Kellanova (K) Earnings Call Transcript & Summary

Thanks for having us, Andrew, and good afternoon, everyone. Before we start, this slide 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. We thought it might be useful today to step back and assess where we are on our long-term journey of balanced financial delivery. Our strategy, our capabilities and our portfolio are putting us on this journey. We're going to look out further into the future today rather than discussing near-term results or outlook today, which we just did a few weeks ago during our second quarter earnings release. The simple message is that we are right on schedule for this long-term journey. If anything, in the past 12 months since we last presented at this conference, we have gained even more confidence in our company's ability to deliver this balanced financial delivery over time. First, there is no doubt in our minds that deploy for balanced growth is as appropriate and effective as ever. It had us on the right path pre-COVID, it allowed us to flex with the changing business environment during COVID, and it has us in a position to sustain balanced financial delivery after COVID finally passes. Second, we are realizing the benefits of investing in key capabilities in recent years. This slide lists just a few of the capabilities we've discussed in detail with you over the past year, and they have proved to be, especially, effective during current pandemic and challenging business environment. We couldn't have targeted specific consumer cohorts and eating occasions the way we have during the pandemic without that investment in data and analytics. We couldn't have doubled our e-commerce sales last year without the work we did previously to build up our capabilities in this area. We have dramatically upgraded our revenue growth management capabilities from the data and analytics we use to our approach and processes for each of the pillars of RGM. This has obviously become much more important in today's high-cost inflation environment. We've even built up on our capabilities and activities in the areas of environmental, social and governance, a long-standing strength of Kellogg's and one that has become more in-focus in the past year. Simply put, our capabilities have been enhanced, and that is paying off for us. And third, our results have indicated our return to balanced financial delivery. We said we would be back on a sustainable path of balanced financial delivery once we got past our cost reduction and revenue rejuvenation periods. We did just that in 2020, and we have sustained it in the first half of 2021. Today, we're going to focus our presentation on our reshaped portfolio, a key reason for our confidence in our ability to sustain this balanced financial delivery. This slide shows a portfolio analysis that we've shared many times. It has been clearly reshaped in recent years. Emerging Markets now account for more than 20% of our net sales, which is more than double its percentage running through our P&L in 2015. Developed Markets Snacks remains our largest portfolio segment, coming down as a percentage of sales only because of a major divestiture that actually improved our growth profile. And Developed Markets Cereal, which many perceive as being the bulk of our business, is in reality less than 1/3 of our portfolio with the U.S. less than 1/5 of our overall portfolio. The long-term growth rates assigned to each portfolio segment are the same rates we've shared with you previously that add up to low single-digit net sales growth over time. We're more confident than ever that this portfolio can deliver that growth. And today, we've asked a few of our business leaders to highlight some important reasons why. We'll start with Developed Market Snacks and introduce Chris Hood, our President of Kellogg North America. Chris, over to you.

Thanks, Steve. Developed Markets Snacks is the single largest segment of our portfolio. This is important as snacking categories continue to grow amidst a global trend towards snacking. We're in attractive snacking categories, salty snacks, crackers and portable wholesome snacks. These are big growing categories around the world, and they respond very well to brand building and innovation. Our portfolio features differentiated brands that can play in indulgence and wellness in at-home occasions and on-the-go occasions. We saw this vividly during the pandemic when we were able to shift our mix and marketing focus away from on-the-go foods and pack formats and toward foods and pack formats that are more conducive to at-home snacking. Importantly, we compete well in these categories with big differentiated brands. There's quite simply nothing in the marketplace like Pringles, Cheez-Its, Pop-Tarts and Rice Krispies Treats in their respective categories. And these are huge global brands. Pringles is more than $2 billion in global retail sales, Cheez-It is over $1 billion, and Pop-Tarts and Rice Krispies Treats are together north of $1 billion. In addition, our portfolio offers smaller, yet uniquely positioned brands. Think RXBAR, Nutri-Grain, Special K, Club and Town House, which are collectively close to $1 billion. Our big snack brands have shown exceptional momentum in recent years, particularly after we exited from DSD in the U.S. using the overhead savings to invest behind the brands. And this momentum has continued during the pandemic. Pringles, Cheez-It, Pop-Tarts and Rice Krispies Treats have each continued to outpace their categories on a 2-year CAGR basis in the U.S. this year, even despite diminished on-the-go consumer occasions. The story is the same outside the U.S. And around the world, we're seeing similar outperformance by Pringles. Take a look at the growth rates on the slide, which shows our large markets in each region. Pringles is truly a global brand for which ideas can be shared across markets. For instance, look at how we continue to launch innovation that is incremental to the core line, bringing new flavors and ingredients. A great example is the launch of Scorchin in the U.S. and Sizzl'n in Europe, featuring bold flavors. We can also adapt the brand to local tastes, including some of the flavors shown on the slide. Importantly, these brands have plenty of room to grow. Take Pringles, for example. Pringles has less than a 4% share in the U.S. and Canada, less than a 10% share in Australia, and roughly, 10% share in the U.K. and Continental Europe. And outside the U.S., our shares for brands like Pop-Tarts and Rice Krispies Treats have plenty of upside, too. Cheez-It has only just expanded outside the U.S. with last year's successful launch in Canada. We continue to have opportunity to expand household penetration which, for Pringles, is still less than half the overall category in the U.S., and also increasing its buy rates via further commercial activation. Innovation works well on these brands. Pringles Scorchin, Cheez-It Snap'd, Pop-Tarts Bites are all new platforms and have been incremental to their respective brand franchises. Pack formats continue to be a growth opportunity. Single-serve, multi-packs, variety packs and sustainable packaging are all areas of potential expansion to reach new occasion. And brand building definitely works. Pringles Super Bowl and the Euros campaigns and the Cheez-It sports sponsorships are just a few examples. So you can see why we're confident that our Developed Markets Snacks can grow at a low single-digit rate over time. In fact, we've done this in the past couple of years post the DSD exit. And we've done better than that, more like mid-single digits over the past 2 to 3 years. Now let me turn it over to Dave Lawlor, our President of Kellogg Europe, who'll discuss Developed Markets Cereal from his office in Dublin.

Thank you, Chris, and hello, everyone. Developed Markets Cereal is less than 1/3 of our total company portfolio with a considerable portion of it outside of the U.S. Now despite it being a century old category, cereal has some of the highest penetrations of any packaged foods business. It's over 95% penetrated in the U.K. and Ireland and around 90% in the U.S. In developed markets, cereal is one of the top 3 foods even at breakfast and the top packaged food. And while categories can run through cycles, it tends to be remarkably stable and salient through time because its attributes are so compelling: convenience, nutrition, deliciousness, affordability. Kellogg has leading market positions in most developed markets and our brand portfolio that offers unrivaled choice for consumers ranging from taste all the way through to wellness. And we also have brands that can take advantage of expanding consumption outside of the breakfast occasion and into other categories and dayparts. So here, we see just a sample of these enduring and powerful brands. And one of the themes, I think, to help navigate around this portfolio, I would say, breadth, scale and expandability. So let's take breadth. Our heritage is wellness-oriented brands. And we tend to over-index in this segment. But we also have a stable of beloved brands in the all-family segment, right, and a strong lineup of brands in the taste segment, critically, also. Now as for scale, whilst some of these brands are local favorites, most of these are global equities with consistent resonance regardless of where you're going to encounter them around the world. And in many instances, as mentioned, their equities and positionings lend themselves well to extending beyond the breakfast occasion and even beyond cereal per se. So let's take a closer look at Europe, and especially, into the U.K. just to show you how we are bringing cereal back to growth. Now we have leading share positions across key markets in Europe, as you can see. But with that hard-earned position and privilege comes the expectation of category leadership. Our approach is rooted in playing to our strengths, which is our asset base and connecting them to our customers' needs and plans and consumers' evolving expectations. In recent years, we've embarked on several initiatives to restore growth to the category. Initiatives that bolster our well-being credentials, examples being our core brand renovation, new brand innovation launches and consistent visual identity work on our packaging and refreshed intentionality around our investment. Examples being contemporized media and consumer modeling and master brand communications, just to name a few. The pandemic has also brought elevated consumption to the category, not always as much as meal preparation categories but we have witnessed higher penetration and frequency rates, suggesting to us new and returning users. That's a great opportunity. As a result, categories around developed markets in Europe are seeing 2-year CAGRs, compound annual growth rates, remain above the pre-pandemic growth rates. So let's turn to the U.K. It's our biggest European market, and it's one which we have initially stabilized ahead of returning it to growth in recent years. And for us, that began with an agenda centered around category leadership and leveraging those strengths as we ran an evolved playbook. Specifically, we framed our strategy around that portfolio breadth, I mentioned. It meant focusing and innovating around those core brands and being more ambitious in how we pursue well-being as an engagement and growth enabler. Now this included successful reformulations. Examples would be the reduced sugar in Coco Pops and clear on-pack messaging. It incorporated a contemporization, if you will, of our consumer messaging and media choices. And it's also included sustainability initiatives, particularly in our packaging with some exciting trials and test and learns live in the marketplace as we speak. All of this was activated with smart RGM plans that add value to the category in a manner consistent and bespoke to our customers' distinct strategies and expectations. These efforts have helped lift the entire category starting in 2019, and we have consistently outpaced the category and gained share ever since. Indeed, we have returned our U.K. business to low single-digit growth pre-pandemic. That's an enviable starting point ahead of the initial consumption surge that I know -- you know we experienced in the early days of COVID. Now this year, our momentum has continued. And as you can see on the slide, our 2-year CAGRs have been impressive and broad-based. Brands like Crunchy Nut; Kellogg's Fruit 'n Fibre; All-Bran, bran flakes are all up double digit; and Frosties isn't far behind. Similar actions and results are being seen elsewhere. They're being seen in Continental Europe, in Australia. And prior to bumping into some capacity constraints, North America was also seeing improved performance, employing a very similar playbook. As you see on the next slide, the best news is that there is plenty of opportunity for additional growth. Today, purpose matters. And our company and brands are as ambitious as ever to deliver on our unique stated purpose, which is setting a seat at the table for everyone. We're finding new ways to lead in packaging innovation. For example, for partially sided shoppers, something which, by the way, we are sharing beyond the category; or bringing our compelling well-being stories to life in the market. Notable examples being the Coco Pops, the story I just mentioned; the Fiber-Fit campaign in Australia; and recent momentum of natural and organic brands like Kashi and Bear Naked in the U.S. We're exploring sustainability as an area of opportunity, be more focused, faster, and therefore, potentially bigger when partnered with customers and doing so around things like sourcing, packaging, et cetera. We're addressing even occasions, notably snacking. You've seen the success of jumbo snacks in the U.S. We've extended Krave Tresor here in Europe into a snacking format, expanding the brand's occasion and channel opportunities here in the region. And we're boosting media sufficiency and return on investment, including applying the learnings from our snacks media activations back into our cereal business. All of these have been activated through a mindset of true end-to-end customer engagement, earning that right through our execution capability and beyond transactional focus, thought leadership to unlock mutually accretive plans and performance, including evolving omni-channel opportunities together. It's an exciting and substantive list. So in summary on the last slide, we continue to prove in our key developed markets, our ability to stabilize and grow this category. And despite this fluid cycle, which we are now trading into, we are as confident as ever in our ability to lead and continue to grow a category that we believe has so much untapped and residual potential. Now I'll invite Sara Young, our General Manager of plant-based proteins, to talk to you about Developed Markets Frozen segment. Sara?

Thanks, Dave. Our Developed Markets Frozen business probably doesn't get as much attention as it should. It's got a track record of steady growth, propelled by 2 big profitable and growing brands: Eggo, the leader in the from the griddle category; and MorningStar Farms, a leader in the vegetarian and vegan category. These brands allow us to address multiple occasions. And with the recent explosion of awareness and adoption of plant-based foods, we've even seen an acceleration of growth in frozen led by MorningStar Farms. But let me briefly give a quick nod to the Eggo business. This is clearly a power brand, one that has turned in consistent growth over the years, propelled by effective brand building and exciting innovation in a category that responds well to both. As you can see, its growth accelerated amidst the pandemic in 2020, and it has sustained strong growth on a 2-year CAGR basis, even as it runs up against capacity limits. But today, I want to focus on the brand that I lead, MorningStar Farms. This brand is a pioneer of the vegetarian and vegan category and has only focused on the component side of the category. As you can see on the chart, components are about $1.3 billion in measured channel retail sales, making up more than half of the overall vegetarian and vegan category. And MorningStar Farms accounts for nearly 1/3 of the components business, even despite a host of new entrants over the past couple of years. MorningStar Farms has enjoyed decades of growth. In the past couple of years, its growth has accelerated as overall demand for plant-based foods has increased, driven by the flexitarian consumers wanting to reduce their meat consumption for both health and environmental reasons. This is an attractive category. It responds very well to brand building and innovation, and there is considerable opportunity to grow in food formats, pack formats and distribution expansion. It's also important to note how broad the MorningStar Farms portfolio is. It's easy these days to get the impression that the category is simply burgers, a segment that has surged in recent years with new entrants, but is now lapping that surge. But the category also encompasses other food forms, like poultry, meal starters, breakfast meat and dinner sausages. These non-burger segments are large and growing. And MorningStar Farms is a leader in nearly all of them. This is a true point of differentiation, enabling us to target a much broader set of occasions. And MorningStar Farms has continued to grow. You can see how it has grown rapidly over the past 18 months, aided by general rise in demand, but also by innovations such as our vegetizers, which allowed us to reach another snacking occasion, and Incogmeato, which enables us to reach an incremental consumer, the flexitarian. The brand has outpaced the category for years only trailing recently as the category has added new entrants and because demand has run up against our capacity limitations. These new entrants are helping to create awareness and penetration, and we believe this can further fuel growth for the category and for MorningStar Farms. Clearly, MorningStar Farms is another power brand in our portfolio that is performing very well. Obviously, we like the sustained growth and potential for this brand. In many ways, plant-based protein represents an emerging market right here in North America. Consumer awareness and household penetration for this category remain relatively low, even though they've been on a clear upswing in the past couple of years. Imagine what growth could be for this $400 million retail sales brand by expanding awareness and penetration. Just one incremental point of penetration equates to nearly $50 million. And we're not sitting still. We're investing in brand building to drive awareness and trial. We continue to innovate across segments and occasions, and we continue to add new accounts in our away-from-home channels, particularly in the areas of college and universities, health care and restaurants. So let's step back and look at the overall Developed Markets Frozen segment. As you can see, this segment has been delivering on its long-term growth target or better in recent years. Over time, Eggo should sustain its steady growth, likely in the low single digits. If this is accompanied by MorningStar Farms' sustaining growth in the mid-single digits or better, you can see why this portfolio segment has the potential to exceed its long-term targets of low single digits. Now let me turn it over to Shumit Kapoor, our President of Kellogg AMEA, who will talk from Singapore about another important growth driver, Emerging Markets.

Thanks, Sara. Emerging Markets have been a strategic focus for the company for several years. Kellogg entered these markets decades ago with cereal. Through internal growth and acquisitions, we have diversified our portfolio, build scale in key markets and filled in geographic gaps. Today, our geographic footprint extends across Africa, the Middle East, Asia, Russia and Latin America, bringing us reach to millions of consumers and diversifying the volatility that can occasionally arise in individual markets. Our diversified portfolio is another source of strength. Cereal was our original category in the Emerging Markets, and it continues to grow steadily on year-after-year. But a game changer for us was our diversification into snacks, accelerating in a big way with the acquisition of Pringles in 2012 and continuing through acquisitions and internal expansion thereafter. Snacks gives us a strong offering to the mom-and-pop channels that predominate in Emerging Markets and take advantage of trends towards snacking. And then there's noodles. We entered noodles with our partnership with Tolaram in West Africa in 2015 and have since then expanded into other parts of Africa, including launching a Kellogg's branded product. Just like that, we've created another growth leg in our portfolio. We've also worked hard to expand our product offerings down to price pyramid. This enables us to reach a broader consumer base and to better penetrate the mom-and-pop outlets that predominate in many emerging markets. The result is a portfolio that's broader, more affordable and more targeted for the Emerging Markets. Allow me to discuss Africa in a little more detail. This is a continent featuring a large and growing population. And as its economy continues to expand, more and more of this population can afford Western-style packaged foods. And in this most emerging of Emerging Markets, we have an exceptionally high-quality business. Firstly, we have geographic reach and diversification. Kellogg started in Africa many decades ago with a strong foothold in South Africa. Since that time, the combination of expansion and acquisitions have filled in Northern Africa, and a major partnership with Tolaram gave us access to West Africa, where we find the largest population and economy in the continent. Next, we have strong leading brands in attractive categories. We have major Kellogg's brands and cereals. We have Pringles and snacks and we have noodles, both under the market-leading Indomie brand in West Africa and the Kellogg's brand elsewhere in Africa. We have strong route-to-market capabilities in these markets, direct in some place through distribution partners and others, and with an ownership stake in Nigeria's leading consumables distributor, as we'll talk about in a moment, we have a great position. Finally, we've invested in local production, another long-term competitive edge for us. I'd like to drill down a little further, giving you some color on our business in West Africa, and then on our recently launched noodles business. In West Africa, we have a partnership with Tolaram, an experienced investor and operator in this region. Essentially, 3 entities: the Kellogg-Tolaram joint ventures, Dufil and Multipro. Many of you have wondered why would we have a low-margin distributor running through our P&L. It's because Multipro is a competitive advantage, a distribution and marketing powerhouse that drives incremental profit growth. As you can see on the slide, Multipro has generated strong growth year after year. The growth has been notably impressive lately amidst COVID and recent price increases to cover higher input costs and a devalued currency. Our experience with our partners in West Africa has led to the development of another leg of growth for us, noodles. Through our joint ventures, we've launched Kellogg's branded noodles in South Africa and Northern Africa. It marries our strength in grain-based foods and breakfast occasions expertise with a food form that helps us offer consumers something lower on the price pyramid. And its growth has been spectacular, already reaching about $40 million of net sales just 2 years after launch. So you can understand why we are so confident in our ability to grow our Emerging Markets business at a mid-single-digit rate over time. In fact, we've done this and better in recent years, and we've continued to strengthen our presence and portfolio. I will now turn it over to Amit, who will provide you some financial implications of our reshaped portfolio.

Thanks, Shumit, and hello, everyone. With these portfolio segment growth rates, you can see why we are confident we can grow net sales at a low single-digit rate even without M&A. It's important to remember that we are off to a balanced financial delivery. Hence, each of these portfolio segments is expected to increase its operating profit and cash flow at a rate that is faster than net sales. This requires margin expansion and the sources of margin expansion for each segment are shown on this slide. All of our portfolio segments offer high returns on invested capital. All of the growing segments will generate operating leverage; and the Emerging Markets, in particular, will benefit meaningfully from increasing scale. Meantime, we will continue to implement productivity and revenue growth management initiatives in all 4 segments. This is, particularly, critical during high-cost inflationary periods. In recent years, we have honed these capabilities in productivity and price realization. The slide shows some examples of initiatives and areas of focus within each. We have a strong track record on delivering productivity and savings each year. You can see that there are various elements of our productivity ranging from how we procure materials to how we design and reformulate our products to how we operate for optimal efficiency and minimal waste. We invest in sustainability, and we invest in the modernization and productivity of our facilities. And we are always looking at ways to optimize our overall supply chain network. We've also become a lot more sophisticated and effective in the area of revenue growth management. In recent years, we brought in external talent and upgraded processes, training and analytics. This has led to significantly improved execution of all 4 pillars: list prices, trade optimization, price pack architecture and mix management. This capability has clearly been on display over the past few quarters when we've had to augment productivity with price realization in order to cover a surge in input and freight costs. With dependable top line and gradual expansion of profit margins, we should be able to deliver operating profit growth that is modestly faster than net sales growth over time. After a few years of heavy cash outlays for restructuring and elevated capital expenditure, we are back on a path of solid cash flow conversion, and we expect steady improvement over time. We're pleased with the progress we made in strengthening our balance sheet. We spent the past couple of years reducing debt, both with the divestiture proceeds and with improving cash flow. Today, we have strong financial flexibility. From a capital allocation standpoint, this allows us to continue to grow our dividend, repurchase shares to return even more cash to share owners and remain on the lookout for share owner, value-enhancing acquisitions. This is what we mean by balanced financial delivery. And our entire organization is focused on this balance, even measuring ourselves with metrics that underpin our 2 growth gears. These gears ensure a virtuous financial cycle that produces consistent balanced financial delivery. I'll now turn it back to Steve for some final remarks.

I'm certain you can sense our increased confidence in our long-term prospects even since last year's Barclays' conference. Our strategy is working, focusing us on the right choices, capabilities and actions. Our reshaped portfolio is working with each segment of portfolio delivering on its role, and roughly, 70% of this portfolio is in segments that deliver steady, reliable growth. The capabilities we have honed in recent years are paying off, and we've been delivering balanced financial growth, which we expect to sustain for a long time. Thanks for your interest and your time today.