Q1 2021 Kellogg Co Earnings Call

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Good morning, welcome to the Kellogg Company's first quarter 2021 earnings call all lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session with the publishing analyst. 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. Renwick, you May begin your conference call.

Thank you good morning, and thank you for joining us today for a review of our first quarter 2021 results as well as an update regarding our outlook for the full year of 2021 and I'm joined this morning by Steve Caitlin, Our chairman and CEO and Amit Banotti, 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 the third slide of this.

A 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 resulting 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 will turn it over to Steve.

Thanks, John and good morning, everyone I Hope you and your families are doing well and staying healthy here at Kellogg I'm continuously impressed by the way. Our organization has remained focused and engaged and executing through what are undeniably challenging circumstances, both at work and at home keeping employees safe remains job number one.

And in quarter, one we continued to execute safety protocols, while following the guidance of local health authorities supply and the world with food continued to require agility, including temporary labor and incremental capacity and of course, we continue to actively support our communities.

After all of the pandemic is not behind us in fact, and some parts of the world. We are seeing it accelerate and our thoughts and prayers go out to all those affected.

Turning to slide number six our deploy for balanced growth strategy remains as relevant and effective as ever during this pandemic.

And growth boosters continued to do their job as much as anything else. This pandemic has prompted a shift and eating occasions, our focus on occasions continued to be evident and the first quarter and our tailored consumer messaging and and innovation geared toward specific occasions that.

And the portfolio and that we've shaped toward growth has benefited from a balance of convenient meals and snacking that can be done at home and plant based foods and sustained growth and emerging markets are building a world class brands has been evident and our commitment to continued equity building communication as well as leveraging our data and analytics to devise creative ways to.

To reach new consumers and sustained momentum in the marketplace.

And our commitment to perfect service perfect store tested by the sudden and sharp rise in demand has forced us to get creative around ways to increase throughput even if it meant temporarily holding back on merchandising activity to ensure inventory and incurring incremental logistics cost to get food to our customers and we continue to grow rapidly and e-commerce.

And leveraging our enhanced capabilities there and.

Environmental social and governance is not a new area of focus for Kellogg, it's been embedded in our history and strategy for a long long time, our ESG oriented better days boosters always a key element of our strategy have become more important to our communities and employees customers and consumers.

At Cagny and a few months ago, we discussed our global better days purpose and strategy and on slide number seven you can see that we continued to progress in this area addressing the interconnected issues of health hunger relief and climate.

Our nursing with our foods, we've continued to innovate and renovate our foods, providing choices across wellness and indulgence and during the quarter. Our Kashi became the first organic cereal to be authorized for the women infants and children program in the United States.

On feeding people and need we've remained and an elevated level of donations, making accelerated progress toward our goal of beating 375 million families. During the first quarter pop tarts joined with the United way to raise money for school vegetable gardens.

On nurturing our planet, we announced during the first quarter, our commitment to achieve over 50% renewable electricity to address Kellogg manufacturing globally by the end of 2022, and we celebrated women farmers as part of International Women's day.

And under living our Founder's values, we launched and the first quarter, our new equity diversity, and inclusion and vision and strategy to all employees and all four regions.

Aligned with those values, we launched a campaign called a call for food Justice and Black communities and partnership with World Food program USA tied to some of our biggest brands, including special K Morningstar farms Kashi and NGO.

Our strategy and execution led to another good quarter as highlighted on slide number eight.

At home demand remained elevated more than offsetting continued softness and away from home channels and on the go occasions.

Our biggest brands continued to show strong momentum aided by sustained consumer communication and innovation activity. There why we gained share and most of our key markets and categories around the world.

We continued to bring on our planned capacity increases, which will continue to relieve supply tightness and enable us to return to normal levels of merchandising activity as we get through the first half of the year.

Our emerging markets businesses accelerated their growth proving their metal and what are challenging conditions.

From a financial perspective, we continue to seek and deliver balanced financial results. The kind we achieved in 2020 and Thats. What we did again in the first quarter strong net sales growth, even despite lapping last year's pandemic related surge and we delivered this organic growth across all four regions and on.

All four global category groups for a fifth consecutive quarter.

Positive price mix, reflecting revenue growth management actions made all the more important by the recent rise and input cost inflation.

Gross profit margin improved year on year, despite higher costs and faster growth and our emerging markets and including our distributor business and West Africa.

Operating profit increased year on year, despite lapping last year's strong growth ex divestiture, driven by topline momentum and despite a year on year increase and brand investment.

Cash flow remains strong and we were able to accelerate share buybacks into the first quarter. So a very good start to 2021 with the potential to put us a little ahead of where we thought we would be through the first half and it's extremely difficult comparisons. This enables us to raise the full year guidance. We provided for you and February even amidst what.

Undeniably and uncertain business environment, 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 Slide number 10 office and Aragon summary of our financial results for the first quarter as you can see they are quite strong, particularly when considering the year ago growth they were lapping spitz.

And specifically last year's first quarter featured 8% organic growth on net sales and operating profit that grew roughly 8% excluding the impact of the prior year divestiture.

So we generated very good growth on growth.

Net sales grew on a one year and two year basis and developed markets. It was aided by shipment timing and at home demand remaining elevated partially offset by continued softness and away from home channels.

And emerging markets, we generated sales performance that was better than expected.

Currency neutral adjusted basis operating profit grew on a one year and a two year basis, driven by the net sales growth and expansion and gross profit margin and good discipline on overhead all of which more than offset our year on year increase and brand building and clearly we're seeing good operating leverage.

From our strong topline growth.

Currency neutral adjusted basis earnings per share grew on a one year and a two year basis, despite a higher effective tax rate.

And and what is typically our lightest quarter for cash flow it was stronger than anticipated for the quarter.

Of course, it's down from last years unusually high first quarter cash flow, but as you can see it is ahead of the pre pandemic 2019 levels.

Let's look at these metrics and a little more detail.

Slide number 11 breaks quarter, one net sales growth into its components volume declined against last year's March surge, but it was up on a two year basis at home demand remained elevated and.

<unk> markets.

Gained momentum and we did see favorable timing of shipments and the U S as expected.

<unk> mix was again positive which is important given the accelerated cost inflation, we have seen during.

And during quarter, one we saw positive pricing in all four regions, reflecting revenue growth management initiatives and we also saw and overall mix shift back towards snacks.

Currency translation was a slight positive and the quarter.

As we look to the remainder of 2021, we still expect to see a moderating topline refi.

And we faced at office volume comparison and quarter, two and we are assuming continued deceleration and at home demand.

Slide number 12 and offer some perspective on our profit margins, which held up very well in spite of higher costs.

Our gross profit margin and quarter, one improved on a one year and total year basis as productivity and price realization were effective at covering accelerated input cost inflation as well as incremental COVID-19 costs against only a partial quarter of those costs and the earlier quarter.

We also more than offset a mix shift towards emerging markets and particularly towards our distributor business in West Africa.

The flow through of the higher gross profit margin led to an increase in operating profit margin as well as decreased overhead balanced out a high single digit increase and brand building.

The brand building increase reflects the phasing of our commercial plans for <unk>.

<unk> two large deals modest decrease in quarter, one at the onset of the pandemic.

Even with this year on year increase and brand building, we still grew operating profit at a double digit rate this quarter.

As we look to the rest of the year, we obviously faced our toughest gross profit margin comparison and quarter two due to last year's outsized operating leverage that produced by far the highest gross profit margin of the past couple of years as you can see on the slide and.

And the second half we are working to hold on margin as close as possible to year ago levels. In spite of a mix shift towards emerging markets and accelerated cost inflation.

Further down the P&L, we faced our toughest comparison on brand building and quarter, two as well because last year's quarter. Two was when we delayed significant brand investment through the second half.

That second half investment helped create the momentum we are seeing today, but will return to more typical levels of brand investment in the sales second half.

Turning to the remainder of the income statement on slide number 13, we see that are below the line items were relatively neutral to earnings per share and quarter one.

As expected interest expense decreased year on year on lower debt and this will continue for the remainder of the year with quarter. Four. Additionally, lapping the nonrecurring $20 million debt redemption expense, we recorded large deal.

Other income was lower year on year and modestly lower than what should be its quarterly run rate for the rest of the yield on.

Our effective tax rate of 22, 7% was higher than last year's relatively low level and.

So it still turn out to be around 22, 5% portfolio.

Average shares outstanding were flattish year on year with the impact of quarter, one accelerated buybacks to be more pronounced in the coming quarters, resulting in a full year average shares outstanding that is a little more than half a percent lower than 2020.

Turning to our cash flow on slide number 14, we had a strong start to the year and maintain good financial flexibility.

As expected our cash flow and quarter, one was low than quarter, one 2000, twenty's unusually high level non.

And because of net earnings our working capital both of which will favorable year on year, but because of year on year swings and accruals and other balance sheet items as well as lapping lost deals delayed capital expenditure.

However, as you can see on the chart quarter, one 2021 cash flow was well above that of quarter, one 2019, and what is always our lightest cash low quarter of the Europe.

Net debt is lower year on year, even despite a resumption of share buybacks and we like the state of our balance sheet.

And as we look to the rest of the year cash flow will likely remain below last year's co related levels, but still well above 2019 levels.

And between our share buybacks, which we were able to accelerate into the first quarter and an increased dividend we are meaningfully increasing the cash returned to shareowners.

I'll conclude with a discussion about full year guidance shown on slide number 15, as Steve mentioned.

Strong quarter, one performance gives us the confidence to raise our guidance. This early in the Europe.

Specifically our guidance for full year organic net sales growth moves up to approximately flat year on year from our previous guidance of about negative 1%.

This would equate to closer to 3% growth on north <unk> compound.

Annual growth rate effectively eliminating the noise of lapping last year's COVID-19 related surge.

<unk> for currency neutral adjusted basis operating profit improved to a decline of about 1% to 2% year on year versus our previous guidance of minus 2%.

This equates to closer to 4% growth on a two year CAGR basis, excluding ottens divested businesses from the 2019 base.

Our guidance for cash neutral adjusted basis earnings per share increases to growth of about 1% to 2% year on year versus our previous guidance of up 1%. This equates to something around 5% growth on a two year CAGR basis, excluding ottens divested businesses from the 2000.

19 base.

And our guidance for cash flow moves up to a range of one one to $1 2 billion versus our previous guidance of approximately $1 1 billion.

We think this guidance is prudent given that it is early and the euro and given a business environment that is somewhat uncertain in terms of pandemic impact and cost inflation.

Obviously, we're pleased with our start to the year, Brian strong financial condition, our brands and regions are performing well and we are solidly on track for continued balanced financial delivery on a two year basis.

And with that let me turn it back to Steve for a review of our major businesses. Thanks, Amit I'll start with a quick review of the quarter. One results of each of our regions and then I'll go a little deeper into some of our key brands and categories. The region's net sales and operating profit growth rates and quarter. One are shown on slide number 17, you can see.

And that our growth was broad based particularly on the more meaningful two year growth rates and North America. Our organic net sales grew on top of last year's high growth with elevated at home consumption and strong momentum and key brands as well as favorable timing of shipments between quarters, partially offset by continued softness and away from home channels.

Operating profit also increased year on year, despite tough underlying comparisons the two year trends only further confirm that this business got off to a good start to the year.

Our business and Europe had another good quarter at solid one year organic net sales growth was on top of last year's strong growth and it was led by accelerated growth and pringles, resulting operating leverage produced strong operating profit growth.

And Latin America are strong organic net sales growth was driven by pringles and cereal and the resultant operating leverage boosted operate operating profit as well.

Macro conditions in this region are challenging so and this was a terrific way to start the year and and EMEA. Our strong organic net sales growth was led by multi pro the distributor portion of our business and West Africa and across the region by Pringles cereal and noodles, leading to outstanding growth and operating profit as well.

Now, let's go a little deeper and some of our categories markets and channels.

We will start with our global category groups as shown on slide number 18 as you can see from the chart. We grew all four category groups on both a one year and two year basis during quarter, one despite lapping last year's COVID-19 related surge and despite continued softness and away from home channels.

Our largest global category snacks sustained growth in the first quarter on both a one year and two year basis with growth and all four regions and thats. Despite the on the go nature of many of its foods and pack formats. This is a testament to the strength of our snacks brands as well as to our ability to adapt messaging and pack form.

And that's to current at home occasions.

And cereal, we also recorded growth on both a one year and two year basis. We saw notable strength in Europe with share gains led by power brands like <unk> and crunchy nut.

We posted broad based growth and Latin America with share gains in key markets led by corn flakes. We also recorded strong growth and share performance in EMEA, where our master brand approach is working well and Asia and innovation activity is contributing across the region as.

As expected we had a slow start in the U S. As we limited merchandising activity and supply constrained brands, but this should improve and the second half as new capacity comes online.

Frozen Foods also grew net sales on both a one year and two year basis. This predominantly North America business sustained momentum and both Eggo, and especially Morningstar farms and I'll come back to each of them in a moment.

And our noodles and other business, which is predominantly and Africa continued to generate rapid growth both on a one year and two year basis as well with annual net sales approaching $1 billion. This is going to be a growth contributor for some time.

So both on a region basis, and a category basis, our reshaped portfolio clearly offers growth and diversification and within each of these regions and categories. Our world class brands that continue to grow lets take a look at a few of these important brands.

And we'll start with our largest global brand pringles, whose consumption trends for its biggest markets and each of our four regions are shown on slide number 19.

This is more than a $2 billion global brand that has demonstrated exceptional momentum for some time and all four regions during quarter. One this momentum continued with pringles sustained and growth on top of very strong year ago growth.

This was driven by effective brand building, including the incremental consumer communication. We did in late 2020, plus important consumer activations and the first quarter such as our Super Bowl campaign in the U S and are gaining oriented commercial activations in Europe.

The growth was also augmented by innovation launches, including on a more intense flavors under the scorching and Sizzlin sub lines and the U S and U K, respectively, as well as uniquely local flavors and Asian markets. All of these innovations are off to great starts. It's also aided by increased local production and emerging market.

Notably in Brazil, where this relatively new local capacity is enabling exceptional growth.

<unk> is truly a world class brand performing extremely well here.

Here's another really incredible brand cheez. It shown on slide number 20, its U S consumption and share growth has been exceptional over the last several years and it has continued in the first quarter.

And the base product line continues to perform well helped by effective advertising and sports related activations as well as new flavors and a re formulation of the grooves sub line. Meanwhile, the snapped sub line is providing incremental growth enough that we had to add capacity and 2020 and only its second year since launch.

And <unk> is no longer solely a U S brand, we expanded into Canada last year and during the first quarter. It continued to grow rapidly and and the first quarter, we brought cheez it to Brazil, where it is off to a very good start this is more than $1 billion plus retail sales brand that continues to outpace the category and the U S and <unk>.

And we have begun to expand internationally.

And before we move on from our snacks discussion I want to point out two other power brands and our snacks portfolio shown on slide number 21 <unk>.

Since the outbreak of the pandemic the portable wholesome snacks category has been declining due to fewer on the go occasions. We've continued to gain share of this category largely because of two brands that have been able to grow their at home consumption pop tarts continued to post growth on a two year basis and quarter, one lapping last year's.

Greenlee large growth and sustaining multi year growth momentum right.

<unk>, Chris These streets consumption and share growth has been impressive over the last several years and this momentum has continued in quarter one aided by the launch of new Homestyle treats again big brands sustaining momentum.

Let's turn to cereal markets and brands on slide number 22.

Behind our one year and two year growth and global cereal net sales and the first quarter, our strong performances by key brands in key markets. The chart shows our largest international markets of each region with consumption growth on a two year basis to avoid distortion from lapping last year's surge in March and share performance on a one year basis to show how we are.

Impeding and.

And Europe, we've outpaced the category with share gains in key markets like the UK, which was propelled by power brands like crunchy nut, and all bran and and other European markets. We saw particular strength and global brands like <unk>, our largest cereal brand in Europe and extra a key wellness oriented brands internationally for us.

And Canada, where the category got more immediate lift and we did and the year ago quarter, we outpaced the category and this year's first quarter on the strength of brands like global brand, all bran and local jewel vector.

We recorded strong growth and share performance in EMEA led by our largest cereal market in that region, Australia. The outperformance was led by global brands like our Australia and version of Raisin Bran as well as local jewels like our wellness oriented just right.

We saw broad based zero growth in Latin America, where we continued to gain share and key markets like Mexico, Brazil, where the Rico and Central America, and Mexico, you can see the strong share performance was driven by big brands like corn flakes, and choco krispies and across the region. Our growth was aided by strong innovation and short we're seeing.

The impact of strong brands and strong execution and all of these markets.

Let's discuss U S cereal for a moment shown on slide number 23 as expected we experienced a slow start and this market as we limited merchandising activity on supply constrained brands and scanner data you can see this and are larger than category decline and percent of volume sold on promotion and we will be caught up on supply.

And capacity around mid year as we've mentioned previously but in the first quarter at those supply constraint brands frosted flakes, and Froot loops two of the stronger brands and the category accounted for all and more of our share decrease and the first quarter, excluding them our consumption kept pace with a category so our underlying <unk>.

<unk> remains in good shape.

We're very pleased with our innovation, which not only outpaced the category innovation and the first quarter, but is showing very strong velocities already. This includes additions to the jumbo snacks line, we successfully launched last year as well as mini wheats cinnamon roll Little Debbie special K, blueberries and keto friendly Kashi go offerings.

So we get back up to adequate supply and capacity and returned to a normal commercial calendar, particularly and the second half we expect our U S cereal performance to improve and perform like our other big developed markets.

Slide number 24 calls out another big brand and that is sustaining growth on a two year basis AG.

And <unk> reliable growth and consumption over the past few years accelerated to nearly 17% and 2020, gaining nearly two points of share, but leaving us very tight on capacity and.

And quarter, one and <unk> sustained strong two year growth of plus 5% despite capacity limiting its upside and this is one of the brands for which we are freeing up capacity over the course of this year and when you add and Kashi our overall from the griddle consumption outpaced the category on that two year CAGR basis.

And really good shape with more capacity coming on with effective advertising and promising innovation on the way. This is a nearly $1 billion retail sales brand with an outlook for sustained growth.

And even better growth is being generated by our leading plant based brand Morningstar farms shown on slide number 25, our overall Morningstar farms brand franchise is over $400 million and retail sales and is poised to sustain strong growth for years to come.

This brand's consumption growth in the first quarter, even on a one year basis added to its multi year growth trend and with incremental capacity in place. This brand gained share as well. There is no question that consumers are becoming more aware and interested in plant based foods Morningstar farms since increased its household penetration and the <unk>.

Last year to a level that remains well above any of our competitors and yet it's still only 8%, suggesting significant room to expand.

Morningstar farms is also unique and the breadth of its offerings. This is evident and our share gains across a spectrum of segments and quarter, one raging from breakfast meats to breakfast handhelds to sausage to poultry.

Our new vegetarian line has created a whole other occasion for plant based foods and now we are reaching and expanded consumer base. Our recently launched incognito by Morningstar farms sub brand is aimed at incremental flexitarian consumers and continues to expand retail distribution both in the refrigerated.

And frozen aisles, and it continues to add foodservice customers. It's early days, but incognito is great food and is showing a lot of promise.

And this week the National Restaurant Association awarded 2021, Savi Awards for the year's most delicious unique and exciting food per restaurant operators and consumers. Among those awarded were three incognito products Homestyle chicken tenders, Italian sausage and original broad worst as well as and <unk>.

Iconic veg forward offering Morningstar farms, Chipotle Black Bean Burger.

Simply put Morningstar farms is the largest brand with the highest penetration the broadest portfolio and the most occasions and this plant based category.

So we are realizing good underlying momentum across our major category groups and led by World class brands.

Let's now shift our discussion to geographic markets, specifically are emerging markets highlighted on slide number 26.

Emerging markets accounted for more than 20% of our net sales last year, among the highest percentages and our peer group. This is important because these markets represent outstanding long term growth prospects for packaged food owing to their population growth and expanding middle classes and 2020, despite COVID-19 related shutdowns of REIT.

Hillary and schools economic disruption from depressed oil prices and even bouts of political and social unrest are geographically diverse emerging markets business is actually accelerated net sales growth.

This is a credit to our product portfolios and our brand strength, our local supply chains and experienced management teams and these markets.

And in the first quarter of this year, despite lapping an unusually strong year ago quarter, we sustained this momentum even accelerating again and.

And Africa on our multi pro distributor business grew more than 20% year on year and quarter, one even as it lapped strong high teens growth and the year earlier quarter and we also continued to grow our kellogg's branded noodles business.

And Asia, we sustained double digit growth and pringles and cereal and Russia, we recorded double digit organic growth and cereal and in snacks and Latin America is strong quarter, one growth was broad based and led by cereal and Mexico and Pringles in Brazil.

And let's finish up with a couple of channels to call out on slide number 27 and.

And the first quarter, we sustained tremendous growth momentum and E. Commerce. The investments we have made and this channel everything from reorganizing around it and bringing in external talent and developing capabilities paid off and a big way in 2020, when our e-commerce sales doubled year on year and.

And in the first quarter, our growth was about 75% even as it lapped the year goes quarter's acceleration.

And this is a shopper behavior that is likely to stick now roughly 7% of our total company sales, we know that our brands and categories play well in this channel and we are building this business for the long term.

Of course on the other end of the spectrum during the pandemic our away from home channels, which declined sharply and Mitch shutdowns and restrictions. This slide shows that our U S away from home business continued to moderate its declines as measured on an average two year basis to better gauge the trend.

Important to note that we have not been sitting still waiting for consumer mobility to resume and away from home outlets to reopen.

And actively securing future business signing up new accounts per brands, ranging from Rx to Morningstar farms and income Mito. These actions today will pay off well into the future.

Let's wrap up with a brief summary on slide number 29.

Quarter, one 2021 was yet another quarter of good performance and investment in the future.

We have sustained strong momentum and most of our biggest world class brands and never having led up and innovation or communication with consumers. We are unlocking capacity. So we can resume full commercial activity and some of the foods and brands that had reached capacity limitations. After a good growth in recent years and acceleration since the pandemic.

Nick.

It's added capacity, we will continue to come on stream during the year continuing to improve service levels and returned to full merchandising activity with our retail partners.

Our emerging markets have not only manage through challenging macro environments over the past year, it actually accelerated their growth and we continue to build scale and these long term growth markets, we're leveraging capabilities that we've been and enhancing over the past few years from data and analytics to ecommerce to innovation these capabilities have only.

Become even more important since the pandemic, our cash flow and balance sheet are strong and we have increased cash returned to shareowners, while maintaining financial flexibility.

Our results for quarter, one were particularly strong but more importantly, they reflected high quality balanced financial delivery, we sustained net sales growth expanded gross profit margin remained disciplined on overhead and invested behind our brands and still delivered growth and operating profit and earnings per share leading to strong cash flow.

All of which adds up to and in early increase and our full year outlook.

And as always I want to salute, our 31000 employees, whose dedication and creativity have made this performance possible. Despite the most challenging business conditions and with that we'd be happy to take any questions you might have.

We will now begin the question and answer session with publishing analysts and.

Analysts may enter the queue by pressing the star key and the number one on their telephone keypad.

And if youre using a speakerphone please pick up your handset before pressing the keys.

If you wish to remove yourself from the queue Press Star then two as a courtesy to your colleagues. Please limit yourself to one question.

Our first question comes from David Palmer with Evercore ISI. Please go ahead.

Alright. Thanks.

Question about the 'twenty, one guidance and the implications of that you had a 3% two year CAGR, that's implied by that and obviously this has been an unusual year and 21, even if we look past 'twenty. There is still some COVID-19 related factors you mentioned supply chain, if you think about.

Yes, I think you would take a 3%.

Organic growth rate most years, but.

Could you maybe talk about that 3% CAGR.

And sort of been a tailwind what its been headwinds and <unk>.

We think about that as you're really executing this turnaround plan like how you are basically setting up for 'twenty two and beyond.

<unk>.

Yes, Thanks, David I'll start and on.

And it can build but what I'd say is it's important to look at those two year CAGR as you point out that's what we've been talking about because 2020 was such an unusual year right, but whats underlying our confidence in that CAGR is the brand performances that we talked about as we went through the prepared remarks, and our snacks business our frozen biz.

<unk>, our veg business, our international business and our emerging markets business, all performing very strong and.

And if you think about our new guidance for 2021, essentially just from a top line basis, we're saying flat. So what we thought potentially when many companies thought of 2020, when they were COVID-19 beneficiaries would be a high watermark is in fact, where we're going to lap that and so that's because of the strength of.

Of our brands the execution and the marketplace and the plans that we've put in place. So Amit you want to yes, I think and all it reflects the strength of our portfolio and you're seeing that come through.

And from a pure guidance standpoint.

We are expecting that elevated demand will moderate a little bit from quarter, one and so I think that's what's built into the guidance.

We're expecting growth in emerging markets to sustain.

Maybe not at the double digit rates that we saw in quarter one.

Certainly we continue to expect growth and the emerging markets.

Thanks, and I'll pass it on.

The next question is from Ken Goldman with Jpmorgan. Please go ahead.

Good morning, It's Tom Palmer on for Ken.

Wanted to ask on the inflation picture. So during the prepared remarks, you made mention of rising.

Cost inflation could you provide a bit more detail on the inflation Youre seeing right now and then what you expect to see as the year plays out and just the timing of your hedges rolling off and then.

On your comfort and in terms of offsetting it.

I guess really the major tool.

And I'm curious about color on it and how you think about list pricing and instituting that this year.

And.

Yes, Thanks, Tom So what I'd say is we've talked about the inflationary environment, which is real and we've also talked about the hedging and I'll, let amit build on that debt. We've got in place for the first half of the year as well as the back half of the year on the on the pricing front and just a cost pressure front, what I would say.

As we have a host of tools at our disposal. So we think about the suite of offerings, we want to always start with productivity and drive productivity as hard as we possibly can and then we're going to look to revenue growth management and the tools that we have and revenue growth management, whether they be price package architecture, whether they be.

Pricing, which would include list pricing all of those are at our disposal, but at the end of the day, we have to earn that price and the marketplace through investing and our brands through innovating through putting the types of performances that we've been able to put against our brands, which puts us in a good position to have the confidence to slightly raise our guidance even despite.

Increased cost pressures that are quite real Amit you on.

Yes, I think it will cost to inflation no question, it's accelerated I think and we're now looking at it being in the eye and of the mid single digit rate for 2021.

And think it across our cost basket from exchange traded commodities.

To diesel and energy and Ocean freight.

Seen a spike and ocean freight as well.

I think and all of that has been incorporated into the guidance that we provided today from a hedging perspective, we are.

Were about 76% hedged on the exchange traded commodities, obviously, there are other cost specials outside those as well.

But I think it'll be reflected that.

And our in our guidance.

And you would have seen that and our quarter. One results, we had strong pricing and mix come through and as Steve mentioned.

It's across the whole range of levers.

Including productivity, including.

Our list price increases including trade optimization.

And and price pack architecture, and the whole suite of revenue growth.

Management tools.

Yes.

Okay. Thank you and just to clarify where would you have been and the first quarter in terms of that inflationary environment.

I think similar levels, though obviously, it's accelerating through the year and then obviously and quarter. One we were in a more hedged than in the later part of the year as you would expect.

Thank you.

The next question is from Steve powers with Deutsche Bank. Please go ahead.

Yes, hey, guys. Thanks.

Maybe just to round out that conversation a little bit more.

I think you'd said on the last quarter that you were you were targeting 21 gross margins ahead of 19 levels is that I guess first off is that still realistic or is up and ratchet down a bit and your thinking and then given given that relatively extensive coverage from a from a from a hedge position.

It would appear just given the cost.

The cost curve that we're seeing and the spot market, but it implies.

And some residual inflation carryover into 2022, I don't know if there is and where you can kind of frame frame the extent of that carryover and the 22, but I'm really curious about given that if I'm right about that that outlook does that does that impact your plans around the timing and pricing or other discretionary spending at all on 'twenty one.

Dresses.

Yes, so I think and our goal is still to expand our gross profit margin on a two year basis, So I think and all that still a goal.

And in that context from a 'twenty one standpoint, obviously, we were ahead and quarter one quarter two is going to be our biggest lap as we lap last deals outsized operating leverage and then for the balance of 'twenty. One our goal would be to be as close to flat as possible. So that's kind of the way we are thinking about growth.

Profit margin.

Too early to talk about 2022 right now.

Certainly.

As Steve mentioned from a revenue growth management standpoint, we're looking at.

On a whole range of tools.

And to offset.

The inflation that we see.

Okay. Thank you very much.

The next question is from Jason English with Goldman Sachs. Please go ahead.

Yes.

Hey, folks thanks for letting me on.

One quick housekeeping question, and then a more robust question housekeeping.

And I thought I heard you say that developed markets benefited from shipment timing and the quarter.

On my right. So that picked up can you clarify and provide any sort of quantification.

Yes, so we definitely did benefit somewhat from shipment timing and if you think about go back to quarter, one 2020, where U S consumption growth exceeded shipments fairly markedly because of the surge you almost have the mirror reflection and quarter, one 2021, where the reverse was true where U S net sales growth.

And exceeded consumption and as we've said many times in the past consumption as a good guide it evens out over time and.

Some of this was clearly borrowed from our taken from quarter, four which we talked about when we did our quarter four call.

But that's essentially where that ends up on them and do you want on yes, I think just to build on what Steve said Jason.

In addition to lost deals factors and timing of awards is large deal as.

And as we had mentioned and our last call.

Some of this game from quota for most of it I'd say the diamond came from quarter four there has been a little bit as.

And as it relates to quarter two.

There was some shipment.

Ahead of activities, but most of it came from quarter four.

Okay, and then on those activities.

Steve We certainly heard you talk a lot about Brian merchandising activity back to to try to.

Get the market share going the right way, how do we think about that in context of the price equation for the price. When we saw this quarter was phenomenally robust, particularly on <unk>, but also on Dms.

As we think about the glide path forward net of this more merchandising activity.

Can you hold the serve and like the levels, we're looking at or should we expect sort of a <unk>.

Migration to net neutral by Tommy for the back half of the year at least within Dms. Thank you.

Yes, Thanks, Jason and I'd say, obviously, we can't comment on forward looking pricing and promotions and so forth, but what we are seeing what we'd expect is a gradual return to normal levels of merchandising activity.

As more and more people start to emerge from the pandemic as capacity for ourselves and others starts to become more normalized I would just expect that youll see a more normal return to levels I wouldn't see anything really above that I wouldn't see the macro conditions that would drive that and.

So yes, I think we can hold serve and we're off to a good start it's clear the areas, where we want to work on where we need to work on and it's clear where we have really good momentum and we want to continue to push push against that as well.

Thanks, a lot guys and I'll pass it on.

The next question is from Michael Lavery with Piper Sandler. Please go ahead.

Thank you and good morning.

Good morning, good morning.

Can you give a sense of how your conversations with retailers.

Going with respect to pricing and maybe specifically are they more sensitive to list pricing.

And more receptive to other approaches or is it similar across the board.

And kind of love to get a temperature check on where they are and how much.

Kind of Wiggle room, you have from here out.

Yeah. Thanks, Michael So, obviously I'm not going to comment on any specific customers, but we have a mantra here that we talked about all the time and that said we have to earn the pricing that we get and the marketplace.

Clearly there is an inflationary environment, that's real clearly that's across broad swaths of the economy and clearly there's been a lot of reporting on that but we approach it with the humility that says we've got to invest in our brands. We've got to bring innovation. We've got to do everything that we can to continue to earn our place in the marketplace, but I would also say.

And we did raise guidance and we're talking about holding as close to possible to our gross margins. So that reflects the types of confidence that we have that we'll be able to get through this by managing our price mix innovation.

And with our customers.

And how much can you balance the EBIT margin targets with the brand spending and inflation and pressures.

Is there some interplay there or do you want to protect the brand spend specifically to allow pricing.

Well.

We've said in the past we like the brand building that we've got in place we like the levels that we have in place and.

And the back half of last year, we were very purposeful and saying what we pulled from the second quarter, we're putting in the back half of the year because brands need investment and we kept to our overall budget from last year, although as back half weighted and that clearly gave us momentum as we entered 2021, whether it be the Pringles example, and the U S and <unk>.

But we like our levels of brand building spending we think they are important they clearly give us the opportunity to drive our brands and as I said earn.

And what we get and the marketplace and so I think we're I think we're well balanced I think we're confident again, we raised our guidance based on net and it's still very early in the year. So there's a lot of uncertainty at play, but we like the way it's shaped up we like the way it started and we like our plan going forward from a brand building perspective, and <unk> and profit delivery perspective.

Okay, great. Thanks, so much.

The next question is from Chris Growe with Stifel. Please go ahead.

Hi, good morning.

Good morning, and Chris just a bit of a follow on to that last answer and to Michael's question.

And I guess just to get a sense of.

The first quarter profit performance and EPS performance being so much stronger than expected I guess I want understand were there any unique factors, we talked about some maybe some over shipment in relation to.

Consumption.

But just to understand kind of how that kind of took hold during the quarter and then the degree to which inflation I guess is obviously picking up through the year was that is that picking up more than you expected such that there is more of a limitation on earnings growth and the remaining quarters. It just seems with this degree of outperformance on the first quarter that it would have led to a strong.

Performance for the year overall, unless there's some other unique factors on that start and incorporating here.

Yes, Thanks, Chris I'll start and Amit can build as well.

We did raise guidance and I think I hear and your question why not more.

But we're being prudent obviously, we're still in a pandemic, where others are really not even giving guidance beyond the next quarter.

And we're trying to be as helpful and as transparent as possible. We still have COVID-19, obviously, we have lots of challenges and emerging markets based on COVID-19 and other things, but we're off to a good start and we're confident and we feel like we can manage all of the things that you mentioned and the inflationary environment the potential disruptions, but we want to be prudent and we want to.

And when would be able to deliver what we say we're going to deliver the undistributed on that and maybe a couple a couple of additional points just on the shape of the year.

So I think and our quarter two is when we've got the biggest lap right. So if you look at it from a gross margin standpoint.

That was the that was the quarter, where we saw the operational and the outsized operational leverage come through so we're going to lap that and quarter to quarter. Two was also when we delayed our brand building into the rest of the year.

And just just if you recall a quarter two operating profit loss deal in 2020 was up 24%.

So I take it on that just to give you a sense of the lap ahead of us and just the shape of the Europe.

I think in on like I said from a gross margin standpoint in the second half.

Target to get as close to flat as possible recognizing that inflation continues to rise and.

And recognizing that we are probably about 76% hedged.

And the SG&A comp should moderate.

And the second half.

Okay. That's great. Thank you for the color on that.

Your next question is from Brian Spillane with Bank of America. Please go ahead.

Good morning, everyone.

Good morning, Brian and Brian.

Two quick ones for me first and it's just on.

A follow up on on some of the inflation and commodity question on the could you.

We've heard from some other companies and their spend with some commodities like like soybean oil for instance, where there's where availability is actually a question. So can you just.

I guess give us some insight in terms of.

Your confidence and the availability or your ability to.

Source, the raw materials you need.

Yes, I think from a sourcing standpoint.

We feel very confident in terms of our diverse supplier base. So.

While obviously.

And with Ocean freight and container and the Suez crisis.

Theres been pressure and the system book.

I think from a supply and <unk>.

<unk> of supply standpoint.

We're confident about that.

Okay and then.

It's been a few years now since deploy per balance growth.

And I know.

And some disruption with.

With COVID-19 over the last last year or 13 months or so, but I guess could you just stepping back can you just give us a little bit of insight in terms of like where you think you're maybe ahead of what your expectations would have been kind of what's in line and then and then maybe just where you still think there is there is some work to do.

Yes, thanks, Brian So I'd say, we're really where we want to be right. We're always <unk>.

And structurally discontent, we want to do better.

Demand of ourselves to do better, but when you think about things like shaping a growth portfolio that came through and it delivered the divestiture is behind US. It was a smart thing to do it was the right thing to do but you see our emerging markets you see our snacks brands you see are.

Sure.

Many of our portfolio of brands really executing well for us when we think about perfect service and perfect store build perfectly for the type of pressure that we had to face last year and ongoing and facing this year, we're talking about building world class brands, and we put some investment surges into our brands.

Unapologetically in the past and because of those things before the pandemic I would remind you that we exited the year before the pandemic with two 7%.

Organic sales growth rate and we were getting to balance and then the surge happened and co.

COVID-19 happened and.

And here, we are and we've had this unbelievable sampling opportunity this reappraisal opportunity, which we've aimed to make the most of but when you look at the two year stacks and you look at our portfolio and you look at our performance. We're delivering topline growth. We are we're back to growth reliably and for a lot of quarters now.

And we're delivering balanced growth as well and it's through the strength of our brands and the strength of the execution of our strategy. So we remain.

<unk> to do better we remain hungry, but I think theres no question that deploy for growth has delivered and we are back to a balance growth performance.

I think the only thing I'd add.

Is that we delivered balanced delivery last year I think it will be.

Our goal is to grow our gross margin on a two year basis.

And our cash flow convergence loss to us and exceptionally low.

And even if you set that aside.

And our goal is to increase our cash flow conversion.

And you know.

And our new guidance on the cash flow would indicate around a 75% to 80% conversion.

Okay.

Our next question is from Robert Moskow with Credit Suisse. Please go ahead.

Hi.

The 5% pricing or price mix and a quarter is a lot higher than what I had modeled and I think others had too.

The perception was that the pricing from our list basis, and maybe revenue growth management to would come later in the year.

As your hedges rollover.

Does this mean that you can accelerate pricing even above 5% as the year goes on.

Or is there something unusual about the 5% maybe related to the timing of promotional programs.

That would that would indicate that debt thats your peak.

Yes, I think.

Most of the price mix came from pricing in the quarter.

And like I mentioned that.

That was the whole range of tools across all the regions.

And some of our <unk>.

We took.

A significant pricing to cover for our commodity and remember and some of these markets. We've also had transactional forex.

Impacts through the back half of 2020 into 2021, so you've seen pricing to offset that come through in the pricing on.

We also benefited from mix.

And with snacks growth coming back from all certainly from a mixed standpoint, that's a positive so.

That's kind of what drove the.

Quarter one results.

Okay. So a snacks comes back that that boost your price mix.

But what does that do to your gross margin and operating margin is that dilutive to both or just one of those.

Yes.

We don't get into the bike category profitability, but I would say that yes.

Yes.

It's kind of at the.

And at the mix level at the margin level, it kind of neutral ish.

The price level, it's accretive.

Okay alright, thank you.

The next question is from Andrew Lazar with Barclays. Please go ahead.

Thanks, Good morning, everybody on.

Andrew just a quick one Steve on the capacity additions that you talked about I'm curious if you can maybe dimensionalize a little bit how much of that capacity broadly speaking would be sort of internal versus let's say leveraging external third party sources and really the reason I ask is just because to the extent that more of the capacity is internal debt.

Implications for obviously your level of conviction around stickiness of demand or elevated levels of demand going forward, let's say versus pre pandemic versus if you were doing more of this externally. Thanks so much.

Yes, Thanks, Andrew So I would say most of what we talked about is internal capacity right.

Many times, we look to external capacity when we're starting out. So if you look at like Cheez. It snap line, we might start with the first line being external but can get lots of conviction that second line was internal and so when we talk about cereal capacity when we talk about ego capacity, we're talking about internal capacity.

Capacity building and expansion and so you can take from that that there is real conviction, but what I would say is we're not building based on any kind of pandemic that is going to go away. We're building on what we really need right and so like others we operate.

On our capacity pretty tightly right and historically when you're in a category or categories that are growing low single digits. You would expect that the surge created a whole different set of circumstances, but as I said 2020 is not really going to be our high water Mark right and so we're going to lap those things and 2021.

And we're going to need the capacity to do that and things like certain elements of our ready to eat cereal and eggo and some of our cheese and lines, but we're in pretty good shape and so it's all embedded in our guidance and we feel we feel like we've got a good plan. Thank.

Thank you.

I think operator, we have time for one more question and.

And that question comes from Rob Dickerson with Jefferies. Please go ahead.

Alright, great. Thanks, so much.

Maybe two quick questions and one just quick follow up from Andrew on capacity.

And as that comes on and sounds like you're increasingly later this year and then and into next year.

Is that just more on the drivers very simplistically as to why you might be a little bit better.

On the gross margin side, and then I would assume right as that comes on and third party goes away. But then maybe there is also a double positive effect by just bringing on more and internally off the volume leverage price. Thanks.

Net net really Rob a couple of years ago. When we were doing a lot of on the go we were attacking the on the go occasions, and we did a lot of third party, but we also had a lot of manual.

Manual work being done that was the case, but now we're more on a normalized environment, where we're building capacity based on increasing demand. So so not not really.

Okay, Great Paul.

And then just other quickly just on the pricing piece and I know you said right Chris.

On transactional.

Impact, obviously and then obviously and then also on the cost inflation side.

There was very high and EMEA is impressive.

Is that like was there pricing and there that you would say you could also just been opportunistic given.

And what you're seeing across all of those countries within that segment, such that you werent pricing that much historically, but maybe there was like you said some of that brand building could have been targeted to some of the areas within EMEA and therefore.

You've kind of stepped in and took maybe a little bit more pricing.

Debt.

FX or cost inflation.

Excuse me Matt suggested thanks, that's it.

No I think it's.

I think and ill just looking at the cost the cost situation commodities Forex.

And obviously, we've seen inflation and both so I think trying to preserve your margins while also balancing out.

Volume growth and <unk> and.

And share I think and all in.

And triangulating between those drivers.

Alright, that's all I have thank you everyone.

Thank you. Thank you all right well that concludes the thanks very much 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.

Yeah.

That's what Paul.

Thank you.

Sure.

Or is everyone pretty.

Pringles originally.

Mark Mchugh.

Yeah.

Barbecue pizza stack.

And.

Paul.

Chris.

Okay.

Got it.

So on a patio.

Thanks, John.

Yes.

Yes.

Okay.

And then.

Yes.

And so.

And plus flavors to stack and Joe and carefully.

She grew.

And.

Labor and labor.

And David Green.

Labor is on Brian Crunch.

Mr. Clark.

And data is a very good day Sir.

When you crave, the uncomfortable trying new spicy pringles scorching.

Pop Tarts, Chris Huff frosting.

Sterling besting ever.

Okay.