Q4 2020 Kellogg Co Earnings Call
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Good morning, welcome to the Kellogg company's fourth quarter 2020 earnings call.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer session with publishing analysts at this time I will turn the call over to John Renwick, Vice President of Investor Relations and corporate planning for Kellogg Company.
As a reminder, this call is being recorded Mr. Renwick, you may begin your conference call.
Good morning, and thank you for joining us today for a review of our fourth quarter and full year 2020 results as well as a discussion regarding our outlook for 2021 I'm joined this morning by Steve Caitlin, our chairman and CEO and Amit <unk>, our Chief Financial Officer.
Slide number three shows our forward looking statements disclaimer as you are 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.
The presentation as well as to our public SEC filings.
This is of 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 recording of today's webcast and supporting documents 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 an organic basis for net sales and on a currency neutral adjusted basis for operating profit and earnings per share and now I'll turn it over to Steve. Thanks, John and good morning, everyone. I Hope you and your families are holding up well in these turbulent times.
Certainly 2020 was an extraordinary year and I'm incredibly proud of how our organization responded to and executed during a business environment that was anything but business as usual.
Keeping our employees safe remains job one and this has required investment and changes to the way we work supply in the marketplace with food required agility contingency planning and creative ways to increase production not to mention the courage and dedication of our frontline workers and aiding our communities a key element of our company's culture and.
Legacy was accelerated during the crisis and it has been especially heartwarming to see our employees, giving their time and effort to the cause we also preserved and improved our financial flexibility. These had been our priority during the crisis and we have been executing well against all of them.
And even while having execute against crisis management priorities. We also over delivered on our financial commitments. We did our best to provide you with guidance during the year. Despite an uncertain environment and I Trust that transparency was helpful to you. We ended up raising that guidance twice during the year, ultimately hitting or exceeding that guidance with our quarter four and.
Full year results, even after absorbing $20 million in onetime costs related to redeeming debt late in the year. This is the kind of dependability, we are striving for.
We set out this year to return to balance financial growth, meaning balance between top line growth margin expansion and cash flow conversion and sure enough through all the unusual impacts divestiture impact Covid impacts 50, <unk> week, we did return to balance financial growth in 2020 strong organic net sales growth, even if you exclude a reasonable estimate.
But for Covid net benefit and expansion in gross profit margin, despite incremental COVID-19 related costs growth in operating profit, even despite losing about six percentage points from the mechanical impact of last year's divestiture of better than expected increase in cash flow featuring a significantly improved conversion of net income even excluding <unk>.
<unk> net benefits, we returned to balance financial growth in 2020, right on schedule, we executed very well in market. The pandemic presented us with a sampling event like none other than we saw increases in household penetration that outpaced most of our categories, giving us an excellent opportunity to communicate too and retain new and <unk>.
<unk> consumers and we outgrew most of our categories holding or gaining share of categories, representing more than 80% of our net sales and those measured markets. Our emerging markets are a key long term growth driver for us and they represent over 20% of our net sales in 2020, they were severely tested by pandemic relate.
Shutdowns economic slowdowns, even social unrest and yet they delivered high single digit organic net sales growth for us in 2020, even accelerating from the prior two years growth rates. This is a real testament to our portfolio, our local supply chains and our experienced management teams in these markets in short the business.
Performed very well in 2020, and we will take that momentum into 2021.
Throughout the crisis, we have been working to ensure that there are lasting impact from 2020 that should increase confidence in our ability to deliver consistent dependable balanced growth over time I'll discuss just a few of them here, one is communicating with new and lapsed households, rather than giving up on A&P, we couldnt execute in the first half we shifted that.
Budgeted investment in the second half focusing on advertising to these new and lapsed users and we've leveraged advanced data and analytics to target those households, and occasions. This gives us our best opportunity to retain an expanded consumer base.
We know that online shopping for food experienced a step change in 2020, our triple digit growth in E. Commerce sales was made possible by the brands in our portfolio and by our recent years' investment in infrastructure and capabilities. This will continue to benefit us.
We're investing in our supply chain. This includes sustaining enhanced safety protocols that carry with them higher costs, but the crisis has also resulted in us increasing our supply chain agility and reducing complexity with the exiting of certain non core product lines and tail skus and it accelerated our expansion of capacity in areas that were on.
Already tight before the pandemic hit this too will benefit us in 2021 and beyond enhanced financial flexibility is another lasting benefit improved cash flow generation and the prioritization of debt reduction resulted in deleveraging our balance sheet faster than we had anticipated as Amit will discuss in a moment.
This financial flexibility puts us in a position to resume dividend increases and share repurchases earlier than previously planned returning more cash to shareowners and lastly, we remain solidly on track for consistent balance growth even amidst the crisis. Our focus was on what is best for sustainable growth.
In addition to sustaining our solid top line growth, we have organizational focus on improving gross profit margin increasing the return on our brand building investment and disciplined on overhead there will be noise and uncertainty around the pandemic and its impacts but in the spirit of transparency. We will continue to provide you guidance on our planning stands today.
Our guidance for 2021 indicates balanced growth on a two year basis attempting to smooth out 2000, twenty's unusual events and to ensure that we remain on our balanced trajectory. So with that let me turn it over to Amit who will take you through our financial results and outlook in more detail.
Thanks, Steve Good morning, everyone.
Youll of unprecedented uncertainty, we consistently get you apprised of our planning.
Raising our guidance twice during the year.
As shown on slide number nine we ultimately achieved or exceeded that guidance with the results we announced today.
This improved outlook across the Europe reflected the impact on elevated at home consumption of course.
But it also reflected the strength of our underlying business and I'll return to balance growth.
So let's review our 2020 results, which are summarized on slide number 10.
As I mentioned our results for the fourth quarter came in better than expected.
Organic net sales growth moderated from two 5% in quarter four slightly better than we had forecast.
On finished deal with 6% growth as guided.
Currency neutral adjusted basis operating profit increased slightly year on Europe in the fourth quarter.
Which was better than we had forecast per quarter with double digit Brian Berthing investment incremental COVID-19 costs and higher performance based compensation.
We finished the year with currency neutral adjusted basis operating profit growth of three 5%, which is higher than our guidance on.
Includes roughly.
6% negative impact from the absence of businesses, we divested in 2019.
Currency neutral adjusted basis earnings per share declined year on year on quarter, four owing to a higher tax rate.
Shares outstanding as well as absorbing $20 million of nonrecurring costs related to our debt redemption, we executed in December.
<unk> will deleverage our balance sheet.
While the yield on.
Earnings per share grew two 5%, which excludes roughly 5% negative impact from the absence of divested businesses.
Finally, our cash flow of nearly $1 $5 billion was much higher than projected featuring high on <unk> and a higher conversion of those net earnings.
And on a strong performance.
On the kind of balanced financial delivery, we aim Paul.
Let's take a look at these metrics in more detail.
We start with net sales growth on slide number 11.
Our organic basis net.
Growth decelerated as expected and colorful coming in.
Two five per se.
A few factors to point out.
At home consumption growth rates around the world.
Elevated not decelerating as much as expected.
Away from home decline remained in double digits.
Not moderating as much as expected.
We experienced a growth timing of shipments.
Certain categories in the us relative to that sustained consumption growth.
And we experienced the business specific headwinds that we had anticipated such as school closings in Northern Africa and October.
Well on rates in Nigeria.
Nevertheless, we saw.
Organic growth in all four regions again in quarter Paul.
Outside of organic business growth.
Paul adverse currency translation moderate from earlier in the yield.
Reflecting the weakening of the us dollar since quarter three.
Our quarter four included an extra week, something we have everything that's going to Europe.
Portfolio organic net sales growth was 6% featuring growth in both volume and price mix angry.
And good growth in all four regions.
All four major category growth.
On that theory.
Frozen and noodles and other.
On a reasonable estimate for the net COVID-19 impact after its various puts and day would suggest that it contributed about half of this organic net sales growth in 2020.
Putting all underlying growth at a very strong rate.
Rounding out net sales growth for 2020 in Europe.
Operating loss.
Five percentage points from the absence of businesses, we had divested back in July 2019.
Currency translation was offset by the impact of having the extra week in our fourth quarter.
Now, let's turn our discussion to profit margins with slide number 12.
As we've discussed as we enter 2020, our goal was to stabilize gross profit margin.
Would require offsetting on natural mix shift towards emerging markets.
Building, our distributor business in Africa.
We ended up doing better than that.
Even as that mix shift continue.
Specifically, our gross profit margin improved by 60 basis points year on year on the operating leverage revenue growth management and productivity initiatives more than offset the impact of more than $60 million.
Incremental direct COVID-19 related costs.
In the fourth quarter gross margin never doubt because of shipment timing in the us and some incremental costs, particularly in Latin America.
But we are pleased with how we performed on this metric in 2020.
Our operating profit margin also improved in 2020.
But its quarter by quarter performance was greatly affected by the timing and our investment in advertising and consumer promotion.
Recall that we postponed some advertising and a significant amount of consumer promotion during the first half.
Sponsored events were canceled and the industry's focus was on getting food auto sales.
As you know, we decided to put that deferred spending to work in the second half.
Primarily in advertising aimed at building brand equity and retaining household penetration.
The result was double digit increases year on year on an E&P during quarter, three and quarter four as increased advertising more than offset decreased consume on promotion.
For total E&P, we finished 2020 right on our budget with a mid single digit increase year on year.
That brings us to cash flow on the balance sheet on slide number 13.
Cash flow came in higher than anticipated throughout the year, a combination of our improved operating profit and reduced restructuring outlays, along with good working capital management.
The result was a significant improvement in our conversion ratio of net income into cash flow.
As you know our priority for cash flow during 2019 on 2020 was to reduce our debt leverage after several years of acquisitions on restructuring outlook.
This became all the more important as we enter an uncertain economic environment amidst the pandemic.
On a stronger than expected cash flow allowed us to reduce debt Pottsville deadline, right up to the $1 $2 billion on that.
In December.
This reduction in debt leverage gives us the financial flexibility.
John more cash to share on us as I'll discuss in just a moment.
So, let's now turn our attention to 2021, starting with slide number 14.
In forecasting our P&L for 2021.
Sure.
And on track for steady balance growth.
Obviously, though 2020 as an unusual based on to say the least.
Not only did it have an extra shipping week in quarter, four but the pandemic created unusually high sales and operating leverage, especially in the first half.
And it also resulted in investment being shifted to the second half.
All stance will supplant portfolio growth that keeps us on our strategic plan.
That's perfectly we planned around assumption that result in full year growth in organic net sales growth that is more than 2%.
Gross profit margin expansion on a two year basis, and we have growth in currency neutral operating profit of 3% to 4% excluding divested businesses about from the 2019 day.
Obviously, we've made planning assumptions around Covid, which are as follows.
On the line at home demand remains relatively elevated but labs unusual surges in quarter, one and quarter two.
Away from home demand remains depressed.
Moderating over the course of the year.
Emerging market remained in growth.
Rank by challenging macro conditions.
But as you can see by the Red bars on the slide.
Underlying base business, excluding the divestiture of Covid and the 53rd week.
Expected to post another year of net sales and operating profit growth.
And on a two year basis.
Actively ignore the noise of 2020, we remain right on our strategic plan.
Through 2021.
And would call for similar balance performance in 2022.
Slide number 15 puts our 2021 guidance altogether.
Organic net sales are expected to be down about 1% year on year.
Reflecting the difficult comps in the first half.
On a two year compound annual growth, though this translates to roughly two 5% in line with our strategic plan I mentioned earlier.
Adjusted operating profit on a currency neutral basis.
Projected to be down roughly 2% year on year.
Reflecting difficult comps in the first half related to last year's outsized operating leverage and delayed Brian investment.
On a two year CAGR and excluding divested businesses from the 2019 base this translate into roughly 3% to 4% growth in line with our strategic plan.
Adjusted earnings per share on a currency neutral basis is expected to increase by approximately 1% year on year.
Aided by a decrease in interest expense caused by reduced debt and by lapping last year's debt redemption costs.
On a per year basis, excluding the impact of the divestiture from 2019 this implies about a 4% to 5% CAGR.
Cash flow is projected to be about $1 1 billion.
Coming off 2000, Twenty's exceptional $1 5 billion.
But still significantly higher than 2019 cash flow of $600 million.
Which really was about $900 million when excluding the net of the divested businesses cash flow less the divestiture related backed and other outlets.
This 2021 forecast is based on the earnings outlook and some timing of payments such as performance based compensation accrued in 2020.
In 2021.
Turning to slide number 16, we enter 2021 and very solid financial condition.
<unk> growth momentum across our region as evidenced by consumption on share trend.
We did not pull back on brand investment in 2020, So our brands are in good health.
We benefited from strength and capabilities in digital data and analytics and E Commerce.
And we are well on our way.
Finding capacity when it's tight.
We've improved our ability to convert income into cash flow.
And we deleverage our balance sheet for increased financial flexibility.
The combination of this improved business conditions and enhanced financial flexibility enabled us to resume share repurchases. This year after having to refrain from them since quarter one 2019.
In addition, we are increasing our quarterly dividend rate starting in quarter two.
This means returning more cash to shareowners and us.
It reflects our confidence in the business.
In summary.
In 2020 will return to balance growth.
Topline margins bottom line on cash flow.
We are confident that 2021 will be a continuation of this balance growth, even if 2000 Twenty's COVID-19 impact on 50, <unk> create some noise on a one year basis.
And with that let me turn it back to Steve for a review of each of our major businesses.
Thanks, Amit, let's begin with North America, and slide number 18, North America's organic net sales growth decelerated as expected in quarter four but in a different way than we projected consumption growth in retail channels decelerated only modestly as another wave of the pandemic set in however related to this was less moderation of <unk>.
Declines in away from home channels and on the go products. In addition, we did experience some unexpected shipment timing in quarter, four which likely resulted in trade inventory decreases in certain categories in the us, notably crackers cereal and portable wholesome snacks. We don't think this is anything other than timing between quarters, some of which should come.
Back in quarter, one from a financial standpoint, the quarter and year featured balance growth on an organic basis, which excludes the impact of 2019 as divestiture, but also 2000 Twenty's 50, <unk> week Kellogg North America delivered 5% net sales growth in 2020, with both volume and price mix contributing Meanwhile, we expect.
Granted the region's gross profit margin and grew operating profit, even while increasing brand building investment to ensure we are retaining new households, and adding to our brands long term equity no question. It was a very strong year for Kellogg North America.
Importantly, we saw growth across our category groups in 2020 as shown on slide number 19 in each of these category groups. There were headwinds in the form of sharply lower away from home occasions in outlets as well as reduced on the go occasions.
Good news is that elevated at home demand and a consumer preference for brands accelerated our retail channel growth in each of these category groups. This is a tribute to the strength of our brands, but also to the agility and execution of our team innovation launches were impeded, but we still launch successes like jumbo snacks and cereal expanded into.
The new segments like we did with incognito in meat alternatives and built on the runaway success of Cheez. It snapped marketing programs had to be postponed early in the year. So we revised our commercial plan, we shifted more of our brand building into advertising and we put to work in the second half the investment dollars, we couldnt execute in the first half.
E commerce growth accelerated throughout the industry in 2020, and our recent year's investments and capability building paid off in the form of triple digit growth. In 2020. The result was more than 3% organic net sales growth for our largest business snacks. Despite a lack of on the go occasions to go with notably strong 7% growth.
On cereal in 8% growth in frozen all despite declines in away from home channels.
More important is our performance in market depicted on slide number 20 as you can see we held or gained share in four of our six primary categories in 2020, including in quarter four even in the two categories, where we didn't outpaced the category. We grew consumption at a double digit rate and this overall performance came despite running up against <unk>.
Capacity on certain foods, and despite having a sizable business and the types of on the go foods and pack formats that have declined during the pandemic.
In cereal, we executed less promotional activity for frosted flakes in quarter four as we caught up on supply, which held us back late in the year, but we're pleased with our overall consumption growth in 2020, and particularly by the responsiveness of key brands to new messaging, such as mini Wheats, Raisin Bran and special K and to resumed meat.
<unk> support such as Apple Jacks and corn Pops.
In snacks, our share gain in crackers came from Cheez its growth in both the base business and from the snapped innovations impressive year two performance pringles growth accelerated as the year progressed gaining share in quarter four behind the strength of its standard sized Khan and core four flavors, we grew consumption any declining portable wholesome snack.
<unk> category led by sustained momentum in pop tarts, and rice krispies treats as well as the resurgence of nutri grain backed by its first media campaign in several years and frozen Eggo continued to well outpace its frozen from the griddle category.
And and Veggie foods Morningstar farms tested the bounds of capacity and growing consumption nearly 26% and it narrowed its GAAP to the surging category in quarter four as we increased its production. So clearly we're competing well across our categories.
Potentially lasting impact is the household penetration we gained as shown on slide number 21 with the exception of portable wholesome snacks category affected by reduced on the go occasions. During the pandemic, we gained penetration in all of our categories. In fact, we outperformed our categories in this area in all but the frozen veggie food.
Category, where we faced capacity limitations and the entrance of new players. This increased penetration is promising for future growth and a big reason, we elected to reinvest in our brands in the second half.
Equally important is the fact that our velocities have increased across all our categories as shown on slide number 22, our velocities, we're already above those of almost all of our primary categories going into the year and the improved further in 2020. This is a very good sign regarding the health of our brands in.
In summary, North America enters 2021 in very good condition.
Market fundamentals, well invested brands momentum in E commerce, a proven agility amidst very uncertain conditions and better than expected financial performance.
As we look to 2021, we will continue to relieve capacity constraints, while continuing to invest in communicating to incremental households, and resuming a full flight of innovation, while comparisons get a little distortive, especially between March and August the results should be sustained in market momentum.
Now, let's discuss our international businesses, starting with Europe on Slide number 24 for Kellogg Europe quarter, four was our 13th consecutive quarter of organic net sales growth.
Resurgence in Covid cases, and restrictions re accelerated cereal categories across the region and we gained share overall by outpacing the category in four of our top five markets. This was led by a particularly impressive performance in the U K and by some of our biggest brands in the region like crunchy nut <unk> and extra.
Importantly, our snacks business returned to growth in quarter, four recall that in quarter, two and quarter three wed experienced softness in snacks shipments related to COVID-19 and difficult economic conditions in markets like Russia, and then it canceled Euro Cup soccer tournament made it more difficult to lab previous year's enormously successful Pringles summer.
<unk> programs during.
During quarter four our pringles business rebounded nicely and we finished 2020 with a collective share gain and our top eight markets led by each of our top three markets, the UK, Germany and Russia.
From a financial perspective, it was a strong year for Kellogg Europe, even amidst disruptions and costs related to Covid. In addition to the strong 5% organic net sales growth our gross profit margin improved, allowing us to increase brand investment and still deliver strong operating profit growth, even excluding the 50 <unk> week so euro.
<unk> enters 2021 with good momentum.
Our snacks business is on the upswing and we have exciting innovation plan for pringles, including a line of sizzling Hot flavors and our commercial plan includes exciting activation around gaming and in the Reschedule Euro Cup soccer tournament.
While cereal categories will likely decelerate as COVID-19 passes and mobility increases we are actively investing to retain new households gained we have a great commercial plan, including a multi brand campaign around well being the launch of a strawberry Coco Pops and a strong digital activation around key brands by Crunchy nut X.
<unk> just to name a few.
Russia, and central and Eastern Europe remained promising opportunities for expansion, even amidst the challenging environment presented by Covid and economic slowdowns.
We look to Reaccelerate growth in this business in 2021.
Let's turn on Latin America on slide number 26.
We had another strong quarter in this region, it's quarter for profit decline had been expected owing to some one off costs related to Mexico labeling regulations and a significant year on year increase in brand building. What was impressive was its ability to sustain very strong topline growth amidst challenging conditions and delivered double digit operating.
Profit growth for the year cereal category growth rates in the region continued to decelerate, but remained at elevated levels. We outpaced the category in key markets, including Mexico, Puerto Rico Central America in Argentina. The result, with strong net sales growth for cereal across all of our sub regions.
Our snacks business on improvement again in quarter four accelerating our net sales growth in Latin America, even as these categories remain under pressure amidst COVID-19 and economic softness free.
<unk> posted strong consumption growth and share performance led by Mexico, and by Brazil, which continues to benefit from local production and a new strategic distributor on.
Also in Brazil, our parity business continued to gain share in cookies and powder drinks.
So Kellogg Latin America has momentum going into 2021 snack.
<unk> growth should be led by continued momentum in pringles, which is in a good position to build on its expansion in Brazil, and adding to our snacks offerings. We've just launched cheez it and that market in.
In cereal, we assume continued deceleration in depend emmick related consumption growth and we continue to navigate through Mexico's regulatory environment. Nevertheless, we have good plans in place and aim to continue to outpace our categories and we will finish with a discussion about EMEA shown on slide number 28.
As we told you a few months ago, our business in this region phase II primary headwinds in the form of civil unrest that disrupted all commerce in Nigeria. During the last couple of weeks of October and school closings in Northern Africa, which effectively cancelled a sizable biscuits business for us in quarter four together these likely clipped about.
Five percentage points of Emea's Q4, net sales growth.
But behind these known disruptions. We continued positive performance, we continued to grow our noodles and other business in Africa, and the middle East with momentum sustained through the fourth quarter and full year net sales approaching a $1 billion.
This gives our portfolio a low price point staple with terrific opportunity for continued growth.
In cereals, we continue to outpace category growth in the region behind effective commercial programs led by strong share performance in markets, ranging from Australia, and Korea to India, and South Africa free.
<unk> net sales grew on the strength of double digit consumption growth in quarter four outpacing the category overall in the region with notable share gains in markets like Australia, Korea, and South Africa.
It was the rest of our snacks business that felt the brunt of the net sales headwinds I mentioned earlier, resulting in the overall snacks decline you see on this slide financially. It was a quarter of good balance growth net sales growth improved gross profit margin and growth in operating profit even with a significant year on year increase in brand building investment.
The quarter finishes what was another impressive year for EMEA, especially given the environment like our other regions EMEA has experienced elevated cereal consumption, giving us the opportunity to retain consumers with the right messaging and innovation, while continuing to expand penetration in emerging markets.
While other parts of our snacks businesses were interrupted by various Covid impacts Pringles continues to show good momentum heading into the new year, and we continue to grow our business in Africa, and the middle East with noodles, giving us a third growth engine to go along with cereal and snacks.
Let's wrap up with a brief summary on slide number 31.
And a year. Unlike any other we are proud of the way our organization rally to execute through unprecedented and challenging conditions.
First we've managed well through crisis, we've kept each other safe supplying the marketplace with food and aiding our communities. The crisis is not over and we will continue to focus on these areas.
Second we improved our competitive positions in 2020, we expanded household penetration by more than our categories grew consumption across key markets brands and retail channels, notably in ecommerce, we held or gained share in categories that represent nearly 85% of our company's net sales and those measured markets and we <unk>.
<unk> our brand investment for the year, even after some of it had to be delayed during the first half.
Third we sustained strong growth in emerging markets in spite of challenging conditions. In fact, we accelerated our growth in these markets. This is a credit to our experienced management teams, our diversified geographic footprint, our local supply chains and the breadth of our portfolio.
Fourth we delivered better than expected financial results, we twice raised our full year outlook and ultimately delivered on that guidance, we accelerated our organic net sales growth, even without COVID-19 and in a nod to balance delivery. We expanded our gross profit margin in spite of incremental COVID-19 costs and ongoing mix shifts towards emerging markets.
We delivered operating profit growth and EPS growth, even despite the impact of last year's major divestiture and finally, we improved our financial flexibility, we generated stronger than expected cash flow, allowing us to pay down debt faster than anticipated. So we enter 2021, a stronger company our outlook Keith.
US on a two year trajectory that is right on our strategic plan, we have a strong commercial plan that builds on the increased consumer communication of 2020 and returns to broader activation and a more complete innovation launch calendar all aimed at retaining households, and continuing to improve our share across categories. We continue to <unk>.
Vest in capacity that will enable us to catch up to demand and because of our improved financial flexibility. We are returning to share buybacks and dividend increases earlier than anticipated.
Our goal is sustained balance between top line and cash flow growth and we are on firmer footing now more than ever I would like to really thank our employees for their hard work and dedication and with that we'll now open it up for your questions.
We will now begin the question and answer session with publishing publishing analysts.
Analysts may enter the queue by pressing the star key and the number one on your telephone keypad as a courtesy to your colleagues. Please limit yourself to one question. If you would like to remove yourself from the queue. Please press Star then two our first question comes from Eric Larson with Seaport Global Securities. Please go ahead.
Yes. Thank you.
And congratulations on a on a good year Steve.
What I'd really like to focus on us kind of your guidance for organic sales growth.
Obviously theres a lot there were a lot of puts and takes.
In the year, but obviously youre going to have some sort of resurgence in things like European Soccer program was with us.
With singles it seems like your comps in some cases are easier. Despite the fact that obviously North America.
Benefited from at home consumption increases, but can you.
Can you give us a little more clarity on on away.
Away from home side, and why that may or may not be stronger.
Yeah, Eric Thanks for the question.
There's a lot of puts and takes when you think about 2021 guidance versus 2020, which is why we keep going back to 2019 ex divestiture and talking about that as kind of a pretty relevant base year and looking at a two year CAGR because when you look at areas like away from <unk>.
Home, which will recover and on the go consumption, which will recover.
That's going to offset.
Deceleration that we're seeing but because youre not going to have another surge in March and elevated demands like April and May right, it's going to remain elevated versus 2019, but not at the same levels as 2021 getting back to away from home. The reason, we think that will recover slightly more slowly for us is because we over.
And travel leisure.
Areas like that which we think will recover more slowly right travel won't come back quite as quickly as perhaps people going to the office and being on the go so lots of puts and takes in terms of whats going to happen by brand by category by geography, and the biggest COVID-19 impacts that we saw were clearly.
North America Europe.
Very proud of what the team did in Europe in pivoting away from the Euro Soccer championship and towards gaming, we do think that soccer will or we're hopeful the soccer will come back in some ways in 2021, so there's a lot in the guidance, but what we have really done is <unk> impacts in 2020 US we think about 2021.
Look at the 2019 base and put together winning plans by category by geography by brand that gets us exactly to where we are today. When we talk about the 2021 guidance and rolls up into the net sales operating profit EPS that we talked about so I don't know Amit if you want to add anything to that.
Well I think I think you said Steve.
I'll focus at least from a planning stance was to look at it from a material standpoint and us.
If you kind of look at the <unk>.
They are on top of growth standpoint, two and a half a percent on the top line three to focus on it on the bottom line and then on the EPS, 4% to 5%.
Okay, a quick follow up.
Marketing spend as a percentage of sales for this year are you reinvesting more in sales or is it going to be more in line with sales.
We're going to be pretty flattish right. So we've talked about brand building.
On being exactly where we think it needs to be overall.
And we like where we are we like the way we are positioned as we said in the last call that we would keep our brand building pretty much at budget in 2020, which meant that big shift from the first half to the second half for what are now obvious reasons. So it will smooth that out in 2021, but we don't we don't we no we don't need a big resurgence we.
Like where we are in terms of investing in our brands, we like the way we're exiting this year with the equity that we built on the brands and the money that we spent behind the brands you look across our categories and what we've done with all of our big brands, we feel very good about where we are.
Alright, thank you.
The next question is from Alexia Howard with Bernstein. Please go ahead.
Good morning, everyone.
Good morning wondering Alexia good morning.
And you mentioned.
On a pullback in promotional activity on frosted flakes.
I imagine that Michael contributed to some of the share.
Sure.
Signs that we're seeing more recently in the U S cereal category when did that.
Get overcome when did it.
I'll speak strength and would you expect to see.
<unk> share trends performance over the next 30 months, Thank you and I'll pass it on.
Thanks.
Alexia, we were capacity constrained as we exited the year nobody anticipated obviously the type of year that cereal would have category grew nearly 9% slowed down a little bit in the second half, but still 5% to six percentage growth. So we work very hard all year to keep up with demand and keep our service levels as high as <unk>.
We possibly could and we ended the year with a flat share performance slipped a little on the fourth quarter. As you noted almost all of that slippage was due to frosted flakes, where because of capacity we had to back away from promotions you can see that in the syndicated data down 20% in incremental sales because we couldnt execute against the mission Tiger program and we.
Wanted to keep our service levels, where retailers deserve them debate. So we did give up promotional slots and nearly all of our share decline in the fourth quarter was due to frosted flakes now as we enter 2021, we continue to build against capacity. We continue to make good improvements and we continue to be very optimistic as we go through the first half.
This year, we're going to get better and better in terms of that capacity and therefore, we will get better and better in terms of our share performance.
Thank you very much I'll pass it on.
The next question is from Robert Moskow with Credit Suisse. Please go ahead.
Thanks, Amit.
Like to ask about your inflation exposure in 2021, what kind of a step up do you expect in cost inflation and to what extent your hedges protect you.
And then actually I do have a question about the two year.
Metrics here a lot of your peers are saying that the COVID-19 benefits are allowing them to outperform their two year targets your guidance implies that you're you're on track.
Is there any reason why you wouldn't.
Step things up in your 2021 outlook to reflect above trend given.
<unk> is higher than you thought and household penetration higher than you thought.
Okay. So let me start with the first question on commodities I think we closed out 2020, all with the input cost inflation in the mid single digits and this was mostly offset by the productivity right all the way through quarter Paul.
I think we have seen green energy market to rebound sharply.
In recent months.
Just on near term supply demand and other factors.
I think from our exchange traded commodity standpoint, we are well hedged through the first half of 2021.
And roughly around the <unk>.
70%.
Level of hedging coverage for the year.
So I think in terms of total inflation for 2021, we expect that will be on Ohio than what we've experienced in 2020.
Still in the mid single digit rates.
And I think.
We're looking to offset that with our usual productivity programs all with the revenue growth management.
And overall as the guidance, we'd expect our gross margin.
It will be up on a full year basis, obviously in this in 2020 on gross margin was up 60 basis points.
And on a two year basis, we still expect gross margins to be up and from a 'twenty one standpoint, we'd be aiming for our gross margins to be stable.
And then the two year give you Steve you want to talk to you.
Yes, so Robert as we looked at it we aim to do better right, but theres a lot of uncertainty and recall, we returned to growth of our deploy for growth strategy. So it gets us back to where we said we would be and where we wanted to be based on our structured strategic planning stance.
It should be but it could be better than retail and could be better in certain categories. It could be slightly worse in away from home depending on how that recovery happens. So we think it's a prudent planning stance, but as we always say, we aim to do better and.
Hopefully we will.
Okay. Thank you.
The next question is from Chris Growe with Stifel. Please go ahead.
Hi, good morning.
Chris Good morning, Chris.
I had two quick questions here in a bit of follow ons and in each case.
The first one is in relation to the surge in sales that we saw on you to help define that Amit in terms of 2020 from Covid have you.
For like a high level viewpoint here, but like how much of those incremental sales or share you've gained some categories do you expect to hold on to so that was my first question on the second one was.
And related to that as we look across a number of your categories. There were some areas, where you had clear market share gains through the year, but in the fourth really through the year, but especially on the fourth quarter, we have seen market share losses in particular in the us and I'm looking mostly measured channels here some market share losses. There. So I wanted to just kind of bring that back around to the concept about keeping mark.
Getting flat this year on areas, where <unk> had some share pressure do you need to increase your marketing and impressive as part of the plan in 2021.
Yes, Chris So I'll start first.
We've said in the past our goal is to always gained share and so we finished the year globally with holding or gaining share in over 80% of our category country combinations, where theres measured data. So we feel good about that in terms of the us in particular, which you referenced I did talk about the U S. R Tech where we.
<unk> share for the full year, but we lost 50 basis points of share in the fourth quarter much of that due to capacity limitations that we had which I already mentioned and so our plan for 2021, we think in our tech and ready to eat cereal is a winning plan, but if I look at some of the other categories for the full year and even the fourth.
Quarter, if you look at the U S snacks business in crackers, we gained share for the full year and we gained share in the fourth quarter. So we gained 50 basis points of cracker share in the fourth quarter in salty, which the category was was explosive in the full year gained about 12 five.
Points of volume, we were up 11, so based on our size down ever so slightly but in the fourth quarter actually we performed nearly 15% growth against the category of 10%. So we actually even did better and solve our pringles business. If I look at the portable wholesome snacks category, obviously, a lot of on the go so.
Category that was under pressure for the full year and the fourth quarter, we had tremendous share performances. So we gained 250 basis points of share for the full year 390 basis points in the fourth quarter and that was great performance by pop Tarts Rice Krispies treats neutral grain returned to growth in the fourth quarter and then if I.
Look at frozen.
From the griddle, our Agi business.
Obviously terrific year again, some capacity limitations for us, but we gained 150 basis points of share in the fourth quarter, which was better than our us.
Online with our full year performance and then finally on <unk>, which has got a lot of attention because it is an explosive growth category.
We're capacity constrained again, there because nobody plan for the type of explosive growth.
But we were up for the full year, 24%, which wasn't enough to gain share. We lost one basis point of share, but in the fourth quarter. We did better we cut that share declined more than in half. We lost 40 basis points and were up 20%. So that's a pretty good performance there so in the cash.
<unk>, where we didn't gain share we were still growing double digits as another way to look at it. So that's why we like where our brand building is we think it's been very very productive we measure every ROI by brand by category and we think we enter 2021 with a lot of good momentum in our brands in our categories and a good outlook for <unk>.
Share performance in 2021.
Okay.
Okay.
Yes.
Our next question. Our next question is from Michael Lavery with Piper Sandler. Please go ahead.
Good morning, Thank you.
Good morning, Hey, Michael I was wondering.
I'm just wondering if you could touch on some of the thinking around guidance a little bit.
Pretty specific to not have a range for a full year with this.
On this amount of uncertainty.
So I guess, maybe two parts. One is what are some of your assumptions around things like lapping <unk> 'twenty.
The timing of buybacks what are some other key moving parts on how youre thinking about them or I guess, the other part of it is <unk>.
On the progression of your guidance last year you raised it a few times is this more kind of like how we should think about the low end of our guidance range with something above this just put that all in context for us. Please.
Yes, Michael Thanks, I'll start and turn it over to Amit as well, we've tried to be transparent as best as we possibly could.
Unprecedented environment right and so the this guidance I would say is the best that we can do and it's down the middle of the fairway. So.
Could be better it could have more challenges, depending on how things recover and what happens in emerging markets, but we feel.
We don't want to be falsely precise and say, we know exactly what's going to happen in these uncertain times, but we want to maintain our transparency. We wanted to share with you what our planning stances are in terms of what we think will recover how it will recover and how our brands category country combinations will perform and again, we triangulated, we look back at <unk>.
1020, actual what we had planned for 2020 pre Covid 2019 base year ex the divestiture, what our strategic planning intentions were and therefore, what we wanted to accomplish in 2021 on what we thought we could accomplish in 2021 and those are the points that we landed on and so again trying to be transparent.
And trying to hit it down the middle of the Fairway I would say is kind of the way I'd characterize the guidance Amit.
Do you have do you want to add.
No I think I think Steve you've covered it at 10 O clock, it's in line with our internal plan.
I talked about.
Underlying at home demand remaining elevated.
But no question, we will have to lap last year's sales, particularly in March and it's interesting as we've gone into further lockdowns, we haven't seen that panic buying that we saw in March. So that's something that we'll have to lap.
On away from home, we've assumed that it would moderate.
<unk>.
Over the course of the year.
Sitting here today, they still remained depressed.
That's the assumption and then from emerging market standpoint, we had a <unk>.
Relatively strong year in 2020.
So we are continuing to plan on growth in emerging markets.
But we are being cautious and prudent in terms of the macro conditions in emerging markets. So I think those are all on.
Some of the assumptions.
The way we've approached the guidance.
Okay. That's very helpful. Thanks, Chris.
Thinking on a quick follow up on Morningstar capacity do you know when you would get relief for that there.
I didn't hear on the capacity I think you said, yes.
We're catching up right now so.
We're in good shape. The incognito launch continues to go forward, we're adding chick flu.
<unk> flavors to that we've got some great innovations around chicken and so we feel good about where the capacity is right now relative to the demand.
Okay, great. Thank you very much.
The next question is from Rob Dickerson with Jefferies. Please go ahead.
Alright, great. Thank you so much.
I guess first question.
Around your operating profit dollars and then also free cash flow dollars, if I looked at kind of where that might come on or where they came in excuse me in 2020, where it might come in in 'twenty one.
Frankly, it's not that much different than we saw let's say three five years ago and I realize there are number of moving pieces.
So let's see.
A big piece of the strategic playbook has been reinvesting for growth right. That's the theme and Youre getting there.
Gross profit margins totaled better, but obviously that will flow out of operating profit margin, which can obviously helped us free cash flow grow over time.
We stepped way back.
How do you think about getting that free cash flow to grow the <unk>.
Margins moving vessels good good on the right things.
But you know kind of name of the game is to get more cash on the business can you tell us.
How do you kind of right size that.
Think forward a few years that I have a quick follow up thanks, yes.
Yes, Thanks, Ross I'll start and Amit definitely some things to add there, but I would start by reminding you obviously the divestiture big divestiture. So when you look back and look at the numbers and say cash flow or overall <unk>. I think you said absolute <unk> dollars theres going to be a big difference because of that divestiture and if I think.
Where we finished the year, so organic net sales of plus 6% right.
Forex neutral adjusted Op at three 5% Forex adjusted EPS of two 3% and a cash flow of $1 5 billion.
That's a terrific year I think under any set of circumstances and us based on the guidance that we gave in 2021 to your question around cash at substantially better than the 2019 performance and remember there is some outflows of cash that happened.
Whether it be incentives whether it be other release of accruals that were accrued for in 2020, and the cash flow actually outflow in 2021, which is why I think it's again useful to look at a two year comparison on everything including the cash flow performance, which continues to get better and so as we exit this year. That's why we were very confident.
As a company from a top line through a balanced bottomline delivery standpoint, we are a much stronger company and we come out of this pandemic.
And we enter 2021 and a much stronger position from a balance sheet perspective, and from a top line potential perspective, as well Amit do you want to build on that.
Yeah, I think from a.
To your standpoint.
We're looking at.
Organic growth of two 5% on the top line and then EPS growth at around four 4% to 5% and then the cash flow conversion. We've had an exceptional year of cash flow conversion in 2020, north of 100% I think in 2021.
Also on timing differences, but some of the accruals will be paid out in 2021.
But our convergent even in 2021, we are targeting.
In the mid 70% to 80% conversion.
And then if you adjust for the pension income that runs through our P&L, that's about a 15% adjustment. It gets us gets us to go on <unk>.
<unk>.
So I think it also on an overall standpoint.
It's balanced.
In 2020, we demonstrated we delivered.
Delivery and certainly the guidance for 2021 calls for that for another year of that.
Alright, great. Thanks, so much and then just quickly on.
On incognito.
Obviously.
Thank you are somewhat past the upfront trial phase seems like <unk>.
Scott received good distribution good trial.
As you think forward, let's say next nine months right as we kind of near.
On the grilling season, and I'm, assuming there'll be some pent up demand for consumers to get back outside to do that.
Is there anything strategically that.
You can do to just further kind of drive increased household penetration and I'd just add given obviously all of the incremental competition.
That already exists.
Within the retail channel.
Yeah, So Rob I would start by just reminding all of us that incognito launched during the pandemic right. So very difficult time to launch, but having said that we're happy with where we are and I'd also remind us that it is a sub brand of Morningstar farms and Morningstar farms finished the year with 25% consumption growth so hardly.
<unk> a brand that's been disrupted but clearly a brand that is doing very very well. Despite some of the capacity constraints that I mentioned.
<unk> said that we did launch incognito, we're up to about a full point share when we look at our velocities relative to some of the smaller players we're exceeding those velocities when we look at the velocities compared to early Morningstar farm launches at the same stage. We're ahead of those.
Velocities as well and as I said, we've got these chicken offerings, including Disney royalty chicken offering offerings that are coming to the fore right. Now so we feel very good about where the whole Morningstar Farms' performance is and we continue to innovate around Morningstar farms, but.
So incognito, we're bullish about this and 25% consumption growth is pretty good.
Alright I apologize.
Go ahead, yes, we are we are at the at the end of time.
If you do have follow up questions. Please do not hesitate to call and thank everybody. Thank you everyone for your interest and time this morning.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Pop Tarts, Chris Huff frosting.
Sterling besting ever.
Okay.
Yes.
Hi, Brian.
On pieces still Brian.
Yes.
Yes.
Cinnamon free to Apple Jacks classic Kellogg's, cornflakes, and the crispy crunch of corn Pops.
Everyone's got their favorite.
Or maybe a few of them.
Hello.
Right.
Okay.
Okay.
John.
Okay.
Okay.
How did kellogg's combine punch yield clusters, with a touch of honey juicy races, and tasty fiber into one delicious cereal took a lot of brand stormy.
Kellogg's Raisin Bran Crunch, two scoops of delicious.
Yes.
Real fruit.
And Paul Green.
Yes.
Doing something good for yourself has never been this evening Kellogg.
Kellogg's special K do what's delicious.
Okay.
Thanks.
Yes.
Thank you.
Yes.
So on the one <unk> times.
Paul.
Michael I'm, sorry, with the college football playoff.
Okay.
Or is everyone.
It was originally.
Barbecue.
Sure.
It's a barbecue pizza stack.
Okay.
Yes.