Kellanova (K) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Kellogg Company's 2021 Annual Shareholders' Meeting. I would now like to turn the call over to CEO and Chairman of the Board, Steve Cahillane. Please go ahead, sir.

Good afternoon. Thank you for joining us today for Kellogg Company's 99th Annual Shareowners' Meeting. Traditionally, our annual Shareowners meeting are held in a public forum in Battle Creek, Michigan. However, to support the health and well-being of our shareowners, employees and all stakeholders as we continue through the global pandemic, we're hosting this year's meeting virtually. Before we continue, it is with sincere gratitude and respect that I say thank you to all of our employees, for their hard work and dedication during such a challenging and turbulent time. Their commitment and dedication has been inspiring, but it has not been surprising. I'd also like to thank our Board of Directors who are joining us virtually today. Now it's my privilege to call to order the 99th Annual Shareowners' Meeting of Kellogg Company. As we begin on Slide 2, I want to take this opportunity to reflect on the year behind us. Clearly, the global COVID-19 pandemic has been heartbreaking, especially as we're surpassing 3 million deaths globally. Our heart goes out to all those that are affected by this crisis. And while the pandemic has been disruptive for all of us, at Kellogg, we are striving not only to make it through this crisis but to emerge from it that much stronger as a company. Certainly, 2020 was an extraordinary year. And I'm incredibly proud of how our organization responded to and executed during a business environment that was anything but business as usual. We remain committed to the top 3 priorities we identified at the beginning of the crisis. Keeping our employees safe remains our top priority and has required investment and changes to the way we work. Supplying the marketplace with food requires agility, contingency planning and creative ways to increase production, not to mention the courage and dedication of our front-line workers. And aiding our communities, a key element of our company's culture and legacy, accelerated during the crisis. And it has been especially heartwarming to see our employees volunteering their time and effort to help our neighbors when they're in need. These have been our priorities during the crisis, and we have been executing well against all of them. We did this effectively, with the special culture of Kellogg truly shining through as employees remained as engaged and industrious as ever, caring for one another and delivering on the responsibilities and objectives in spite of all the distractions. And as you can see on Slide #3, there's one more important group we'd like to acknowledge this afternoon: our veterans. We'd like to pay tribute to these very special members of our Kellogg family: those who are currently serving our country in the military. We thank you for your incredible service and hope for your safe return home soon to your loved ones. Whether you have served in the past or are currently on active duty, your courage and dedication are an inspiration to all of us. So turning to Slide 4. As a reminder, our order of business will follow today's agenda. As usual, we will also have time for questions and answers later in the meeting. On our agenda today, we have the election of 4 directors, approval of an advisory resolution for executive compensation, the ratification of the appointment of the company's independent auditors, the management proposal to reduce supermajority vote requirements and a shareowner proposal. As the company's bylaws provide, I will act as Chairman of this meeting. Also on the call today is Gary Pilnick, our Vice Chairman, who will act as secretary of the meeting. The Board of Directors has appointed a representative of Carl Hagberg & Associates to act as independent judge of elections. The customary oath of office has been taken and signed and will be filed with the records of the meeting. His function is to decide upon the qualifications of voters, accept the votes and tally the ballots cast. Also present virtually today is a representative from PricewaterhouseCoopers, our company's auditors. During 2020, our Board of Directors held 8 meetings. Each of the incumbent directors attended 100% of the total number of Board meetings and Board Committee meetings on which the Director served. Turning to Slide 5. I would like to introduce you to the company's directors and nominees. Nominees standing for reelection are: Carter Cast, Zach Gund, Don Knauss and Mike Schlotman. Directors whose terms do not expire this year and are continuing in office are Rod Gillum, Mary Laschinger, Erica Mann, Carolyn Tastad, Stephanie Burns, Rick Dreiling, La June Montgomery Tabron and me. Turning to Slide 6. We'd like to thank Jim Jenness for his incredible service to the Board. Jim retires from this Board after nearly 21 years of dedicated service to Kellogg Company and our shareholders, including as Chairman and Chief Executive Officer. On the Board of Directors, he served on the Manufacturing Committee, Social Responsibility and Public Policy Committee, Finance Committee, Executive Committee and Consumer Marketing Committee, which he founded and chaired. Jim has displayed exceptional leadership and an unquestionable commitment to our success, serving Kellogg Company in a number of roles during his nearly 50-year association with our company. On behalf of our leadership team, employees, shareowners, customers and consumers all over the world, I'd like us to take a moment to thank him for his years of unwavering dedication and service to Kellogg Company. Thank you ever so much, Jim. We wish you the very best. Turning to Slide 7. I'm excited to share with you that we recently announced the election of Mike Schlotman to our Kellogg Company Board of Directors. Since joining Kroger in 1985, Mike has served in various positions, including most recently as CFO for 19 years. Mike's tremendous financial experience, coupled with his extensive knowledge of the retail customer and food industry, will be of great value to our company. Please join me in welcoming Mike to Kellogg Company's Board of Directors. Turning to Slide 8. In 1906, W.K. Kellogg established the Battle Creek Toasted Corn Flake Company with 44 employees. Today, the Kellogg Company employs tens of thousands of employees around the world and markets more than 1,000 products in 180 countries. At Kellogg, we are proud of our heritage and excited to be celebrating our 115th anniversary in 2021. Our employees are the key ingredient to our long history of success. As we embark on the next 115 years, we'll continue to lead with our purpose to create better days and a place at the table for everyone through our trusted food brands. Turning to Slide 9. Critical to who we are and where we're headed as a company is our vision and purpose. In 2020, we launched our new vision and purpose, one that's more forward-looking and reflects the ambition of our company and the success of our Deploy for Growth strategy. Our vision is a good and just world where people are not just fed but fulfilled. Our purpose is creating better days and a place at the table for everyone through our trusted food brands. Now as we turn to Slide #10, will the secretary please report on the mailing of the annual report, Notice of Meeting and proxy statement and advise whether the necessary quorum to conduct the business of the meeting is present?

Mr. Chairman, beginning on or about March 10, 2021, copies of the annual report on Form 10-K, Notice of the Annual Meeting and proxy statement were distributed to each holder of record of common stock at the close of business on the record date for the meeting, March 2, 2021, which is in accordance with the bylaws of the company. We have received an affidavit attesting to the mailing. A list of shareowners as of the record date has been duly certified by our transfer agent. That list has been available for inspection by the shareowners for the past 10 days and is available on the Shareowners' Annual Meeting webcast during this meeting for examination by any shareowner. In addition, I have been advised by the independent judge of election that there are present, at today's meeting, holders of approximately 301 million shares of common stock, representing approximately 88% of the shares of stock outstanding and entitled to vote. Since the majority of the company's shares are represented here today, a quorum is present. The meeting is duly constituted, and the business of the meeting may proceed.

Thank you, Gary. The report of the secretary on the existence of a quorum is accepted. I direct that the affidavit of mailing is to be made part of the minutes of the meeting. On behalf of the Board of Directors, we would like to express our appreciation to all shareowners who returned their proxies. The first order of business to come before us is the election of directors. The 4 nominees for election to the Board for a 3-year term expiring in the 2024 Annual Meeting are: Carter Cast, Zach Gund, Don Knauss and Mike Schlotman. Information concerning the nominees' experiences and qualifications is in the proxy statement. The company's bylaws require that a shareowner provide advanced notice to the company of a shareowner's intent to nominate persons as directors. No such notice was received. Therefore, I declare the nominations for directors closed. The next order of business is the advisory resolution to approve executive compensation. At this time, I would like to ask Gary to present the proposal.

The Board of Directors has recommended that the shareowners vote for the resolution approving the compensation of our named executive officers as disclosed in the company's proxy statement.

The next order of business is the proposal to ratify the appointment of an independent registered public accounting firm for fiscal year 2021. At this time, I'd like to ask Gary to present the proposal.

The Audit Committee has appointed and the Board of Directors recommends that the shareowners ratify PricewaterhouseCoopers LLP as the company's independent registered public accounting firm for fiscal year 2021.

The next order of business is the management proposal to reduce supermajority vote requirements. At this time, I would like to ask Gary to present this proposal.

The Board of Directors recommends that shareholders approve to reduce supermajority vote requirements.

The next order of business is the shareowner proposal to adopt the shareowner right to call a special meeting. I understand that James McRitchie is on the line to present the proposal. Mr. Ritchie?

Thank you. I think a little background is in order. In 2019, my proposal to declassify the Board won 62% of the vote. In 2020, the Board asked shareholders to approve amendments to accomplish that goal, and we did. My proposal to adopt a simple majority standard won 53% last year. Following that vote, the Board is asking shareholders to approve amendments to accomplish that goal through proposal #4 today. We should all thank the Board for listening to shareholders and improving our corporate governance. This year, I'm requesting that shareholders holding 15% of the company be able to request a special meeting. The Board is not taking a position on the proposal. Currently, 65% of the S&P 500 companies allow shareholders to call a special meeting. Well over half of the S&P 1,500 companies also allow shareholders this right. Large funds, such as Vanguard, TIAA-CREF, BlackRock and others support the right of shareholders to call a special meeting. The beauty of a good governance proposal like this one is that it's highly unlikely to result in more costs or a special meeting. The mere presence of the good governance right empowering shareholders serves as a guardrail that helps ensure the Board nominees are the best directors. They will know that if they don't nominate the best directors, shareholders will have a practical remedy with [ team ]. We urge the Board to join the mainstream of major U.S. companies and establish a right for shareholders owning 15% of our outstanding common stock to call a special meeting. Please vote for proposal #5 and do so immediately before the Board closes the polls. I hope the Board will leave the polls open for a moment or two to allow shareholders to vote for this item, if they have not or if they have voted against and now want to change their vote. All too often, I've witnessed virtual shareholder meetings where voting polls are closed immediately after the final proposal is presented. Closing the poll so rapidly renders presentations meaningless. So I'm stalling a bit here to give you a little time to vote, just in case the Board intends to close the polls immediately after I finish. However, I don't want to be accused of wasting your time or filibustering. So I'll close now by once again asking you to vote for proposal #5, requesting the right of shareholders to hold a special meeting. Thank you for your attention and your consideration.

Thank you, James. The Board's position to this proposal is included in the proxy statement. The Board believes there are a variety of valid perspectives with respect to the right of shareowners to call special meetings. As such, the Board is determined to use this proposal to provide the opportunity for shareowners to express their views on this topic, and the Board will respond accordingly. Because there is no further business scheduled to come before the shareowners, I declare the polls for voting on each matter before this meeting are now open and direct that a vote of the shareowners be taken. Please remember, if you returned your proxy, your vote has already been recorded. The polls for voting on these matters will remain open for 5 minutes and will then be closed. After voting has been completed on all matters on the agenda, votes will be tabulated by the proxy judge. [Voting]

While the votes are counted, I wanted to provide you the following update on our business. Afterwards, you'll have the opportunity to ask questions. Now on Slide 11. Before we begin our business update, I need to remind you that some of the statements today, such as Kellogg Company projections for future performance, are forward-looking. Our actual results could be materially different than the projections. Let's move on to the agenda on Slide 12. Keep in mind that the results we are about to share are from 2020, not our Q1 2021 earnings, which will be reported next week. Even while having to execute against crisis management priorities in 2020, we also over-delivered on our financial commitments and entered 2021 from a position of strength. We are making very real progress on our Deploy for Growth strategy. This afternoon, we're going to take a look at our progress against our strategy and then open the line for questions. As you can see on Slide #13, even while having to execute against crisis management priorities, we also over-delivered on our financial commitments. We did our best to provide guidance during the year despite an uncertain environment. We raised guidance twice during the year, ultimately hitting or exceeding that guidance with our Q4 and full year results, even after absorbing $20 million in onetime costs related to redeeming debt late in the year. This is the kind of dependability we are striving for. We set out to return to balanced financial growth in 2020, meaning balance between top line growth, margin expansion and cash flow conversion. And sure enough, through all the unusual impacts, we did return to balanced financial growth in 2020. We executed very well in the market. The pandemic presented us with a sampling event like none other. And we saw increases in household penetration that outpaced most of our categories, giving us an excellent opportunity to communicate to and retain new and lapsed consumers. And we outgrew most of our categories, holding our gaining share of categories, representing more than 80% of our net sales in those measured markets. Our emerging markets are a key long-term growth driver for us. And they represent over 20% of our net sales. In 2020, they were severely tested by pandemic-related shutdowns, economic slowdowns, even social unrest. And yet they delivered high single-digit organic net sales growth for us in 2020, even accelerating from the prior 2 years' growth rates. In short, the business performed very well in 2020, and we carried that momentum into 2021. As you can see on Slide #14, throughout the crisis, we have been working to ensure that there are lasting impacts from 2020 that should increase confidence in our ability to deliver consistent, dependable balance growth over time. I'll discuss just a few of them here. One is communicating with new and lapsed households. Rather than giving up on advertising and promotions that we couldn't execute in the first half, we shifted that budget and investment to the second half, focusing on advertising to these new and lapsed users. And we've leveraged advanced data and analytics to target those households and occasions. This gives us our best opportunity to retain an expanded consumer base. Online shopping for food experienced a step change in 2020. Our triple-digit growth in e-commerce sales was made possible by the brands in our portfolio and by our recent years' investment in infrastructure and capabilities. This will continue to benefit us. We're investing in our supply chain. This includes sustaining enhanced safety protocols that carry with them higher costs. But the crisis also resulted in us increasing our supply chain's agility and reducing complexity, and it accelerated our expansion of capacity in areas that were already tight before the pandemic hit. This, too, will benefit us in 2021 and beyond. Enhanced financial flexibility is another lasting benefit. Improved cash flow generation and the prioritization of debt reduction resulted in deleveraging our balance sheet faster than we had anticipated. And lastly, we remain solidly on track for consistent balanced growth. Even amidst the crisis, our focus was on what is best for sustainable growth. In addition to sustaining our solid top line growth, we have organizational focus on improving gross profit margin, increasing the return on our brand-building investment and discipline on overhead. There will be noise and uncertainty around the pandemic and its benefits. But in the spirit of transparency, we will continue to provide guidance on our planning stance today. Our guidance for 2021 indicates balanced growth on a 2-year basis, attempting to smooth out 2020's unusual events and to ensure that we remain on our balanced trajectory. Now turning to Slide #15. Let's review our regional business progress, starting with North America. Innovation launches were impeded, but we still launched successes like Jumbo Snax and cereal, expanded into new segments like we did with Incogmeato in meat alternatives and built on the runaway success of Cheez-It Snap'd. Marketing programs had to be postponed early in the year. So we revised our commercial plan. We shifted more of our brand-building into advertising, and we put to work, in the second half, the investment dollars we couldn't execute in the first half. E-commerce growth accelerated throughout the industry in 2020. And our recent years' investments and capability building paid off in the form of triple-digit growth in 2020. The result was more than 3% organic net sales growth for our largest business, snacks, despite a lack of on-the-go occasions to go with notably strong 7% growth in cereal and 8% growth in frozen, all despite declines in away-from-home channels, a proven agility amidst very on certain conditions; and better-than-expected financial performance. From a financial standpoint, the quarter and year featured balanced growth on an organic basis, which excludes the impact of 2019's divestiture but also 2020's 53rd week. Kellogg North America delivered 5% net sales growth in 2020. Meanwhile, we expanded the region's gross profit margin and grew operating profit even while increasing brand building investment to ensure we are retaining new households and adding to our brand's long-term equity. As we look to 2021, we will continue to relieve capacity constraints while continuing to invest in communicating to incremental households and resuming a full flight of innovation. As you can see on Slide 16, Europe entered 2021 with good momentum. Our snacks business is on the upswing, and we have exciting innovation plan for Pringles, including a line of sizzling hot flavors, and our commercial plan includes exciting activation around gaming and the rescheduled Euro Cup soccer tournament. While cereal categories will likely decelerate as COVID passes and mobility increases, we are actively investing to retain new households gained. We have a great commercial plan, including a multi-brand campaign around well-being, the launch of a strawberry Coco Pops and a strong digital activation around key brands like Crunchy Nut, Extra and Tresor, just to name a few. Russia and Central and Eastern Europe remain promising opportunities for expansion even amidst the challenging environment presented by COVID and economic slowdowns. We look to reaccelerate growth in this business in 2021. Turning to Slide 17. You can see that Kellogg Latin America has momentum going into 2021. Snacks growth should be led by continued momentum in Pringles, which is in a good position to build on its expansion in Brazil. And adding to our snacks offering, we've just launched Cheez-It in that market. In cereal, we assume continued deceleration in the pandemic-related consumption growth as we continue to navigate through Mexico's regulatory environment. Nevertheless, we have good plans in place and aim to continue to outpace our categories. Turning to Slide 18. Our Asia Pacific, Middle East and Africa region, or AMEA, finishes what was another impressive year for AMEA, especially given the environment. Like our other regions, AMEA has experienced elevated cereal consumption, giving us the opportunity to retain consumers with the right messaging and innovation while continuing to expand penetration in emerging markets. While other parts of our snacks businesses were interrupted by various COVID impacts, Pringles continues to show good momentum heading into the new year. And we continue to grow our business in Africa and the Middle East, with noodles giving us a third growth engine to go along with cereal and snacks. So turning to Slide 19. We entered 2021 in very solid financial condition. We have growth momentum across our regions as evidenced by consumption and share trends. We did not pull back on brand investment in 2020, so our brands are in good health. We benefited from strengthened capabilities in digital, data and analytics and e-commerce. We've improved our ability to convert income into cash flow, and we deleveraged our balance sheet for increased financial flexibility. The combination of this improved business condition and enhanced financial flexibility enables us resume share repurchases this year after having refrained from them since quarter 1 2019. In addition, we are increasing our quarterly dividend rate starting in quarter 2. This means returning more cash to shareowners, and it reflects our confidence in the business. In summary, in 2020, we returned to balance growth between top line, margins, bottom line and cash flow. We are confident that 2021 will be a continuation of this balanced growth even if 2020's COVID impact creates some noise on a year-on-year basis. As you can see on Slide, Kellogg Company continues to pay a strong dividend to shareowners. This year's June quarterly dividend will be the 386th dividend that Kellogg has paid to owners of common stock since 1925. The annual dividend for fiscal year 2021 will be $2.31, $0.03 higher than fiscal year 2020. Our dividend yield will exceed the peer group average and continues Kellogg's long history of outperformance on this investment metric. As we turn to Slide 21, let's take a look at our Better Days global purpose platform and the progress we're making. Kellogg's heart and soul is more apparent than ever as we work towards -- as we work together across our company to help our food bank partners and neighbors in need during the coronavirus pandemic. To date, Kellogg and its charitable funds have made significant cash and food donations to support global COVID-19 food relief efforts, all aligned with our global Kellogg's Better Days purpose to address food and security, and we continue to evaluate need in all of our communities. Turning to Slide 22. All year long, our heart and soul comes to life through Kellogg's Better Days, which has 4 tenets: nourishing people with our food, feeding people in need, nurturing our planet and living our founder's values. These priorities matter to us today and every day. They also matter to our investors, customers, the people who enjoy our food and others. They especially matter to our employees. That's why Better Days is foundational to our Deploy for Growth business strategy. As a global food company, Kellogg has long been a leader in fighting global hunger through our Better Days purpose platform. Driving growth through purpose, we're addressing food security and creating Better Days for 3 billion people by the end of 2030. We're focused on the interconnected issues of well-being, hunger relief and climate resiliency to drive positive change for people, communities and the planet. Since 2015, Kellogg has created Better Days for nearly 600 million people worldwide. We've done so by donating 2.4 billion servings of food to people facing hunger, reaching 3.2 million children through feeding programs, supporting more than 433,000 farmers with climate-smart agriculture programs that support biodiversity and by reducing greenhouse gas emissions to the equivalent of taking nearly 2.5 billion vehicle miles off the road. As you can see on Slide 23, we're proud to be recognized by numerous reputable organizations. Kellogg is listed on the Dow Jones Sustainability and the FTSE4Good indices. We're also on Barron's list of top 100 most sustainable companies, among Ethisphere's most ethical companies and named a top 50 company for diversity by DiversityInc. As we emerge from this pandemic, we know that being a company with strong purpose and a strong performance is key to balanced growth that will benefit our shareholders, employees, communities and the planet. In summary, on Slide 24, in a year unlike any other, we are proud of the way our organization rallied to execute through unprecedented and challenging conditions. We've managed well through the crisis. We've kept each other safe, supplying the marketplace with food and aiding our communities. The crisis, of course, is not over, and we will continue to focus on these areas. We delivered better-than-expected financial results, accelerating our organic net sales growth even without COVID. And in a nod to balanced delivery, we expanded our gross profit margin in spite of incremental COVID costs and ongoing mix shifts toward emerging markets. We entered 2021 a stronger company. Our outlook keeps us on a 2-year trajectory that is right on our strategic plan. Our goal is sustained balance between top line and cash flow growth. And we are on firmer footing now than ever. And we remain focused on our commitment and legacy to creating Better Days in a good and just world where people are not just fed but fulfilled. We are confident that we will emerge from this crisis an even stronger company. Turning to Slide 25. I now invite you to submit questions through the meeting portal. I am joined by Kris Bahner, Senior Vice President, Global Corporate Affairs, who will read your questions aloud. Kris, will you please read our first question?

Thank you, Steve. The first question is this, would the company consider continuing virtual shareholder meetings after the pandemic for those who can't attend in person?

Yes. Thanks for that question. I think like many things, we all aspire to a world where we're back together face-to-face. We've, of course, learned a lot in this new virtual environment of what can get done. And what I would say is for next year, our intention would be to be back to face-to-face. But as this is always webcast as an event, you're always welcome, in the past as well as in the future, to attend in a virtual manner.

Thank you. The next question, how are you using e-commerce to compete in today's marketplace?