After an “unprecedented” year, Kellogg sees input-cost inflation accelerating to double-digits but is more positive on the supply side and the outlook for M&A.
Chairman and CEO Steven Cahillane described the effects of rising costs in the 12 months to 1 January as an “extreme challenge”. However, as well as grappling with the same inflationary pressures as the rest of the industry, along with supply chain disruptions and labour shortages, the cereals to snacks and plant-based meats maker had a strike to contend with.
The strike at four Kellogg plants in the US lasted through most of the fourth quarter – before the dispute was finally resolved just days before Christmas – and the spill-over effect is expected to impact inventory and sales through the first half of the new fiscal year.
“It negatively impacted sales and profit in the fourth quarter of 2021, and it will have a carry-over cost impact in quarter one 2022. It will also have sales impacts through the second quarter as we continue to rebuild inventories,” Cahillane told analysts yesterday (10 February) in an annual results discussion.
Kellogg was also stretched to meet consumer demand as the pandemic, supply chains and labour issues curtailed the Special K cereal owner’s plans to add capacity.
“We ended the year at full capacity utilisation in cereal and key elements of our frozen from the griddle categories, with the pandemic delaying our ability to expand capacity as previously planned,” Cahillane explained.
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By GlobalData“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.”
Weak cereals sales in North America were a reflection of the strike, along with a fire at Kellogg’s Memphis plant in the summer, which meant promotional activity had to be cut back, Cahillane said.
He added: “Through the first half, our two-year CAGR 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, 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.”
CFO Amit Banati said Kellogg will start to reengage “commercial activation” in the first half as inventories recover.
Banati also provided a sense of what is to come in 2022: “We approach our 2022 plans with a prudent planning stance, given the current operating environment.
“Already high-cost inflation accelerates in 2022 to a double-digit rate, with first-half inflation higher than the second half. 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.”
M&A is also a possibility amid what Cahillane described as “strong” cash flow and continued efforts to cut debt.
“Our cash flow remains strong, benefiting from discipline on restructuring outlays, prioritisation of capital investment and strong management of core working capital. Along with a deleveraged 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,” he said.
Pressed during the Q&A session on what the acquisition activity might entail, he added: “I think if you look at our portfolio and what’s working in the portfolio, that would be good hunting ground. 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.”
