Kellanova

Hello everyone and welcome to the Kellogg Company's fourth quarter 2021 earnings call. My name is Daisy and I'll be the operator for today's call. Please note all lines have been placed on mute ahead of the call to avoid any background noise. At this time I will turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellogg Company. Mr Renwick, you may now begin your conference call.

Thank you. Good morning, and thank you for joining us today for a review of our fourth quarter and full year 2021 results, as well as comments regarding our outlook for 2022. I'm joined this morning by Steve K. Helene, our Chairman and CEO, and Amit Banati, our Chief Financial Officer. Slide number three shows our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for Kellogg Company's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation, as well as to our public SEC filings. This is a particular note during the current COVID-19 pandemic and supply and labor disruptions, when the length and severity of these issues and resultant economic and business impacts are so difficult to predict. A recording of today's webcast and supporting documents will be archived for at least 90 days on the investor page of KelloggCompany.com. As always, when referring to our results in Outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. And now I'll turn it over to Steve.

Thanks, John, and good morning, everyone. I think we can all agree that 2021 was yet another unprecedented year. In addition to lapping an unusually strong 2020, we managed through an operating environment that was more challenging than any other that we can remember. The pandemic persisted, requiring a sustained focus on employee safety, giving back to our communities, and working differently. Bottlenecks and shortages on everything from labor to materials to freight impeded supply across the global economy and created incremental costs and inefficiencies that were difficult to plan for. Finally, there was one more extreme challenge in 2021, the acceleration of cost inflation to levels the industry hadn't seen in a decade. Our particular situation was complicated further by a fire in one of our U.S. cereal plants, followed by a labor strike across all four U.S. cereal plants. The fire further strained our network and our ability to build inventory, which served to worsen the situation when we experienced the labor strike. We are pleased to have our team back to work. Strikes are painful for everyone, and not only did this strike affect our employees' lives, it also had a near-term financial impact on the company. It negatively impacted sales and profit in the fourth quarter of 2021, and it will have carryover cost impacts in quarter one 2022. It will also have sales impacts through the second quarter as we continue to rebuild inventories. In the end, though, we did what we believe was right for the business over the long term. Working through these challenges required extraordinary efforts by our employees, who clearly rose to the occasion. From safety precautions and volunteerism to incredible agility and creativity by our supply chain to the actions we took to help mitigate the profit impact of high costs, including productivity initiatives and revenue growth management actions, we executed well. The result was delivery of the 2021 guidance we had been raising or reaffirming since early in the year. even despite the labor strike extending well beyond what we had incorporated into our latest guidance. So we're in good condition as we head into 2022. Our international regions continue to demonstrate very strong momentum, each growing ahead of their long-term targets and featuring strong in-market performance and responsible price realization. In North America, our snacks and frozen businesses are showing momentum. with two-year compound annual growth and consumption led by leading world-class brands. The capabilities we enhanced in recent years are paying off. Our data and analytics capabilities are making our marketing dollars go further. Our e-commerce capabilities are sustaining momentum in that emerging channel. Our innovation pipeline is as strong as ever, and you can see how our capabilities around revenue growth management have improved just by looking at the strength of our price mix performance. Our cash flow remains strong. benefiting from discipline on restructuring outlays, prioritization of capital investment, and strong management of core working capital. Along with AD leverage balance sheet, this gives us financial flexibility, enabling us to increase the cash we return to share owners and keep our powder dry for potential M&A opportunities. We have some work to do. Economy-wide bottlenecks and shortages persist, and after our supply was further disrupted by the fire and strike, We are in the process of recovering production, inventory, and service levels, as well as commercial programs in that business. And as you'll hear in a moment, we are guiding toward another year of balanced growth, even as we take a prudent planning stance toward the current operating environment. Importantly, we remain on our strategy, Deploy for Balanced Growth, which is depicted on slide number seven. This strategy continues to keep us on our path for steady, balanced financial delivery. It is designed to accommodate evolving industry conditions, and it is working. And equally importantly, we remain committed to our values as a company. We don't merely strive to grow. We strive to grow the right way. Accordingly, we continue to make progress on better days, our ESG-oriented program. Just a few better days highlights from quarter four are shared on slide number eight. As you can see, we remain active in this area, both behind the scenes with donations and sustainability work, but also leveraging some of this good work in our commercial activation. Let me now turn it over to Amit so he can take you through our financial results and outlook in more detail.

Thanks, Steve, and good morning, everyone. Slide number 10 summarizes our full year results for 2021. As you can see, we met or exceeded our full year guidance on all four key metrics. Organic net sales growth came in at 3.5% ahead of our guidance range and equating to a two-year CAGR of nearly 5%. Clearly, this is strong growth, and it reflects good momentum in the vast majority of our business. Currency-neutral adjusted basis operating profit declined by less than 2% within the guidance range we had last quarter. Importantly, we achieved this in spite of the labor strike that began in the fourth quarter extending much longer than we had assumed. On a two-year CAGR basis, excluding from 2019 the since-devastated businesses, this equates to nearly 4% growth, a very strong performance amidst the significant headwinds that Steve mentioned. Currency-neutral adjusted basis earnings per share increased by more than 1%, in line with the guidance we gave last quarter. And cash flow came in at $1.15 billion in line with our guidance for $1.1 to $1.2 billion. And outside of the pandemic lifted 2020, our highest level since 2014, despite having divested major businesses back in 2019. Slide number 11 offers a similar summary for the fourth quarter. As expected, Q4 was the quarter most affected by supply disruptions. Industry-wide bottlenecks and shortages were equally or more prevalent than they were in quarter three. And we also endured the labor strike, which ended up lasting almost the entire fourth quarter. These factors, along with lapping the year-ago quarter's extra week, produced year-on-year declines in currency-neutral adjusted basis operating profit and earnings per share. Meanwhile, the organic basis net sales growth remained very strong, led by sustained momentum in key businesses and brands, along with strong price realization around the world. So aside from transitory supply-related factors, the business remained in good shape through quarter four. Now let's examine these results in a little more detail. We'll start with net sales on slide number 12. As you can see, our organic net sales growth was more than 5% in the quarter and 3.5% for the full year. translating into two-year CAGRs of 4% and 5%, respectively. Volume for the year, of course, lapped last year's strong pandemic-driven gains, particularly in the first half. In quarter four, it was also affected by supply disruptions, particularly in North America, where we also endured the labor strike in our cereal business. Price mix growth for the year was more than 5%. This reflects the revenue growth management actions we took all year, as we endeavor to cover rising cost inflation. This price mix growth accelerated to nearly 9% in quarter four, giving you an idea of just how much our cost inflation has accelerated and just how well we are executing revenue growth management. Also contributing to it is a relative lack of merchandising activity amidst supply disruptions. Outside of organic growth, we lapped 2020s once every six years, 53rd week in quarter four. and foreign currency translation, which had been a tailwind in the first half, turned into a modest headwind in quarter four. Moving down the income statement, slide number 13 shows our gross profit performance. As we had anticipated, our gross profit declined year on year in quarter four. Our productivity and revenue growth management actions continued to substantially cover market-driven cost inflation, even as the latter continued to accelerate. However, there was significant incremental costs and disruption stemming from the current operating environment. And then on top of that came the supply disruptions and costs related to the strike in our U.S. cereal business. These could not be covered with productivity and pricing. For the full year, we delivered gross profit that was below 2020's unusually high level, but still higher than the pre-pandemic 2019. This is a good performance given the decades-high commodity and trade costs, the economy-wide bottlenecks and shortages, and then the fire and strike. As we have said, in this high-cost environment, we have to focus on both margins and dollar growth. On slide number 14, we see SG&A expense, which is comprised of advertising and promotion, R&D, and overhead. Last year's quarter three and quarter four were unusual, in that they included incremental A&P investment delayed from the first half because of the pandemic. They also included a sizable increase in incentive compensation accruals. But comparing this year's SG&A expense to 2019, both for fourth quarter and full year, we see it was lower. A&P in 2021 was down modestly versus 2020, owing to lapping of 53rd week and to restraining investment behind supply-constrained brands, but it remained higher than 2019, reflecting good sustained support. overhead, meanwhile, was lower in 2021 than 2020, principally because of lapping high-incentive compensation, but it was also lower than 2019. This two-year decrease is related to reduced travel and meetings during the pandemic, as well as some benefits not likely to recur. but it also reflects the work we did to remove stranded costs after our divestiture. If you look at operating profit on slide number 15, you can see that our fourth quarter came in below that of 2019 as we saw no moderation of the economy-wide bottlenecks and shortages, and we experienced incremental disruption and costs related to the labor strike. However, for the full year, our operating profit in 2021 finished above that of 2019, even though that year included seven months of profit from since-devastated businesses. So notwithstanding the severe transitory disruptions we experienced in quarter four and the lapping of an exceptional pandemic-driven 2020, there is no question that our operating profit remains on an upward path. Slide number 16 shows the operating profit of each of our regions. As you can see, the international regions had another strong year, posting growth on top of growth. The only region whose operating profit is below 2020 and 2019 is North America, where the bottlenecks and shortages were most acute and where we experienced the fire and strike. Moving down the P&L, let's turn to slide number 17 and the items below operating profit. Interest expense decreased this year on lower debt and the lapping of last year's debt redemption costs in the fourth quarter. Other income decreased because of lower pension income. Effective tax rates came in at 22% rate we had guided to. JV earnings and minority interest were collectively less negative than last year owing to this year's consolidation of our Africa joint ventures. Average shares outstanding were lower year on year due to buybacks we executed early in the year. Let's now discuss our cash flow and balance sheet shown on slide number 18. cash flow finished in line with our guidance. As expected, we finished 2021 with a cash flow that was below last year's unusually high level, but well ahead of pre-pandemic years, which are the more relevant comparisons. Versus 2018 and 2019, this improvement in cash flow generation was driven by higher operating profit, reduced restructuring-related cash outlays, continued effective management of co-working capital, and a moderation in our capital expenditure as a percentage of net sales. Meanwhile, our balance sheet remains solid. We continue to reduce net debt, even despite this year's increase in cash return to shareholders in the form of resumed share buybacks and increased dividend. So our financial condition remains quite strong. Let's now turn to our guidance for 2022, starting with some key planning assumptions shown on slide number 19. We approach our 2022 plans with a prudent planning stance, given the current operating environment, including several assumptions that many of you likely have already considered in your models. Already high cost inflation accelerates in 2022 to a double digit rate, with first half inflation higher than the second half inflation. Continued productivity and revenue growth management actions continue, which have been successful so far in largely covering market-driven cost inflation. The current environment of bottlenecks and shortages persist, at least through the first half, before moderating across the second half. The U.S. cereal, fire, and labor strike has a carryover impact through the first half, as we'll discuss further in a moment. At-home demand growth continues to gradually decelerate, in part reflected by price elasticity gradually returning over the course of the year. In addition, reinvestment is restored behind capabilities and in a gradual progression on commercial activity behind supply-constrained brands. Aside from the wrap-around strike impact, none of this should be news. But in the first half, they do serve to offset what is good underlying momentum in our business, which will then be plainer to see in the second half. With that as background, let's now discuss items for 2022 as shown on slide number 20. Organic basis net sales growth should be about 3%, driven by continued strong price mix around the world. Our international regions have strong momentum, but lack strong two-year volume growth, while North America faces the aforementioned supply constraints, which may impede shipments early in the year. Adjusted basis operating profit growth should be in the 1% to 2% range, excluding currency. As mentioned, we are planning around the assumption of an environment of high-cost inflation and economy-wide bottlenecks and shortages, particularly in the first half, where we are also experiencing carryover impact from last year's strike and fire. In addition, we plan to gradually restore investment in ANP and overhead. Adjusted basis earnings per share growth should also be in the 1% to 2% range before currency. We expect other income to decline because of lower expected pension income, and our effective tax rate is projected to move higher to about 22.5%. These should be partially offset by about a 1% decrease in average shares outstanding as we increase our repurchase activity this year. Not included in these forecasts is any attempt to guide for foreign currency translation, which is unpredictable. But if rates today were to prevail, they would represent a headwind of somewhere between 2 and 3 percent. Cash flow is expected to grow in line with reported basis operating profit and EPS growth, depending on where currency turns out to be, putting us in the 1.1 to 1.2 billion range. and featuring continued discipline on restructuring outlays, co-working capital, and capital expenditure. Our plan is to continue to drive balanced financial delivery, balance between pipeline growth, profit growth, and cash flow growth, even amidst what is clearly a challenging business environment right now. There are some quarterly phasing peculiarities shown on slide number 21 that you should keep in mind as you model 2022. Specifically, we should see an uneven first half versus second half. To begin with, profit comparisons are the toughest in the first half. Then on top of that, this year's first half has added pressures around higher input costs, inflation, persisting bottlenecks and shortages, and the strike and fire impacts that we discussed earlier. These begin to clear up or moderate in the second half, when you should see profit growth not only resume, but get an additional year on your lift in quarter four from lapping the impact of the fire and the strike. And with that, let me turn it back to Steve for a review of our major businesses.

Thanks, Ahmed. I'll start with slide number 23, which shows the two-year compound annual growth rates in net sales across our four regions. Because of the outside impact of COVID in 2020, this is really the best way to evaluate 2021's performance. And what you see is consistently good two-year growth across all regions in all quarters and the full year. There was notable strength in our three international regions, driven by cereal, by snacks, and by noodles and other. And North America fared reasonably well in the context of what were by far the most severe supply disruptions. Let's review each of our regions in turn, starting with North America on slide number 24. North America's 2021 performance has to be viewed in the context of its year-ago comparisons and unusually severe supply constraints. First, remember what we were lapping, a pandemic-related surge in demand, particularly for our most at-home-oriented categories, which are cereal, frozen from the griddle, and veggie foods. This not only led to exceptionally strong organic net sales growth in 2020, but it also triggered exceptional plant utilization and operating leverage, driving up profit that year. We also were lapping a once every six years extra week in our fiscal fourth quarter in 2020. Excluding that 53rd week and any impacts from divestitures or currency translation, North America's operating profit in 2020 grew nearly double digits. Then let's remember the unusual supply constraints we faced in 2021. We entered the year at full capacity utilization in cereal and key elements of our frozen from the griddle categories, with the pandemic delaying our ability to expand capacity as previously planned. We then experienced what all companies experienced, an unprecedented disruption in global supply chains, which not only impeded shipments and slowed production, but also contributed to unexpected costs. And to make matters worse, we suffered the misfortune of a major fire at one of our cereal plants, followed by a labor strike at all four of our U.S. cereal plants. So to finish 2021 with a 2% two-year CAGR in organic nest sales growth and roughly 1% two-year CAGR on operating profit, excluding since divested businesses, is a good achievement. This reflects momentum sustained in key brands outside of cereal. It also reflects productivity and revenue growth management to offset the market-driven inflation in input costs. And it reflects remarkable execution amid unprecedented business conditions. Let's dig into each of the three major category groups within North America, starting with the largest, snacks, on slide number 25. Our North America snacks business finished 2021 with organic net sales growth of 7% year-on-year and 5% on a two-year CAGR basis. This represents a continuation of multi-year momentum for this business and reflects the strength of our brands. Two of these world-class brands are shown on slide number 26. Pringles, closing in on $900 million in retail sales in the U.S., had another strong year in 2021. Not only did it gain share year on year, but as you can see on the slide, its two-year keggers well outpaced the category all year long and even accelerated as the year progressed. The gains were driven by innovation like Scorchin, the expansion of pack formats like multi-packs, and effective advertising from the Super Bowl on. And then there's Cheez-It, now well over a billion dollars in U.S. retail sales. This brand drove most of our share gains in crackers in 2021. As you can see, it continued to well outpace the category on a two-year CAGR basis as well, driven by innovation like Snapped, pack formats like Caddy's, and effective advertising, which drove the core business. But these aren't our only world-class snacking brands. Take a look at the continued momentum in Pop-Tarts and Rice Krispies treats shown on slide number 27. Pop-Tarts, with over $800 million in U.S. retail sales, continued its growth momentum in 2021, outpacing the Portable Wholesome Snacks category on a two-year CAGR in every quarter. Similarly, Rice Krispies treats also sustained its momentum in 2021. These treats generate $350 million in retail sales, and not only did they gain share again in 2021, their two-year CAGRs continued to well outpace the Portable Wholesome Snacks category. Like Pringles and Cheez-It, these are world-class, differentiated brands that respond well to innovation and brand building. Turning to slide number 28, let's discuss our two North American frozen businesses. Lapping high single-digit growth in 2020, these businesses collectively sustained good momentum on a two-year TAGR basis, even despite operating at or near full capacity across much of their product lines. Even better, we have capacity coming online in the first half of 2022. Slide number 29 shows how these two world-class brands performed in market. With almost $900 million in U.S. retail sales, Eggo sustained solid momentum growth on a two-year CAGR basis in 2021, only slightly trailing the category as it operated at capacity. Morningstar Farms, our leading plant-based brand, generated nearly $400 million in U.S. retail sales, and it finished the year outpacing the frozen veg-vegan category on a two-year CAGR basis. So, similar to snacks, our frozen foods brands continue to demonstrate very strong momentum. Let's round out our discussion of North America with cereal, shown on slide number 30. In addition to lapping 2020's pandemic-aided high single-digit growth, North America's cereal faced the most challenging of supply conditions. Recall that we had already been delayed due to the pandemic in previously planned capacity expansions. Then, just as we were adding capacity, came the economy-wide shortages and bottlenecks. In late July, we suffered a fire in our Memphis plant, which not only strained our network further, but it impeded our ability to build inventory ahead of what would eventually be a strike at all four of our U.S. cereal plants, spanning almost the entire fourth quarter. The result of not being able to ship enough product and the related reduction in commercial support for these products was a sharp year-on-year decline in net sales. This was mostly in the second half. In fact, through the first half, our two-year tagger for this business was roughly flat. Unfortunately, this has resulted in low inventories and even out of stocks in stores for many of our brands. And we've therefore elected to pull back on commercial activity. Not only have we had to pull back on A&P investment, we've also had to dramatically reduce our in-store merchandising. The latter can be seen on slide number 31. Specifically, using scanner data, the chart captures the year-on-year changes in the percent of retail sales volume that was sold on any promotion. It shows how Kellogg was, like the rest of the category, returning to pre-pandemic levels of merchandising in 2021, but then it shows just how much we had to pull back in the fourth quarter, especially late in the quarter, due to the strike. Let's talk briefly about how we were thinking about the post-strike and fire recovery of this business. shown on slide number 32. As previously mentioned, the fire and strikes cost impacts spans across the fourth quarter of 2021 and quarter one 2022, owing to carryover of costs and lost operating leverage. In addition, there will be some missed net sales opportunities as we work to catch up on inventory, both ours and that of our customers. In the end, it will be the second half before we can truly be back on a full commercial program, but we will get started as soon as we can in supporting priority brands and SKUs. This is incorporated into our guidance. Now let's turn to our international regions whose financial performance is shown on slide number 33. Remember, these are not small businesses. These three regions collectively account for more than 40% of our net sales, and what they delivered in 2021 was nothing less than impressive, particularly given worldwide supply challenges. All three posted strong organic basis net sales growth in 2021 with both volume and price mix growing on top of what was strong growth last year. And on operating profit, all posted growth in the high single digits or double digits on a currency neutral basis. Kellogg Europe's organic net sales growth is shown on slide number 34. In 2021, we sustained strong growth momentum in a region of the world that is comprised predominantly of mature, developed markets and an intensely competitive retailer environment. Yet we grew net sales organically for a fourth consecutive year in 2021, growing both volume and price mix. As you can see on slide number 35, the growth was driven by strong in-market performance in both Cereal and Pringles. In Cereal, master brand advertising and selective innovation continued to drive consumption growth ahead of the category on a two-year CAGR basis in key markets. Pringles, meanwhile, also continued to outpace the category in key markets. The new Sizzlin line has proven to be incremental, while strong execution of marketing programs, including this year's Eurosoccer tournament, has continued to drive the base business. Similarly, we sustained multi-year momentum in Latin America, as indicated on slide number 36. We grew volume in 2021 on top of last year's surge, and we increased our price mix in order to help cover the double hit of high input costs and adverse transactional foreign currency impact. Slide number 37 shows how this organic net sales growth has been generated in both snacks and cereal using two-year CAGRs. Importantly, this growth was underpinned by good in-market performance. In cereal, our consumption growth on a two-year CAGR basis continued to outpace the category in key markets in 2021. Even on a one-year basis, we realized share gains in key markets. Pringles, meanwhile, also gained share, notably in our biggest markets, Mexico and Brazil. We'll finish our review with our largest international region in terms of net sales, EMEA, which is shown on slide number 38. This is yet another international region that built on multi-year track record for organic net sales growth. In 2021, Kellogg EMEA grew net sales on an organic basis for a seventh consecutive year. And it not only grew on top of 2020's strong growth, but it accelerated its growth to levels we haven't seen before. Growing both volume and price mix, this 2021 performance reflected broad-based gains geographically and across category groups. You can see this in the two-year CAGR trends shown on slide number 39. we continue to see strong organic growth in snacks, cereal, and noodles. And in market, our EMEA cereal consumption outpaced the region's overall category on a one-year and two-year CAGR basis, led by key markets ranging from Australia to India to Saudi Arabia. Pringles recorded similarly impressive consumption performance in 2021 in spite of supply disruptions related to the pandemic. Not only did its consumption outpace the category, on a one-year and two-year basis for the overall region, but it gained share in many of those same key markets. Allow me to wrap up with a brief summary on slide number 41. What you have seen from us this year should give you confidence of what we can do going forward. Firstly, we executed well through what were extraordinarily challenging business conditions overcoming obstacles to deliver on full-year guidance that we had already raised earlier this year. We faced a rapid acceleration in market-driven input cost inflation, and you saw substantially covered with productivity and with very effective revenue growth management actions that enabled us to realize price early and sufficiently. We faced economy-wide bottlenecks and shortages, which created supply disruptions and incremental costs, yet we worked through them to continue to service our customers around the world. We even faced the misfortune of a major fire in one of our U.S. plants, followed by a labor strike in one of our businesses, and we worked through those interruptions as well. Secondly, it should be clear that we have strong business momentum. Our international businesses continue to deliver strong growth this year, even accelerating from strong growth last year. They grew in snacks and they grew in cereal. In North America, our largest business, Snacks, delivered outstanding growth and category share performance all year long. Brands like Pringles, Cheez-Its, Pop-Tarts, and Rice Krispies treats have never been stronger. And in our frozen foods businesses, we continue to show growth momentum on a two-year CAGR basis. Eggo's growth was strong enough to run up against capacity limitations, which we are resolving. And Morningstar Farms' plant-based foods growth came with increased household penetration. And finally, we enter the new year in good financial condition. Our cash flow remains strong, and we have delevered our balance sheet, giving us good financial flexibility. The result of all this was yet another year of balanced financial delivery in 2021, which we expect to sustain reliably and dependably in 2022. And driving this dependable performance are the talents and determination of our world-class employees. who deserve tremendous credit for working through unprecedented challenges and keeping Kellogg on this path of profitable growth. And with that, we'd be happy to take any questions that you might have.

Thank you very much. If you would like to register a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. And when preparing to ask your question, please ensure you are unmuted locally. So we will take our first question from Ken Goldman from J.P. Morgan. Ken, your line is open. Please go ahead.

Hi, thanks, and good morning, everybody. You understandably highlighted the strength of North America's snacks, which is doing phenomenally. I'm just curious, you know, it did improve by 21% organically. That's a lot. more than what's recently been posted. And, you know, I'm sure a lot of it is just ongoing strength in the business. But I'm just curious if we can sort of parse out what drove the spike, I guess, in this particular fourth quarter. Was it kids going back to school? Was it other factors? And then I'm also curious to what degree guidance maybe considers what could be a little bit of a reversal there, if that's true, just on the type of comparison.

Yeah, thanks, Ken. I'd say, you know, the snacks business, there's not one thing that you would point to. It's really overall broad-based execution, innovation, new pack formats that's driving the underlying momentum of the business. It's across brands. It's Pringles. It's Cheez-It. It's Rice Krispies Treats. It's broadly across customers. Some of it is a return to... you know, on the go, clearly, which is benefiting. But it's, you know, it's broad-based. It's very good price-mix performance on top of that. The innovations that, you know, I already mentioned, Scorchin doing extremely well. You know, it's nice to see a number that's, you know, high double digits for sure. And to your question around what's in guidance, you know, we're not forecasting a continued 20% growth to be sure. And, you know, we'll have to lap that next year, but it's a great position to be in. Strong brands, differentiated brands. Good brand building against those. You know, we kicked off the Pringles Super Bowl campaign on CBS. Primetime will be on the big game again this year. So we expect to get off to a very strong start next year in our snacks business as well.

Great. Thank you for that. And then a quick follow-up. And, Steve, I realize that crystal balls are cloudy right now, but when do you think we should start expecting to see an inflection in in scanner trends for U.S. cereal. You know, with the understanding that there's still a lot of challenges in the first quarter, but just trying to get a sense for when we could wake up one day and say, hey, you know what, cereal's bottomed, and it may not be growing yet, but it's certainly, you know, it's certainly the growth is at least accelerating off the bottom. Is that still a month, maybe two months away? Just wanted to get a rough idea of how you're seeing that.

Yeah, so where we are right now, obviously we had a strike that lasted almost the entirety of the fourth quarter. And so what you see there is a depletion of our inventory and our customers' inventory. That takes a little while to rebuild. You know, the plants are fully back in business right now. We're delighted that our folks are back. But it's going to take the first quarter to build inventory. It's going to take into the second quarter to rebuild commercial activity. So think about it as two halves. The first half of the year, we'll see the continued pressure in U.S. cereal. In the second half, you should see some nice growth in our U.S. cereal business. And so that's really – I would think about it as a tale of two halves. The first half is the reparations necessary, and the second half is the rebuilding of commercial activation, customer programs, commercial activity that will see us getting back to growth.

Great. Thanks so much.

Thank you very much. Our next question is from David Palmer from Evercore. David, your line is open. Please go ahead.

Thanks. Good morning. If you had adequate inventory and normalized advertising and promotion levels for serial How much higher do you think your organic revenue growth estimate would have been for 2022? Just trying to isolate how you're thinking about that as a drag.

David, difficult question to answer. You know, it's obviously a hypothetical, but you can see what's happened to our U.S. cereal performance. We wouldn't have been down 24%, right? And so I think you'd look at it and say we'd be down or up, you know, in a plus one, minus one type of range. We're going to lap that in the second half of next year. As I was just saying, we're going to rebuild in the first half and grow in the second half. but clearly it affected our results in the fourth quarter without a doubt and that's why you know we're so pleased to be able to post the type of performance despite Again, the entirety of the fourth quarter, we had a labor strike. The rest of the portfolio stepped up in such a meaningful way to be able to deliver against our guidance despite this unexpected circumstance, I think really shows two things. It shows the incredible strength of the portfolio, and it's a reminder to all of us that when you hear Kellogg, you think cereal, right? But we're so much more than a cereal company. U.S. cereal, North American cereal is less than 20% of our business, and what you saw is the greater than 20% of the emerging markets business performing, the snacks business I was just talking about performing, all of our international businesses performing very well to overcome what was, you know, what could have been a debilitating strike but wasn't.

Yeah, so I think that point taken, and I think, of course, this is going to be God willing, easy comparisons for 2023 for that business. I want to ask you on gross margins. Just looking back to 2019, what do you think is a normalized gross margin for this company after you get past some of these more acute COVID-related supply chain costs, the strike and fire impact ends and pricing catches up? You know, just 2019 levels at, you know, 33 and a half to 34, is that the type of level that this company should operate in longer term?

Yeah, absolutely. I think, you know, longer term, that would, we'd want to get back to, you know, the pre-pandemic levels of gross margin. I think, you know, you saw in quarter four a further deterioration in our gross margin from quarter three. I think a lot of the factors of quarter three were still at play in quarter four. in terms of commodity inflation, in terms of supply bottlenecks and shortages. And, of course, you know, the strike had a significant impact on our margins in quarter four. And so, you know, the deterioration between quarter three and quarter four was largely due to the strike. I think, you know, you're going to continue to see that persist, particularly in quarter one, but into quarter two as we rebuild inventory. You know, there are carryover costs of the strike that will flow through into quarter one as well. And so I think, you know, from a 2022 standpoint, again, I think similar to what Steve mentioned on cereal, even on gross margins, it'll be kind of a tale of two halves. I think, you know, the first half, we'll continue to see the pressure that we saw in the second half of 2021. So you'll see a similar trend in 2022 first half. And then in the second half, we should see our margins start to improve, particularly in quarter four, as we lap the impact of the fire and the strike. I think where we'll end up on 2022 overall, hard to predict. I think it'll depend a little bit on the supply chain environment. But once you go past 2022, I think from a strategic standpoint, we absolutely want to get back to pre-pandemic levels of margins. And that's the focus of all the teams around the world.

Thank you.

Thank you. Our next question comes from Andrew Lazar from Barclays. Your line is open. Please go ahead.

Great. Thanks very much. I guess, Steven Ahmed, I'm trying to get a sense of how you see the balance between gross margin and SG&A sort of playing out for the year. I guess more specifically, would you anticipate somewhat of a pullback on marketing spend really more just in light of sort of the current serial supply challenges? I'm trying to get a better sense of, I guess, how much the company is planning on sort of needing to lean into SG&A to hit full-year targets this year, given where gross margins could come in.

Yeah, I think, Andrew, like I said, on gross margins, you know, we'll see pressure in the first half. We'll see improvement in the second half. And again, you know, there's obviously a little bit of variability depending on how the environment pans out. On SG&A, Right now, our thinking, our planning stance is a modest increase in SG&A for 2022. And so A&P, we'd expect it to be broadly flattish, you know, as the restoration of support behind the brands that were supply disrupted is gradual. So as we rebuild inventory, as we rebuild service, know we will start uh rebuilding uh you know commercial activation in line with that and so that will play through uh in in the first half uh and then i think you know from an overhead standpoint uh there will be a slight increase i mean you know we are lapping an unusual uh 2021 uh where you know the pandemic basically persisted for the full year and so you know we had reduced travel we had reduced me to spend on meetings uh there were a couple of one-time items uh so you know, overhead versus that base, you'd expect a modest increase in overheads.

Thanks for that. And then just briefly, Steve, I seem to remember, I think it was the very beginning of 2020, pre-pandemic, when Kellogg gave guidance for the coming year. It was along the lines of, obviously, snacking and international, the trend line there even then was really very good, and it's obviously only gotten better since then. And the thinking was, hey, 2020 is going to be the year we've got to really invest in this developed market cereal business to sort of get it to a more, you know, sort of stable to maybe slightly growing kind of pace sustainably. And that was the year Kellogg was going to kind of do what was needed to sort of make that happen. And then, of course, all bets were off given the pandemic, you know, came about. And then I realized near term job number one is let's get product, you know, back into the hands of retailers and consumers. Let's get our shelf space back. But If we take sort of the strike and recent events sort of out, if we look back to where you thought that serial business was then and what it needed, once you're back up to speed on inventory and on the shelf, I guess, where would you say that business is in terms of sort of taking some of this recent stuff out of the picture? Is there still a necessary sort of level of investment beyond to sort of get it to the right place or... Do we not know because so much has happened in the last two years that, you know, we really can't go back to what sort of the commentary was then, if you get my question.

Excuse me, Andrew. I do get your question. I think we were on the road to really good recovery in cereal. And if you look at the underlying health of the big brands, you could see that. And even today, if you look at the brands that we've been able to restore, look at Fruit Loops, for example, it's performing very well relative to the rest of the category, and we believe as I said earlier, it's going to be a tale of two halves. But when we get to the second half, we feel good about our cereal and we feel good about our North American cereals performance inside the portfolio. And, you know, as we've said even before 2020, we don't need cereal to be a growth business. We need it to be stable. And we're very confident that we will get it into stability. And if you think about the back half of of the year we're in right now, you're going to see that. And that's in our guidance, and we're confident about that. And then when you think about even as far forward as into 2023, in the beginning of 2023, we're going to be lapping the first quarter of this year. So, you know, we see turning the corner at the half year as the beginning of, you know, a very, very robust, balanced growth for us. And we don't see cereal holding us back.

Thank you very much.

Thank you. Our next question comes from Steve Powers from Deutsche Bank. Steve, your line is open. Please go ahead.

Hey, thank you, and good morning. Just building on that conversation a little bit further, it sounds like you think you can restore trade inventories by mid-year, but how long does it take so you can fully restore market shares, factoring in the need to perhaps earn back some shelf space That you've likely lost you're entering 20 calendar 22 is that is that? Achievable by the end of the calendar year or is that does that also bleed into three in terms of the market share restoration?

You know we we will see market share restoration across it'll be different across brands right we're focusing first on our biggest brands and then obviously we have a number of you know smaller brands and in the portfolio that will be not as high a priority in terms of rebuilding inventory and commercial activity. So you'll see us, you should see us regaining market share in the second half of the year, as I said earlier, just as we regain momentum. Hard to give a market share forecast of where we'll be at certain points, but we are bound and determined to restore this business, restore our TDPs, restore all of our commercial activity, and again, in the second half of the year, show real momentum and exit the year with very strong momentum across the entirety of our portfolio, including our North American cereal business.

okay very good thank you steve and then on it um if if i could just maybe a little bit more just diving into the um the nuts and bolts of the of the outlook just any perspective you have on you know coverage on current cost inflation just visibility as you enter the year where you are um you know in terms of price implementation you know relative that inflation is there a need for more pricing how you're thinking about that um And then if you could, just how that nets out, obviously the first half, second half commentary you gave makes clear, intuitive sense, but can you help frame that a bit further maybe in terms of just rough estimation of the percentage of earnings you're expecting in the first half versus the second half just to give us order of magnitude? Thank you.

Yeah, so I think, you know, in terms of inflation, I'll start there. You know, it's continued to accelerate. And, you know, we've seen that through 21. So we're expecting double-digit inflation in 2022. And, you know, bulk of it is market-driven. So I think, you know, that's our planning stance. You know, we're seeing inflation in ingredients and packaging. You know, oil, corn, wheat. And on the packaging side, you know, cans, cartons. So we're seeing broad-based inflation across our ingredients. You know, we are about 70% hedged on our exchange-traded commodities. So, you know, where we can hedge, we are at around a 70% hedge. So that's kind of typical of where we are at this time of the year. You know, we will look to cover the gross margin impact of all the market-related pricing inflation through our productivity initiatives, through our revenue growth management initiatives. I think, you know, from a supply chain bottleneck standpoint, I think, you know, we've talked a little bit of the carryover impact of the strike. So that's going to play out in quarter one and moderate into quarter two. So that's going to impact the first half margins for sure. And then, you know, the environment itself, that's hard to predict. But I think, you know, what we've assumed is that it'll continue to be a challenging supply chain environment into the first half and then moderate into the second half. I think, you know, when you put all of those assumptions together, right, and kind of look at the first half, second half, it's obviously the earnings would be second half weighted compared to the first half. And then I think, you know, from a lap standpoint, obviously quarter four will be our easiest lap when we start lapping the impact of the fire and the strike. So, you know, that's broadly the shape of the year.

Okay, very good. Thank you.

Thank you very much. Our next question is from Alexia Howard from Alliance Bernstein. Alexia, your line is open. Please go ahead. Good morning, everyone.

Good morning, Alexia.

Thank you. So a couple of questions. I noticed that the price mix growth in EMEA is still incredibly high. I think it was 18% or so this quarter on top of, I think, 10% or so last year. The volumes are obviously down, but not down too much, maybe down double digits over a two-year period. I'm just wondering what's going on in the region. Is it cutting out very low-priced products to get that price mix growth so it's more of a mix effect, or is there something else happening there? And then I have a follow-up.

Yeah, I think, Alexia, the driver for that is really, I mean, you know, we're seeing commodity inflation, we're seeing currency inflation. So I think a lot of that is driven by pricing. And if you look at markets, MultiPro is a good example where we're taking significant pricing, double-digit pricing, multiple rounds of that to cover the currency and the commodity. I'd say elasticity has been better than expected. So the elasticity has held up and volumes have held up. What you're seeing in some of the volume declines is also the impact of supply constraints. I think that region in particular has been impacted by shortage of containers. We do ship a lot of products. Pringles is a good example. We manufacture that in Malaysia and ship it across the region. And certainly the shortage of ocean containers has impacted our ability to supply. And likewise, I think there's been just restrictions, lockdown restrictions on some of our facilities that have impacted supply and service. So that's been a dynamic indeed from a volume standpoint. But overall, I'd say, you know, over a two-year period, terrific, you know, price mix performance by the region, and broadly volumes have held up.

Very helpful. Thank you. And then a quick follow-up. I noticed on the Morningstar Farms graph that – the category and the brand have slowed down fairly meaningfully in the fourth quarter. Could you describe what's happening there and what that means for the incognito part of the brand?

Yeah, Lexi, what I'd say is it's helpful to look at the whole category on a two-year basis as well, because what we're seeing is obviously a huge influx of new distribution and new entrants, which drove you know, outsized demand and outsized sales in certain areas. And there's a big difference between refrigerated and frozen as well. And what you're seeing is the refrigerated segment has decelerated on a two-year CAGR basis. And it's because of, you know, all these, as I said, new entrants, new trial and so forth shaking out. In the frozen side of the business, you know, we're still very pleased about the way Morningstar Farms is performing. And we see what's happening in refrigerated as a lot of shakeout. You typically see this in new categories with lots of new entrants, lots of trial, not always the highest quality items making their way on shelf. And so I think you'll see that shakeout. And we do think that over time, refrigerated has an opportunity to be successful. But we're much more pleased about how we're doing in the frozen segment.

Great. Thank you very much. I'll pass it on.

Thank you. Our next question is from Michael Lavery from Piper Sandler. Michael, your line is open. Please go ahead.

Good morning. Thank you. You touched on some of the elasticities you're seeing now. I'm just curious if you could give a sense of what some of your planning assumptions are. Do you expect that they've been relatively good? Do you expect that to hold? What's in your forecast for how that plays out?

Michael, so what we've seen so far is much better than historical elasticity performance, so much more inelastic. We don't forecast for that to continue. Obviously, inflation continues to rage on. We are very pleased with the price mix that we've seen, but we are forecasting a more return to normal elasticities as the year progresses. I don't know, Ahmed, if you want to. No, I think, yeah.

That's really helpful. And just a quick follow-up. You mentioned early in your release and several times on the call the balance sheet and financial flexibility you have and dry powder. What are your priorities as you think about M&A, either geographically or by category? Is it as kind of high a priority as that sounds? Can you just give some thoughts on how you're thinking about that?

Yeah, definitely, Michael. So we're very pleased with the strength of the balance sheet and the deleveraging that's happened over the course of the last couple of years, and it does give us opportunities and optionality. And I think if you look at our portfolio and what's working in the portfolio, you could see us, you know, that would be good hunting ground. So think snacking, think wellness, think emerging markets. And if we found an opportunity to add shareholder value, we would certainly take a good hard look at it, always, though, being very disciplined on price.

Okay, great. Thanks so much.

Operator, we might have time for one more question.

Of course. Thank you. We'll take our last question from Rob Dickerson from Jefferies. Rob, your line is open. Please go ahead.

Great. Thanks for putting me in. Two quick questions. I guess just to touch on the bars category, obviously, you know, it's been pressured through the pandemic to some extent. I don't know, Steve, just kind of any quick thoughts, you know, in terms of potential growth recovery as mobility increases and kind of how you're thinking that thinking about that through 22, and then a quick follow-up.

Yeah, Rob, so when you look at the bars category, you can see it is really highly correlated to occasions. And so I don't think this was your question, but if you look at Rice Krispies treats, which are bars, doing incredibly well. You look at Nutri-Grain, you know, doing very well. You look at RX, it's back to growth, but not the type of growth that, you know, we had seen in the past. And that's due to occasions. I mean, I think I just saw something the other day where gym traffic is still down 40% from 2019 pre-pandemic. And that's a big occasion for RX, right? Throw a bunch of bars in the gym bag and off you go. So, you know, we're seeing growth, but I think a lot of higher growth will depend on those types of occasions returning. And we are seeing, you know, the trend line is positive. We're seeing mobility increasing. Start to increase, you know Omicron obviously set it back, but now we're seeing it, you know Potentially recover and we'll see what happens in the spring, you know, it's it's hard somebody mentioned the cloudy crystal ball Certainly cloudy to understand what's going to happen in the spring But as those occasions return, you know, we think our X and our other portfolio is well placed Okay, fair enough and then just you know on the organic sales growth guide I

I know you don't always break out price volume, but just wondering if there's any incremental clarity as to kind of, you know, if we're thinking, you know, should pricing that we saw in Q4, let's say, which was price mix at least, you know, kind of close to 9%. As we get through the year, then maybe factor in some increased promotional activity, you know, the back half. Should the market be expecting kind of a similar level of pricing, let's say, at least in the first half of the year, or were there some kind of one-offs in Q4 that, you know, might cause that to decelerate? And that's all. Thanks.

Yeah, I think, you know, most of our, if not all of our net sales growth for 22 would be driven by price mix. So I think, you know, as I mentioned, right, you know, we're seeing double-digit inflation into 22. And so I think, you know, we're working through plans, both productivity as well as revenue growth management. to counter that and to hold margins. So you will see most of the sales being driven by price mix. And, you know, RGM activity will continue to be a focus into 22.

All right. All right. Thank you.

Operator, I think we've hit our time limit. Thanks, everybody, for your interest. And if you have any follow-up questions, please do not hesitate to give us a call. Thank you.

Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.