Q2 2021 Kellogg Co Earnings Call
Except 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.
Thanks, John and good morning, everyone I Hope you and your families are doing well.
There is no question that we are still managing through a pandemic in this environment keeping employees safe remains job number 1 and aiding our communities is more important than ever.
We also continue to supply the world with food, though this remains challenging as the pandemic persists a reacceleration of Covid cases has brought on new restrictions, causing temporary shutdowns of production in some countries meantime, we and the vendors that supply us are having to manage through bottlenecks and shortages of materials labor and freight.
All created by demand supply imbalances that are also pushing up costs.
So 2021 is shaping up to be anything but business as usual and I'm extremely proud of how our organization continues to persevere and succeed in such challenging conditions.
I'm also pleased with how well we continue to execute against our strategy deploy for balanced growth, which is depicted on slide number 6 from a business perspective demand in eating occasions at home remained elevated in quarter 2 but they are gradually shifting as consumer mobility returns in the second quarter. This was reflected in an as forecast.
<unk> of decelerating at home demand growth as measured by 2 year compound annual growth rates in our cereal and frozen categories around the world. We also saw signs of gradual recovery in away from home channels and an on the go snacks and pack formats. These channels grew year on year and better than forecast.
Even if they remain below 2019 levels, our deploy for growth boosters are working effectively from focusing on ever evolving occasions to leveraging our reshaped portfolio to driving momentum in our world class brands and to investing in our supply chain to better serve our customers are better days boosters, which further our ESG efforts.
Continue to work effectively as well.
A few better days highlights are shared on slide number 7 during the second.
Second quarter, we continued to progress toward our ongoing better days commitments. This slide calls out a few of our actions and achievements of the quarter. The key message is that this remains a critical element of our strategy are clear focus of management and are part of the DNA of Kellogg company.
And we turned in another quarter of strong business performance in the second quarter as discussed on slide number 8 overall at home demand remained elevated and we saw continued recovery in our away from home channels. Most encouraging has been the momentum demonstrated by key long term growth engines for us are world class snacks.
<unk> sustained their momentum with many continuing to outpace their respective categories. Our plant based protein business is continuing to show strong growth our emerging markets businesses sustained their rapid growth and continue to excel, even amidst challenging business conditions.
Meanwhile, we continue to manage through the global supply challenges I referred to earlier, even as we continue to bring on our planned capacity increases from a financial standpoint, our second quarter continued the balanced delivery that we return to in 2020, specifically comparing to pre Covid 2019, we realized another.
Quarter of strong organic topline growth and operating profit growth as well as improved cash flow generation. We are affirming our full year guidance today like so many others. We are currently facing increased cost inflation and supply hurdles and that is factored into our second half assumptions. Nonetheless, the business is showing good momentum.
And just as we work through these challenges in the second quarter were confident we can work through them in the second half as well. So let me now turn it over to Amit. So he can take you through our financial results and outlook in more detail. Thanks.
Thanks, Steve and good morning, everyone.
Financial results for the second quarter are summarized on slide number 10.
It was another strong quarter best viewed on a <unk> basis because of the unusual period, we were lapping from large deal.
On an organic basis, we nearly matched last years unusually high net sales generating Paul.
5% growth on a 2 year compound annual growth rate all CAGR basis.
This came in better than expected thanks to an impressive momentum in emerging markets and foster improvement than expected in our away from home channels.
Currency neutral adjusted basis operating profit declined against last year's exceptional quarter. When it grew 27% despite losing about 8 points to divestiture impact.
Excluding those divested businesses from the 2019 base, our operating profit in quarter..2 day grew at a 2 year CAGR of about 8%. This is strong growth that indicate underlying margin expansion.
Currency neutral adjusted basis earnings per share declined as it lapped last year's outsized growth, but it grew about 9% on a 2 year CAGR basis, excluding the divestiture impact on operating profit.
And cash flow was again stronger than anticipated for the quarter.
And while it lapped last years unusually high level. This cash flow was again higher than that of quarter 2 of 2019.
So on a 2 year basis, we saw another quarter of good topline growth margin expansion and conversion of profit into cash flow.
That's the kind of balance we strive for.
Let's examine the results in a little more detail.
I'll start with net sales on slide number 11.
Net sales remained strong despite tough comparisons volume declined against last year's double digit Serge <unk> remained up on a 2 year basis, even despite and as expected reversal of shipment timing from quarter, 1 in North America.
Brian mix was again, an important driver once again most of this price mix growth came from revenue growth management initiatives implemented in all 4 regions mix was only slightly positive as a mix shift towards snacks was partially offset by resumed mix shift towards multi peril westar.
African distributor business.
Or do you organic net sales CAGR was 4.5% in quarter 2 a very strong performance.
Rounding out net sales foreign currency translation was again positive in quarter 2.
As we look to the rest of the year, we assumed continued deceleration in at home demand with moderation in away from home declines being more modest due to the mix of our channels.
We've seen this reflected in our 2 year CAGR from quarter, 1 to quarter, 2 and we expect that deceleration to continue into quarter, 3 and quarter Paul.
And based on way Forex rates are right now we would expect to see a less positive impact on net sales in the second half.
Moving down the income statement slide number 12 shows 2 important drivers of our profit margin performance as you know.
Profit margin in quarter, 2 was lapping outsized operating leverage in quarter..2 2020, when our plants ran flat out producing only a limited lineup of Skus.
But importantly, our gross margin in quarter 2 as in quarter, 1 increased from 2019 levels per day.
Acuity and price realization drove this improvement.
Improvement more than overcoming high cost inflation labor and trade disruptions COVID-19 related costs and a mix shift towards emerging markets.
The <unk> improvement is very encouraging.
As we'll talk about in a moment, we expect to see more pressure on gross margin in the second half than we did in the first half, reflecting the current operating and cost environment.
Operating profit margin remained higher than quarter, 2.2019 as well. This reflects the gross margin performance and good discipline on our way.
Brand building investment while up double digits against large deals delays was up more modestly versus 2 years ago.
As we look to the second half SG&A expense may provide some offset to the gross margin pressure.
SG&A expense in the second half should moderate year on year, not only because of last year's back weighted brand building, particularly in quarter 4 but also because of lapping last year's incentive compensation.
This will be partially offset by a gradual resumption of travel and related activities as economies reopen.
Moving down the P&L, let's turn to slide number 13 during quarter 2 interest expense decreased year on year on lower debt and this decrease will continue for the remainder of the year with quarter..4 Additionally, lapping the $20 million degradation cost recorded last year.
Of note during the quarter, we issued our first ever sustainability bond, which was very well received.
Other income increased modestly year on year to a level that is a little higher than we would expect for the remaining quarters, owing to favorability in various non pension items.
Our effective tax rate of 22, 6% was essentially in line with our full year forecast right.
JV earnings on minority interest together were roughly in line with last year.
And average shares outstanding decreased year on year, reflecting the impact of quarter one's buybacks.
We still expect full year average shares outstanding to be around half a percent lower than 2020.
Let's now discuss our cash flow and balance sheet as shown on slide number 14.
Year to date, our cash flow remains below last years unusually high level as expected.
<unk> well above that of the first half of 2019 day.
<unk> increase is driven by our improved operating profit and improved cash flow conversion.
We finished the first half ahead of our expectations for cash flow and as we look to the rest of the year cash flow should remain below last year's co related levels, but still well above 2019.
Meanwhile, our balance sheet remains solid net debt remains roughly even with large steel and lower than each of the prior 2 years, even despite our increase in cash returned to shareowners and former resumed share buybacks and increased dividends.
So our financial condition is quite strong.
Slide number 15 shows where our results.
After the first 6 months of 2021, obviously, we've added Goodyear so far are producing strong and balanced financial results on a 2 year basis and staying modestly ahead of our own internal forecast.
This strong start is all the more important when you consider just how much more challenging the business environment has gotten lately.
Now, let's discuss our full year guidance shown on slide number 16, as Steve mentioned, we are affirming our overall guidance.
Within that guidance, we are raising our net sales guidance. We are now calling for organic growth of flat to up 2.1%, which is a bit higher than our previous guidance were flat, reflecting our business momentum, particularly in emerging markets.
This equates to almost 3% growth on a 2 year CAGR basis.
Volume will continue to lap last year's large gains, but price mix will remain positive as we execute our revenue growth management actions to cover higher input costs.
Our guidance for currency neutral adjusted operating profit is unchanged still calling for a year on year decrease of about 1% to 2% equating to almost 4% growth on a <unk> basis, excluding the divestiture impact.
This reflects our stronger than expected quarter to profit and raised full year net sales outlook balanced by increased cost pressures and operating challenges that make us a bit more cautious about the second half.
Specifically, we have the productivity and revenue growth management actions in place to continue to cover high market driven cost for commodities and freight however, the economy wide supply chain challenges that Steve mentioned are impeding production and shipping and creating incremental operating.
Cost as well, particularly in quarter 3.
Because of this we now expect gross profit margin to finish 2021 slightly below 2019 levels are well above 2019 and gross profit dollars.
We're also affirming our guidance for 1% to 2% growth in currency neutral adjusted earnings per share, which equates to almost 5% growth on a 2 year CAGR basis.
And we continue to look for cash flow to finish the year in the range of $1.1 to $1.2 billion.
This outlook balances the momentum in our business with the challenging operating environment and balances our margin protection actions against heightened cost pressures to summarize we remain in strong financial condition and we remain solidly on track for continued balanced financial delivery on a 2 year basis.
And with that let me turn it back to Steve for a review of our major businesses. Thanks, Amit before we get into each of the 4 regions. Let me start off by highlighting the strength of some of our most important growth drivers. The first is pringles shown on slide number 18, this $2 billion global retail sales brand continues to.
Formed well around the world here in the United States. It continued to outpace the category on consumption growth using a 2 year CAGR to eliminate uneven comparisons. It's also outperforming the category on household penetration gains since the pandemic and around the world. We are seeing similar momentum, we're seeing growth in original and core flavors.
We're seeing incremental growth from innovations like scorching in Switzerland.
Equally impressive has been cheez it another world class brands shown on slide number 19. This $1 billion retail sales brand continues to perform well in the U S. Its 2 year CAGR remained well ahead of the categories growth in its household penetration has grown in contrast to the rest of the category. Meanwhile, our launches of this Paul.
Brand into Canada, and Brazil are off to strong starts let's.
Lets not overlook to other world class snack brands on slide number 20, we can see the continued strength of pop tarts and rice Krispies treats together. These 2 power brands represent a $1 billion in measured channel retail sales in the U S alone.
You can see from the slide that they are in terrific shape as well their consumption has continued to outpace the portable wholesome snacks category on a 2 year CAGR basis, and these brands have added households, since the pandemic, whereas the overall category has not.
Plant based protein and our leading Morningstar farms brand as another growth driver that is performing very well as shown on slide number 21. This $400 million retail sales brand continues to show strong consumption growth on a 2 year CAGR basis and has continued to add to its household penetration a.
A key advantage of Morningstar farms is the breadth of its offerings across product types and in Q2, we continued to see double digit 2 year CAGR across segments like chicken appetizers breakfast meat and sausages, we continue to innovate against this brand, including a sub brand incognito, which continues to add <unk>.
Distribution and share and is proving to be incremental to the Morningstar farms franchise Morningstar.
Morning Star farms growth has bumped up against our capacity at various times in the past year, even as it has faced numerous new entrants into the category. This is creating a lot of excitement in the category and we are pleased with our momentum and prospects.
And of course, Theres Eggo shown on slide number 22, this $900 million retail sales brand continues to perform well in the U S. As indicated by its strong 2 year compound annual growth in consumption and by its better than category performance on household penetration meantime, the brand continues to grow on a 2 year Bay.
<unk> in Canada, and Mexico as well.
Our emerging markets are another key growth driver for us and as you can see on slide number 23, they have actually accelerated their growth over the past couple of years as we've discussed many times. This is a testament to our geographic footprint our portfolio of foods and brands are local supply chains, our go to market and our experience.
Management teams as you can see from the chart. We continued to record impressive growth in these markets in Q2, even in spite of challenges related to Covid.
We grew strongly in Africa, Asia, Latin America, and Russia, and we continued to grow in cereal snacks and noodles in emerging markets represent more than 20% of our net sales and are expected to remain an important growth driver for a long time to come.
So some of our portfolio is most important growth drivers are very clearly showing good momentum and have only strengthened over the past year and these aren't small businesses, even just the ones I discussed here collectively represent more than half of our company's net sales.
Let's now discuss each of our regions.
We'll start with North America, and slide number 24, we sustained net sales growth on a 2 year basis in North America, even if that growth rate was held back by the pandemic negative impact on away from home channels and on the go pack formats. Moreover versus last year, our volume in Q2 was not only lap.
<unk> last year's double digit surge, but also felt the impact of our previously discussed shift of shipments into Q1 and result in trade inventory coming out as expected during Q2 importantly.
Importantly, though we realized good price mix growth driven by revenue growth management actions and our overall sales growth was supported by good underlying consumption trends, we outpaced 4 of our 6 primary categories on a 2 year compound annual growth basis, with our 2 year consumption growth accelerating sequentially for.
Q1 in 5 of our 6 categories and as we discussed on the past few slides. This strong performance is being driven by many of our biggest brands. So the underlying fundamentals look good.
On operating profit remember that we were lapping a year ago quarter in which operating profit grew 36% excluding divestiture impact an unusually strong quarter elevated by at home demand outsized operating leverage and delayed brand investment during the height of the pandemic.
On a 2 year CAGR basis, though you can see we continued to generate good operating profit growth driven by topline growth productivity and price mix.
These had been able to offset the impacts of extremely high cost inflation. This year as well as the frequent shortages of materials freight and labor, which are most pronounced in North America.
Let's take a closer look at our category groups in North America.
Slide number 25 shows that our net sales for snacks in North America continued to grow both on a 1 year and a 2 year CAGR basis, despite declines in away from home channels and many on the go foods and pack formats.
U S consumption remained solid on a 2 year CAGR basis outpacing all 3 of our snacks categories and led by power brands and crackers, we outpaced the category on a 1 year and 2 year CAGR basis led by continued strength in Cheez It and club.
In salty snacks, we outpaced the category on a 1 year and 2 year CAGR basis as well due to continued strength in pringles, particularly its core 4 flavors, it's new scorching innovation and multi packs.
And in portable wholesome snacks, we're seeing grants like pop tarts, and rice krispies treats hold up very well on a 2 year CAGR basis, while also starting to see signs of recovery in our more on the go oriented brands like special K neutral grain and Rx bars.
In North America cereal shown on slide number 26 organic net sales were off slightly on a 2 year CAGR basis due to declines in away from home channels. We also saw the impact of being capacity constrained on certain brands.
In the U S. The categories consumption was flat on a 2 year CAGR basis in Q2, and after being down about 1% in Q1, we improved to flat in Q2, keeping up with the category on that basis frosted flakes accounted for most of the share decline related to pulling back on brand building and merchandising since Q4 last.
Year, as we work to maintain service levels and add capacity planned prior to the pandemic.
Unfortunately, our capacity expansion has been slowed by current supply shortages and by our recent fire in 1 of our facilities. This will delay our return to normal commercial activity unaffected brands in the meantime, our business continues to progress well, we continue to lead the category and share of innovation and we're seeing better performance in <unk>.
This oriented brands like Raisin Bran special K, Kashi and bare naked.
And on slide number 27, we can see that our 2 frozen businesses plant based foods and frozen breakfast also continued to grow on a 2 year CAGR basis, even despite capacity limitations and declines in away from home channels. We've already discussed both of our key brands in frozen Morningstar farms.
<unk> based foods and Eggo from the Griddle foods, both continued to generate strong consumption growth on a 2 year CAGR basis, and both are poised for sustained growth.
And before we move on from our discussion of North America, We should touch on our U S away from home business in Slide number 28. This slide shows rolling 2 year average growth rates in our net sales over the past few quarters in these channels.
As restrictions eased in consumer mobility increased we saw gradual recovery underway in these channels. It remains to be seen whether this trajectory will continue given recent pandemic developments.
So our North America region continues to perform well, even as we work to catch up to demand and work our way through industry wide shortages of freight labor and materials.
Now, let's take a look at Europe shown on slide number 29.
Kellogg Europe posted its 15th consecutive quarter of organic growth a remarkable track record of consistency in this market volume.
Volume had to lap a year ago surge, but we sustained good price mix growth driven by our GM actions and on a 2 year CAGR basis, you can see that we remain in strong net sales growth with this growth being driven by both snacks and cereal.
Importantly, we also continued to perform well in market retail scanner data indicate only modest sequential deceleration of category and Kellogg consumption growth on a 2 year CAGR basis.
On that 2 year CAGR basis, we kept up with the salty snacks category with particular recent strength in France, and Spain are consumer promotion around the Euro soccer tournament was our biggest summer promo ever for Pringles and.
In cereal our 2 year growth has outpaced the category in most markets led by key brands like crunchy nut in the UK and trays or an extra in continental Europe, and Coco Pops in cocoa krispies more broadly.
Europe's operating profit lapped a year ago quarter in which operating profit grew more than 35%. When it was elevated by at home demand outsized operating leverage and delayed brand investment during the height of the pandemic.
Nevertheless on a 2 year CAGR basis, we grew our profit at a double digit rate in Q2, So clearly Kellogg Europe continues to perform very well.
Moving to Latin America, and Slide number 30, Latin America had a notably strong quarter. It grew organic net sales by 9% on top of last years, 14% gain resulting in strong double digit growth on a 2 year CAGR basis.
Volume had to lap last year's 11% surge and this was felt primarily in cereal, but we sustained strong price mix growth driven by our GM actions across the portfolio and markets. The result was a year on year net sales growth in all sub regions and as shown on the slide sustained momentum on a 2 year CAGR basis.
Scanner data do indicate a gradual slowing of at home demand, which for us manifest itself in cereal. Nevertheless, our 2 year CAGR for consumption remains strong and our key cereal markets with Kellogg exceeding category growth rates, particularly for big brands like corn flakes and Froot loops.
Similarly, pringles outpaced 2 year CAGR for salty snacks categories in key markets and has gained share on a 1 year basis, and our biggest markets, Mexico and Brazil.
While our <unk> business in Brazil continued to post strong consumption growth and increased share in biscuits.
While operating profit had to lap a near doubling in the year earlier quarter. It was still up strongly on a 2 year CAGR basis. Despite high cost they were heightened further by adverse transactional currency exchange.
We clearly are performing well in this region and while we are somewhat cautious about decelerating at home demand and further regulatory pressure in the second half. This year is certainly shaping up to be a good 1 for Kellogg Latin America.
And we will conclude our regional discussion with EMEA and slide number 31.
<unk> produced another quarter of exceptional organic net sales growth both on a 1 year and 2 year CAGR basis, both volume and price mix contributed to the strong year on year growth.
Geographically the growth was broad based and driven by emerging markets. It was led by double digit gains in Africa within Africa, we experienced notably exceptional growth in Nigeria, our business. There has been dependably and growth for a long time and its recent acceleration and momentum has been impressive means.
Meanwhile, we also generated good growth elsewhere in Africa and in the Middle East, we generated double digit organic net sales growth in Asia as well and the gains were broad based across markets like India, Japan, and Korea, and the growth came from both snacks and cereal.
Even in developed market, Australia, our sales were roughly flat against last year surge.
Emea's operating profit growth was also outstanding in Q2 growing 25% year on year.
So EMEA continues to demonstrate strong momentum and while we would not expect it to keep up this exceptional rate of growth. It is very clearly a dependable growth driver for us.
Allow me to wrap up with a brief summary on slide number 33.
We have completed another quarter of strong execution and performance capping a first half that featured the following underlying business momentum driven by our biggest brands.
Unlocking capacity, so we can resume full commercial activity in certain products.
Sustained growth momentum in emerging markets.
Leveraging enhanced capabilities from data and analytics to innovation to ESG.
Strong cash flow and balance sheet, providing financial flexibility and increased cash to shareowners.
A continuation of balanced financial delivery and an affirmation of our full year guidance as topline momentum helps offset the impact of higher cost pressures and global supply chain obstacles.
As I mentioned earlier, the current business environment is anything but business as usual in addition to the challenges of ensuring our employee safety.
And the entire economy are wrestling with tight supply of materials freight and labor as well as the related rise in their costs, we manage through this environment very effectively in the first half and we affirmed guidance today with confidence that we will continue to manage through it in the second half we remain as convinced as ever that we are stronger today as a <unk>.
<unk>.
So before closing I want to thank our Kellogg employees for their dedication and hard work in what had been incredibly challenging circumstances and with that we'd be happy to take any questions you might have.
We will now begin the question and answer session.
To ask a question you May press Star then 1 on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Brian Spillane with Bank of America. Please go ahead, hey, good.
Morning, everyone.
Good morning.
I guess, Mike My question is around.
I know the commentary just around the rising costs in some of the supply chain issues.
Like sourcing materials in North America and taking.
My question is.
In terms of mitigating that you've taken some actions in the second half to begin to try to mitigate but I guess as we go forward how should we think about.
How much of this maybe leaks into the first half of next year.
And are there other incremental actions, whether its pricing or productivity that you might have to take in order to sort of stay on top of this as we move beyond this current fiscal year.
Yes. Thanks for the question, Brian and you hit on some of the most important activities and we always like to say that our first line of defense against something like this is productivity right. So we've been working hard at productivity and looking for every area, where we can be more efficient and then our GM, obviously everything about our GM and the capabilities.
We've been building is very important right now because the surge in inflation that we're all seeing which is clearly industry wide is.
I'm not telling anybody anything they don't know is quite significant.
And on balance probably the most we've seen in nearly a decade and so all of these things that can be very important, but we're going to continue to invest in our brands because as you've heard me say before we can go to the trade and talk about rising commodity prices and all these things, which are very factual, but the more we spend against our brands in terms of innovate.
<unk> and making sure that they pull off the shelf the more we earn the right to have those discussions with our retailers as it is it more.
Moves into the future into 2022, it's hard to say how long. This persists. It's very pervasive there are certain things that are clearly going to unwind containers will eventually find their rightful places on the world and the world Labor shortages.
Should mitigate but it's hard to predict and we're planning for an ongoing challenging cost environment well into next year, Amit I don't know if you had I think just to build on what Steve said, if you look at inflation. It came in higher than what we had expected in the second quarter I think we kind of close the first half at around mid single digit rates of inflation.
<unk> and I think as we look to the second half, we expect that to accelerate to high single digits. I think as you would've seen in our quarter..2 results. We are seeing strong price mix come through.
Globally, so across all our markets.
That will continue to be an emphasis in the second half as well.
We are taking our revenue growth management actions and Youll stops and you will continue to see the impact of that in the second half as well.
And then I think just from a margin standpoint.
As I mentioned.
Our outlook now for the year is that our gross margin will be slightly below 2019 levels, but I think it's important to note that our gross profit dollars will be higher.
In 2.
2019.
Okay. Thanks, Steve Thanks, Amit I appreciate the color.
The next question is from Alexia Howard with Bernstein. Please go ahead.
Good morning, everyone.
Asia.
Hi, Dan.
Just a couple of questions.
Hey.
On the.
The production and shipping issues is that really just speaking to the fire and labor problems.
The cereal side of the business in the U S or is it more broad based and would we expect more out of stocks.
That happened as a result of that and then I have a follow up.
I think I'd like to the Zama, 2 it's broad based and I think everyone thing.
If you kind of look at labor shortages that widespread shortages of labor, particularly here in the U S.
That's impacting the freight market, we have seen the spot market and the freight significantly up due to a shortage of drivers.
It's impacting our operation in our factories in terms of just label.
And it's impacting the entire supply chain. So we're seeing it in our suppliers as well.
It is it is all <unk>.
<unk> based and then when you look internationally.
Covid is raging in some emerging markets.
And so we've seen COVID-19 restrictions kick in.
And a couple of us all facilities have been impacted because of COVID-19 restrictions so broad based.
Great I really appreciate it and just a really minor follow up are you able to quantify the currency impact on EBIT and operating profit and earnings per share for the full year.
Adjusted that we have an idea or guidance imply.
Yes, I think it's hard I mean.
Hard to kind of forecast or exchange rates I think if you look at where the rates are today.
Would say that it's about a 2% on the EPS from a forex standpoint, it's about 1% to 2% on a net sales basis. So that's kind of the.
If you look at this way rates after day.
Thank you very much I'll pass it John.
The next question is from Rob Dickerson with Jefferies. Please go ahead.
Great. Thank you so much.
Just a question around.
The emerging markets.
Steven.
About 20% of the business, obviously, we've seen some nice pricing already comes from there.
Even though it looks like currency hasnt been a headwind. So I'm just curious kind of net debt within kind of the broader emerging market platform you have.
Has the strategy been.
No.
Volume was essentially can remain.
Somewhat steady.
You get through that back half of the year.
While pricing is still elevated maybe there were some pricing opportunity I think you had spoken to kind of coming out of Q1 David.
Follow up.
Yes. Thanks for the question, Rob, obviously, where we're very pleased with the emerging market performance in the first half it was surprisingly strong.
And I say that because as Amit already mentioned and as everybody knows Covid really is raging in many of these parts of the world, but I think our strength there really comes down to the execution of our strategy, which starts with the affordability pyramid, which we've talked about in the past our portfolio is much more affordable today than it has been in years.
It's much more locally relevant in terms of the foods that we bring to market and so that's allowed us to weather what is a very uncertain environment in many of these markets. We also have a very advantaged position in some of these markets. If you think about our west African Nigerian business, our strength in route to market through our multi pro distributor allows us to mean.
To operate in this very challenging environment that parity acquisition in Brazil gave us strong route to market. So the focus on route to market and affordability has allowed us to weather this very challenging and in fact be very successful in the first half of the year. We're cautious going forward. We wouldn't expect this type of elevated performance to continue and we.
Say that just because of the level of uncertainty around COVID-19 around potential disruptions. We have had some factory disruptions in the emerging markets in the past quarter, we can't guarantee that debt won't we.
Won't happen again, and so with some degree of just caution that we look.
Forward relative to the performance that we had in the first half of the year.
Alright, Great and then just to focus on North America for a minute.
Obviously, the price mix is already concerned I think Keith you are assuming.
Some of that as more of a mix driven relative pricing you've already taken so as I think kind of going to go forward in the back half.
It always kind of what you did in Q2 is that let's say 1 of their proxy for what you might be able to put up their pricing and then secondly.
Yes.
<unk> side, obviously came off from Q2 realized you're being a bit cautious on how that plays out given COVID-19.
Deceleration potential but at the same time it seems like maybe your portfolio should be a little bit better insulated relative to others in the volume side.
The back half given you don't have extremely tough comparison and also because you have some of the on the go exposure so kind of 2 parts pricing and then tonnage expectations net debt. Thanks.
Yes, so just starting with the pricing.
We saw like I said around 4% price mix in the first half.
It was across all our markets both in the U S.
In the international markets.
It was a more price than mix in the first half and we'd expect that to continue in the second half.
<unk> and.
We expect to continue to execute on our revenue growth management actions.
Okay.
Alright, Great and then just on the volume side, just kind of thinking about portfolio construct.
Okay.
Et cetera.
Yes, so we feel pretty good about the volume side of the equation.
We're also continuing to focus on the balance of price mix as you think about our various categories. Obviously, the second quarter was the really big lap when it comes to tonnage and then the back half of the year becomes less so.
Yes.
Alright, Thanks, Steve.
The next question is from Michael Lavery with Piper Sandler. Please go ahead.
Good morning, Thank you.
Okay.
You passed your toughest comps for organic growth.
Average around 2% organic growth lift in the first half despite that.
I know you've raised.
Guidelines the guidance for topline expectations, but.
Certainly would point towards deceleration you've called out some of the COVID-19 uncertainty, especially in emerging markets, but what are the real key drivers there that make you think.
Slow down so much in the second half.
Yes, Michael Thanks for the question I think.
Obviously, if you just reflect back on the last 18 months there was a time when many companies werent, giving guidance and we've tried to be as transparent as we possibly can all throughout this we're clearly pleased with the first half of the year. We're pleased with the top line performance, but as we look to the second half of the year, we did slightly.
Raise the guidance that we have for the top line, but again the types of performances, we've had in emerging markets have been quite elevated.
And we're trying to do a center cut down the middle of the fairway do we hope to do better we certainly always hope to do better.
But we're trying to give the best possible outlook that we can given what is still an incredibly uncertain environment. I mean, just a few weeks ago, you wouldn't have forecast the type of.
Delta variant and.
And pandemic disruptions that we're seeing again in North America.
Okay.
So apart from some of this uncertainty.
Especially COVID-19 <unk> emerging market related that theres, not a specific headwind to watch out for it. It's just recognizing some of those moving parts.
Yes, the only other thing I'd say is that.
At home demand is decelerating right, we saw that from quarter 1 into quarter..2 so if you look at Ontario to Europe.
<unk> it was 6% in quarter, 1 is 4 and a half in quarter..2 so you are seeing the deceleration of demand at home. So that's built into our outlook as well that we'd continue to see that now.
I think to Steve's point dry depending on how the pandemic plays out and the twists and turns.
It is hard to forecast that.
Thanks for the color.
The next question is from Laurent <unk> with Guggenheim. Please go ahead.
Yes.
Paul Thanks for your <unk>.
Hi free question about your manufacturing facilities, you mentioned on 2 things first in the U S sales I mean, you had.
Some issues there so just wanted to understand what what is the mist.
<unk> sales.
In Asia.
In the second quarter and how long do you think that will last.
And then I mean.
You mentioned in your remarks as well that.
Net you shut down some facilities.
In imaging country, so I'd like to understand what where that that is what it is.
If there is additional risk coming into the into the first quarter. Thank you.
Yes, Laurent thanks for the question I would say the supply disruptions that we're seeing are the same things that many in the industry are seeing everything from a shortage of labor, which is quite challenging shortage of even things like pallets. So the whole supply chain was disrupted.
Much of that you can point to China went into Lockdown, obviously very early in the pandemic and was the first out recovered quite quickly and sucked up a lot of resource and it's really created supply imbalances throughout the world that everybody has had to deal with and we've had to deal with inside North America. During that time, we were also.
Adding capacity, we've successfully added capacity throughout the world, We had what we call a vertical startup of our Pringles line in Poland, which was done very successfully so we have been able to add capacity in some areas in North America, it's been a little bit slowed because of some of these supply disruptions and so we haven't been able to <unk>.
Net debt level of capacity as quickly as we would want but it's all in our outlook. So as we talk about the second half of the year and what we expect in the second half of the year, we're doing our best to forecast. These types of disruptions in this type of slowed activity relative to a non pandemic world.
Yes can you specify Amit.
The manufacturing facility that just to close and which countries.
And what type of business you have to to growth up 2 minutes, you mentioned market yes.
Yes, I think it will in Malaysia.
And a spike in the total area under the last few weeks.
And we have a manufacturing facility there in Malaysia.
Pringles also.
That's 1 of the production that was impacted but the teams have done a remarkable job.
To get us back up and running but we did see some disruption in the quarter.
And.
South Africa again, we've got a manufacturing location day and there was some civil strife.
So that <unk>.
Impacted.
<unk>, but I think.
It's just with.
With the Covid restrictions and with Covid continuing to day rates in many of these markets right.
We see the supply restrictions and restrictions on movement coming through.
Okay. Thank you very much I'll pass it on thank you.
The next question is from Chris Growe with Stifel. Please go ahead.
Hi, good morning.
Hi, I just had a question for you on North American cereal, obviously, it sounds like capacity is still a bit of an issue. There. So I'm just curious how your share performed extrorse the flakes. It sounds like that's the 1 that's.
Really causing the issues and then what do you think you can get that back to a more normal.
Promotional environment, I guess for that brand.
Yes, Chris Thanks for the question off the top of my head.
Frosted flakes did make up.
Probably more than half of our share loss.
Much of that was still not getting back to the levels of commercial activity that we would like and so we've talked about in the back half of the year getting that.
Going again I did mention a fire in 1 of our facilities that will affect frosted flakes as well as some of our other brands, but the team is working very very swiftly and quickly.
To get that back up to speed. So we're not you've heard me say in the past, we're not happy about losing share in U S. Cereal, we believe it's not going to be a long term continuing trend.
But we've got work to do to get there. The other thing I'd just remind everybody is.
Obviously, we've got a lot of other businesses. Besides U S. Cereal is an important business for us, but it is less than 1 fifth of our total global portfolio.
Yeah. It's good point there I had 1 quick follow up for Amit if I could please which is.
Last quarter, you had indicated you were pretty well hedged on your input costs could you give us an update on that and if I could just add or.
Following the inflation Youre seeing right now is this on primarily on inputs, where youre not hedged is that where we're seeing some of the incremental inflation come through.
Yes, so I think in our hedging we have almost now fully hedged for Europe.
As you would expect at this time with the <unk>. So I think from a hedging standpoint for the year for 'twenty, 1 where we are almost fully hedged.
I think in terms of inflation, we've seen a little bit of inflation on our commodities.
But I think the area that stone inflationary in packaging.
On flexible scans, so that as Don inflationary since our last outlook.
And then I think the comment I made earlier around freight.
We're seeing freight rates continue to rise.
And more importantly, there are widespread shortages and so ill just securing.
The supply of freight right.
Coming at much higher rates than what we had.
Expected.
And so I think those are the areas that we're seeing higher costs come through.
And then the other 1 which is hard to forecast.
<unk> is just the labor shortages and that's kind of.
Through the supply chain. So those are the areas that we are seeing higher costs come through.
Okay. That's very helpful. Thanks for your color and time today.
The next question is from Robert Moskow with Credit Suisse. Please go ahead.
Hi, I have a couple of questions.
The first is.
If your sales do over deliver in the back half.
Because COVID-19 ends up may be benefitting you more than you think with those incremental sales still be profitable.
Or are they much less profitable because the cost to deliver is really high so.
That's the first thing and then the second question is North America snacks decelerated to 2% on a 2 year CAGR in the quarter I think youre snack peers are are growing net.
A stronger rate than that.
Were you surprised by that the amount of DSL did something holding back in the quarter.
John.
Yeah, So Rob I'll start and Amit can add color on the on the first question I would say if you look at our first half performance. Obviously, a strong top line helped us mitigate very inflationary environment and I think that's illustrative of any over delivery, we would it's always going to be profitable, but theres clearly a cough.
The challenge and I think Amit pointed out in his.
Prepared remarks, when we look at margins, we're still looking at 2019 is a decent base year and it's likely we will come in slightly below that but the gross profit dollars will be significantly greater and so that's the way we're thinking we're always looking for profitable sales, but clearly theres a lot of cost challenges.
We will try and deliver the best possible P&L shape that we can and obviously profitable sales are clearly continue to be important.
And I think just on your U S snacks question.
If you look at our first half right. The 2 year CAGR is around 4%.
I think between the quarters between quarter, 1 and quarter 2 there was some shipment timing.
And also these remember remember these numbers include the away from home channel as well, which continues to be impacted I mean, its moderating, but it's still below 2019 levels. So I.
I think from an overall consumption standpoint, we're pleased with the consumption that we're seeing and the momentum that we're seeing in a snack brands in the U S.
Okay, well thank you.
The next question is from Eric Larson with Seaport Research partners. Please go ahead.
Yes. Thank you everyone. Thanks for taking my question I have 2 real quick questions. The first is.
Thank you for the for the framing all your your big brands and the size of those brands and the household penetration.
Question I have on that is you showed the incremental household penetration since COVID-19.
But you don't really give the overall ECB penetration.
Some of these brands are international so it's hard for us to measure some of that but.
Can you make the case here for continued distribution gains as part of Europe.
Overall revenue growth thesis.
Yes, Eric Thanks for the question I think obviously, we all look at the syndicated data.
And it is limited to mostly developed markets.
Less so in developing markets and distribution opportunities remain important for us obviously very important and are different based on the maturity of the brands and so if you look at our ACB distribution for our snacks and cereal business in the U S. Obviously very high and then we will look to add weighted ACB distribution as we look to <unk>.
Launch new innovations and we track that very closely.
And.
So.
It's a clear important metric for us and then with respect to what was the second part of the question.
Total penetration, yes so.
We're looking at categories for us that are already very highly penetrated and so if you look at the penetration gains. We've had we did see penetration gains across our portfolio in our developed markets and we saw even more of that COVID-19 lift coming from buy rates, though.
So increased household penetration is important but obviously looking at buy rates is equally.
More important when you are talking about categories, which are already quite highly penetrated like U S cereal and U S snacks.
Okay. Thanks, and then my second question is you show. The you showed a gradual improvement in your eating away from home sales and in the industries that you compete in and I know you have.
A large exposure to universities.
Hotels et cetera can you give us can you free.
Frameless, where you are over.
Or under index in your eating away from home channel penetration so that.
As these economies as the economy reopens et cetera, we know where you have your best leverage in Europe.
Foodservice sales.
Yeah, So Eric I'd say, we're seeing all of it come back.
But at different rates were over index really in travel and lodging schools convenience stores and theyre coming back at different rates. So C stores are coming back faster schools, we'll see we'll see right now in schools are starting in many parts of the world.
And what happens there remains to be seen but it looks like it will be coming back travel and lodging coming back slower.
And particularly business travel, but then you obviously see.
Leisure travel and the airlines starting to fill up planes again, so that seems to be coming back as well and so its very uneven but by and large coming back as we said now as I said earlier there is still a degree of uncertainty based on what's happening with the pandemic right now and it's still below 2019 levels so not not.
Yet close to where we were pre pandemic.
Okay. Thank you Paul.
The next question is from Steve powers with Deutsche Bank. Please go ahead.
Alright, Thanks, a lot for squeezing me in I guess the question I have and you've talked about it a bit but I'm still trying to better understand how much of the.
The implied second half deceleration is is really just prudence on your part because of the uncertainty you talked about.
Versus things you have.
Firmer line of sight too because.
As you've talked about the first half.
Versus versus 19 was about 5%.
Some deceleration <unk>, but also from shipment timing in there so maybe not as stark as it looks but the back half as implied essentially at 1% from.
Your cable versus 19, so it's a pretty start from acceleration and again I'm just trying to figure out how much of that you actually have some line of sight to versus things that you are just.
Pumping the brakes on just from an expectation standpoint. Thank you.
Yes, Thanks, Steve I'd say.
Again, very pleased with our first half performance as we think about the second half performance as Amit mentioned, we are seeing decelerating.
At home demand and so we've taken that into account. We are also taking into account the strong delivery in emerging markets and the likelihood that.
Continuing that type of performance would be great, but obviously, we're trying to be prudent.
And to be cautious based on supply disruptions that we have seen in the first half that could happen again in the second half and as I said before of course, we aim to over deliver we hope to over deliver but we're trying to take a prudent approach given the degree of uncertainty that we still see and the trend in deceleration debt that is in fact real and.
Again, we hope to over deliver but this is what we felt was a pretty transparent and fair bit of guidance.
Okay. Thank you very much.
Operator, I think we have time for 1 more.
Question is from Jason English with Goldman Sachs. Please go ahead.
Okay. Thanks, guys.
I guess I too wanted to come at the implicit.
Growth challenges in the back half, but I think we've beat that horse pretty aggressively.
So let me zoom in a little bit.
In the U S frozen business from North America frozen business, I guess I'm surprised Steve you showed in your prepared remarks, a slide showing that 2 year stack growth our Morningstar farms is slowing.
And this quarter you delivered.
Shipments.
For frozen that are only marginally above where you were and in 2019.
Based on the decline that you posted the organic sales decline this quarter. So it begs the question of what's happening there.
I would've thought that would be a growth engine with accelerating momentum not deceleration is this a sign that maybe incognito in your efforts of Morningstar farms are beginning to fall flat.
No Jason far from it.
Star farms continues to be a very exciting.
Category for Us a very exciting brand for us underlying consumption is strong on a 1 year and 2 year basis in incognito to put it in perspective incognito entered a category.
Refrigerated category, which is very exciting incredibly competitive with lots of entrants coming in and its growing share in distribution as we speak if you look at the last year last 4 week syndicated data it's over it to share right now and so.
Would we like to be even higher than that of course, we would but it's a very competitive category Morningstar farms is the leader in the category and again underlying 2 year stacked consumption is very good.
So we stand by the performance of Morningstar farms, what the team is doing and far from falling flat I think it's doing quite well, it's strong growth beyond burgers, as well and chicken and others.
So is it shipment timing or something else, that's driven such a weak sales quarter.
Yes, I think that shipment timing I mean, the overall consumption remains strong and then I think within the shipment you have got the away from home as well as dynamic playing through so.
But when you kind of look at retail consumption is strong.
Got it cool thanks, a lot guys and congrats on a good quarter I'll pass it on.
Thanks, Jason.
This concludes our question and answer session I would like to turn the conference back over to John Renwick for any closing remarks.
Thanks, everyone for your interest and if you do 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.
David.
Okay.
Yes.
Correct.
Yes.
Part of a complete breakfast.
I wonder.
Come from.
Thank you.
Paul.
Okay.
Yes.
Cost of wings.
Okay.
Okay.
Okay.
Yes.
The loop is always open.
Part of the complete breakfast.
Okay.
Okay.
John.
Good day.
Yeah.
Yes.
Thanks.
Good day.