of uncertainty, obviously with what really happens with schools and we all see that in our daily lives school's going back and then.
Going into hybrid and then getting shut down and so it is a very fluid situation, but from a consumption standpoint, we still see the elevated demand.
And we still see the benefits of Covid, but it is it is definitely counterbalanced by the away from home softness.
Sure. My next question is on trade spent it's lots of other folks need industry, you're seeing read the price realisation right now because promotional levels are so subdued.
The Nielsen Gotta start you suggest promotion levels are equally subdued for Ya, but we're not seeing the same type of price benefit why is that as you trade spend not coming down and if it's not coming down so it's staying where it is where's the money going if it's not finding promotions.
So we don't we won't we won't get into the specifics of trade, but I think in all from an overall standpoint, we're seeing we're.
We're seeing the price mixed come through.
I think within that there is a very marked category shift I think we talked that in our last call just a mix between cereal and snacks and different rates there are different rates between the channels I think that's probably driving.
Some of the.
The the negatives, but overall, we're seeing prize makes come through.
Okay. Thanks, a lot guys I'll pass it up.
Operator, we are at 10 30, so we're going to have to wrap it up.
Okay. This concludes our question and answer session I would like to turn the conference back over to John Renwick for any closing remarks.
Thanks, everyone for your interest and if you have follow up questions. Please do not hesitate to call us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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