Kellogg Company (K) Q3 2020 Earnings Call Transcript

Kellogg Company (NYSE: K) Q3 2020 earnings call dated Oct. 29, 2020

Corporate Participants:

John Renwick — Vice President of Investor Relations and Corporate Planning

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Amit Banati — Senior Vice President and Chief Financial Officer

Analysts:

Nik Modi — RBC Capital Markets — Analyst

Steve Powers — Deutsche Bank — Analyst

Ken Zaslow — BMO Capital Markets — Analyst

Ken Goldman — J.P. Morgan — Analyst

Bryan Spillane — Bank of America Merrill Lynch — Analyst

Eric Larson — Seaport Global Securities — Analyst

Michael Lavery — Piper Sandler — Analyst

David Palmer — Evercore ISI — Analyst

Chris Growe — Stifel — Analyst

Robert Moskow — Credit Suisse — Analyst

Jason English — Goldman Sachs — Analyst

Presentation:

Operator

Good morning. Welcome to the Kellogg Company’s Third Quarter 2020 Earnings Conference Call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session with publishing analysts. [Operator Instructions]

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 begin your conference call.

John Renwick — Vice President of Investor Relations and Corporate Planning

Thank you, Gary. Good morning, and thank you for joining us today for a review of our third quarter results, as well as updates regarding our outlook for full-year 2020. I’m joined this morning by Steven Cahillane, our Chairman and CEO; and Amit Banati, our Chief Financial Officer.

Slide 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 this third slide of the presentation, as well as to our public SEC filings. This is of particular note, during the current COVID-19 pandemic when the length and severity of the crisis and resultant economic and business impacts are so difficult to predict. A replay of today’s conference call will be available by phone through Thursday, November 5. The call will also be available via webcast, which will be archived for at least 90 days on the Investor page of kelloggcompany.com.

As always when referring to our results and outlook unless otherwise noted, we will be referring to them on a currency neutral 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.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Thanks, John and good morning everyone. I hope you and your families are holding up well in these turbulent times. Here at Kellogg to get through this crisis, we are executing well against our key priorities during the crisis. We remain vigilant and active in keeping our employees safe, which remains job number one for us and our employees have handled this extremely well. We continue to supply the marketplace with our foods with no major supply disruptions and service levels gradually improving in the quarter. We continue to aid our communities with significant cash and food donations, not to mention the time our employees have generously volunteered to various initiatives and causes. And amidst very uncertain economies in financial markets, we have effectively preserved and improved our financial flexibility. These have been our priorities throughout the crisis and we are executing very well against them.

From the standpoint of financial results, we had another strong quarter with some highlights shown on Slide number six. First, our results came in stronger than we expected. We posted another quarter of strong organic net sales growth with a good balance between volume growth and price realization and with growth across all four regions and across all four major category groups; cereal, snacks, frozen and noodles. We expanded our gross profit margin as price volume and productivity, more than offset sustained high levels of incremental COVID costs. And as we said we would, we shifted brand building investment from the first half into the second half, resulting in a double-digit year-on-year increase in quarter three. We generated better-than-expected profit and earnings in the quarter. And particularly important in an uncertain economy, we generated better cash flow than we anticipated, allowing us to further reduce our net debt.

Second, our emerging markets continued to exceed our expectations, in spite of challenging COVID and economic conditions. We generated double-digit organic net sales growth in both Latin America and EMEA. Across all of our emerging markets we collectively recorded double-digit organic net sales growth in cereal and noodles and we grew snacks at a high single-digit rate, despite their on-the-go orientation, they reliance on traditional trade that’s been more disrupted by COVID and being a more discretionary purchase in difficult economic times. The strength of our portfolio, the diversification of our geographies and the experience of our management teams are clearly on display.

And third, we’ve continued to perform well in market. As expected at-home consumption growth for packaged foods in general decelerated across the quarter and our categories were no different. The good news is that year-to-date we have held or gained share in markets that represent almost three quarters of our annual net sales in measured markets. Most notable in quarter three was the United States where we gained share in five of our six primary categories. In Europe where we gained share in cereal across most of our major markets; and in EMEA where we gained share of cereal in 11 of 13 major markets. Clearly, our brands and our brand-building are resonating.

And even in Away From Home channels, which remained soft during this pandemic, we gained share in most of our categories in the US. We also like how we are performing in e-commerce, an area in which we’ve invested in capabilities in recent years and in which we continue to grow rapidly outpacing our categories in key markets. So we are winning in the marketplace and delivering better-than-expected financial results in the process.

Turning to Slide number seven, this sustained strong performance puts us in a good position to finish the year not only with strong results and financial flexibility, but also with investment for the future. Let’s take each in turn. First, we are again raising our full-year guidance based on the strength of our better-than-expected third quarter results. As Amit will explain, we are raising our guidance for full-year organic net sales growth, currency-neutral adjusted basis, operating profit and earnings per share and cash flow. It’s been a lot of work, but we’re headed for a very strong year.

Second, we continue to invest for the future. Our brand-building investment will be up double-digits again in quarter four, as we continue to reinvest funds that were delayed from the first half during the pandemic on top of what had been planned for quarter four. Now is the time to communicate with consumers, who discovered our foods during the pandemic; now is the time to emphasize new messaging around certain brands; now is the time to further develop our master brand approach to advertising multiple brands in certain international markets; and now is the time to invest behind the launch of new brands like plant-based Incogmeato from MorningStar Farms in the US and market expansion of brands like Cheez-It in Canada.

On top of that, we’re investing in capabilities; such as in e-commerce, in packaging capabilities and in capacity. Simply put, we are taking actions now to emerge from this crisis a stronger company and with increased confidence in our trajectory for consistent balanced growth. We’re seeking to retain incremental households; we’re building on our strength in e-commerce and we’re ensuring that our emerging markets remain engines of growth for us. We’re also strengthening our financial flexibility and delivering increased earnings this year for our shareowners.

So with that let me turn it over to Amit, who will take you through our financial results and outlook in more detail.

Amit Banati — Senior Vice President and Chief Financial Officer

Thanks, Steve. Good morning, everyone. Slide number nine, summarizes our results for the third quarter and first nine months. As Steve mentioned, our third quarter results came in better than anticipated, particularly on operating profit and cash flow. Net sales benefited from elevated at home demand during the crisis, though this clearly moderated across countries and categories over the course of the quarter, and was partially offset by continued softness in Away From Home channels.

An important highlight of the quarter was the strength of our emerging markets, whose return to double-digit growth came, despite very challenging conditions; including economic and COVID impacts on the traditional trade.

Operating profit increased on a reported basis, because of a reduction in one-time charges now that recent years substantial restructurings are largely behind us. It declined on an adjusted basis, because of the absence of businesses divested last year, as well as higher expense for performance based compensation and a significant planned increase in advertising and consumer promotion. Operating profit declined less than we expected in large part, because of our positive performance in net sales and gross profit margin.

Earnings per share declined with operating profit, along with an effective tax rate that was higher than last year as expected. And cash flow continue to come in better than planned, bringing our year-to-date cash flow above what had been our forecast for the full-year, a reflection of our elevated earnings, reduced restructuring outlays, good working capital management and capital expenditure that has been delayed during the pandemic.

Let’s take a look at these metrics in more detail. We will start with net sales growth on Slide number 10, while moderating from recent quarters, currency translation was a negative impact of about 1% in the quarter, largely due to Latin American currencies devaluation against the US dollar. Last year’s divestiture of our Keebler Cookies, pie crusts, ice cream cones and fruit snacks anniversaried at the end of July. So we had one month of impact in the quarter, pulling down net sales by just under 2 percentage points.

Organic net sales growth was 4.5% in the quarter, we had anticipated a meaningful deceleration from last quarter’s 9% growth and sure enough, we did indeed, see a moderation in at-home consumption growth across our categories and continued softness in Away From Home channels and on the Go products. Nevertheless, this quarter three organic growth performance was very promising. It was driven by organic growth across all four regions and across all four global category groups. It also featured a better balance between volume and price mix, and it was supported by consumption growth and share gains in key categories and markets in turn Boyd by effective brand building activity.

Now, let’s turn our discussion to profit margins with Slide number 11. Going into the quarter, we had assumed that gross profit margin would contract a bit in quarter three, as we anticipated less net sales growth to cover sustained incremental COVID costs. However, our gross profit margin ended up expanding slightly as growth, productivity and price realization more than offset a resumed mix shift towards emerging markets; including Multipro our distributor business in Nigeria. We expect to see gross profit margin to expand modestly again in quarter four and therefore for the full-year, despite sustained incremental COVID costs.

Another important impact on our operating profit margin was our increase in brand investment. Back in July, we discuss the postponement of advertising and consumer promotions during the height of the pandemic in the first half and our intention to reinvest those funds into brand building during quarter three and quarter four. The slide shows that delay in advertising and consumer promotion during quarter two and how it was followed by a double-digit increase in quarter three along with a similar double-digit increase planned for quarter four. This along with an increase in expense for performance-based compensation was the primary driver of our operating profit decline in quarter three and will be again in quarter four.

Below operating profit, our interest expense remained below last year as expected. Other income, which is predominantly related to our pension plans remained higher year-on-year also as expected, reflecting the impact of higher asset valuations at the beginning of the year. These favorable items were more than offset at earnings per share by a higher effective tax rate and an increase in average shares outstanding as we continue to refrain from share buybacks to prioritize financial flexibility during the current crisis.

That brings us to cash flow and capital structure on Slide number 12. A lasting impact of this year will be the stronger-than-projected cash flow enabling a faster than expected reduction in net debt. As shown on the top graph, our cash flow this year has significantly outpaced that of the past couple of years even beyond lapping unusual outlays in each of the prior two year to-date periods. As I mentioned, this is a result of higher-than-expected adjusted basis earnings this year, as well as the fact that we have gotten past the major restructurings and reorganizations of the last few years, which had required significant cash outlays. But it also reflects our effective management of co-working capital and the capital expenditure we’ve had to prioritize or delay during the pandemic, to us to not impede capacity utilization in any way. This cash flow has enabled further increases in liquidity and further reductions in net debt, as shown on the bottom chart. Strong liquidity and lower net debt against stronger cash flow give us enhanced financial flexibility.

Let’s now discuss our rest of your outlook, starting with Slide number 13 and our planning assumptions around the pandemic for the fourth quarter. While the direction of the pandemic remains uncertain, we are making certain planning assumptions. To that end, we assume that at home demand growth will continue to decelerate, while sizable Away From Home sales declines moderate. These are simply continuation of trends we have seen in recent months. The reason we assume our Away From Home sales will take longer to stabilize is because of our waiting in segments like schools and travel and lodging, which are expected to take longer to recover.

We also assume that growth in emerging markets will decelerate, amidst COVID-related economic softness, as well as some unusual market specific factors in quarter four, such as school food programs being shutdown in North Africa and the impact of new labeling regulations going into effect in Mexico. And finally, there is the investment that we delayed from the first half. Just as in quarter three, this first half funding’s will be implemented during quarter four on top of previously planned activity. The results could be another double-digit increase in advertising and consumer promotion in quarter four.

Slide number 14 shows, what this all means for our full-year outlook. As Steve mentioned, we are once again raising our guidance for the year. This time to reflect our better-than-expected quarter three results, less any timing related factors from that quarter and less some incremental investment that we are adding to quarter four. Our full-year guidance for organic net sales growth improves to just about 6% from our previous guidance of around 5%, this reflects our better-than-expected 4.5% growth in quarter three and a modest increase to our outlook for quarter four. So the latter still assumes a deceleration for the reasons we just discussed.

Our full-year guidance for currency neutral adjusted basis, operating profit improves to growth of approximately 2% from our previous guidance for a decline of about 1%, this positive swing reflects our better than forecast operating profit in quarter three with some timing related shifts in costs into quarter four, along with the incremental advertising and promotion and other costs and investments, I just described. This drives a similar increase in our full-year guidance for currency neutral adjusted basis, earnings per share, which goes to growth of approximately 2% from previous guidance for a decline of about 1%.

Our guidance for cash flow increases to $1.3 billion to $1.4 billion, a substantial improvement from our previous guidance of approximately $1 billion. This reflects our stronger-than-expected delivery in quarter three, let some elements that are likely timing related; such as capital expenditure delayed from earlier this year. Putting it all together, we’re in position to finish 2020 with a strong financial performance featuring a good balance of growth, profitability, investment and cash generation. And we’ll end our 2021 in a very solid financial condition.

And with that let me turn it back to Steve for a review of each of our major businesses.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Thanks, Amit. Let’s begin with North America in Slide number 16. As we had expected and as you’ve seen in the scanner data at-home consumption growth decelerated throughout the third quarter, while the Away From Home channels saw some moderation in their steep declines. The result for our North America region was just under 3% organic net sales growth in quarter three. Note, while we experienced a continued, the moderating double-digit decline in Away From Home sales as expected, the rest of North America business turned in a solid mid single-digit growth performance. And while our deceleration from quarter two surge was inevitable, we’re very pleased with how we performed within our primary categories.

In Canada, we grew consumption in all six of our primary categories including; gaining significant share and distribution in crackers with Cheez-It. In the US, we held or gained share in five of our six primary categories at retail, as well as in the vast majority of our categories in measured Away From Home channels. We’ll visit these key US categories in more detail in a moment, but this end market performance is a key reason, we’re confident that we are strengthening our business, amidst this crisis.

Household penetration and buy rates have increased across our categories, since the pandemic began, and we are focused on retaining as many of these consumers and occasions as we can. This relies an effective marketing and sales execution of course, but it is also dependent on our supply chain to get food to the marketplace. Our plants are running well, still focused on throughput and still up against capacity in certain categories in food forms requiring tremendous agility. Our supply chain clearly has risen to the challenge.

Operating profit decreased as planned in quarter three as brand investment was shifted out of the first half and into the second half and as we had less incremental sales to cover sustained levels of incremental COVID cost. But North America is on track for a very good year of net sales and operating profit growth.

Let’s take a quick look at each of our three major category groupings in North America, starting with our largest snacks on Slide number 17. North America snacks continued to post strong growth even if at home demand decelerated from quarter two’s highs and Away From Home channels and on-the-go pack formats remained in decline. In the US, Pringles continued to post double-digit consumption growth holding share despite continued softness in on-the-go pack formats as expected. In Crackers, we continue to outpace the categories solid mid single-digit growth in the quarter. Cheez-It Snap’d continues to grow strongly in its second year supported by recently added capacity, while accompaniment oriented cracker brands, Club, Townhouse and Cars have collectively gained share as well.

In portable wholesome snacks, the category remains pressured by reduced on-the-go occasions during the pandemic, and while this has impacted on-the-go brands in our portfolio like RX and Kashi, we’ve been able to gain share on the strength of our growing Pop-Tarts and Rice Krispies Treats brands. So our snacks brands business is in great shape.

Now let’s turn to North America cereal in Slide number 18. Our North America cereal net sales grew again in quarter three, though reflecting a deceleration in the category in retail channels and continued declines in Away From Home channels. But what is so encouraging is what we’re doing within the category. In US measured retail channels we again outpaced the category and we did it on the strength of our renewed advertising support and refreshed messaging for brands like Special K and Mini-Wheats and on innovation like jumbo snacks and mash-ups that have helped us lead the category in share of innovation this year. We have added more household penetration during the pandemic, and we’ve held onto more of it than the category and the same goes for buy rates. Our enhanced data and analytics give us the ability to target the right consumer and occasion with the right messaging for that consumer and occasion and we’re seeing the results. So we’re executing well in North America cereal.

We’re also executing well in North America frozen foods shown on Slide number 19. Our North America frozen foods categories didn’t decelerate as much as cereal and snacks during quarter three. And as a result, we continue to deliver high single-digit organic net sales growth and that is despite capacity constraints and declines in Away From Home channels, as well as the phasing out of certain non-core product lines. Our core businesses are performing very well.

In US retail channels, our Eggo brand grew consumption by almost 13% in the quarter with strong growth in waffles, french toast and pancakes and continuing to gain share. Our MorningStar Farms brand grew consumption by nearly 18%, trailing the frozen veggie categories exceptional growth as we ran up against our capacity. MorningStar Farms meat alternative sub-brand Incogmeato was launched during the quarter, it’s early days and we’re still building up our distribution, but we have launched burgers, sausage brought worst and ground beef into the refrigerated aisle and into the frozen aisle we’ve launched Disney shaped chicken nuggets, the first kid oriented offering in this plant-based category. We are expecting a gradual distribution build and we’re confident about our food, branding and breadth of offerings. So like our other North American businesses frozen foods is performing very well.

As we look to the remainder of the year for Kellogg North America, we expect the deceleration in at-home demand growth that we discussed earlier. We’re focused on restoring service levels, particularly in capacity in tied brands and categories and we’ll continue to reinvest the funds we deferred from the first half. We have no doubt we will emerge from 2020 with a stronger North America business.

Now let’s discuss our international businesses, starting with Europe on Slide number 20. Kellogg Europe posted its 12th consecutive quarter of organic net sales growth in quarter three. Growth decelerated as expected as the COVID led surge in at-home cereal demand moderated, while declines persisted in Away From Home channels. In cereal, our net sales increased at a low single-digit rate in the quarter. Category growth rates finished the quarter in roughly that range and we added to our year-to-date share gains in key markets across the region.

In snacks, our net sales were down very slightly in the quarter. Pringles growth improved from last quarter, led by accelerated consumption and share growth in the UK. Even, amidst altered commercial plans because of COVID, we’ve gained share this year in our three biggest markets in the region; the UK, Germany and Russia. Meanwhile, portable wholesome snacks continue to feel the impact of fewer on-the-go occasions during the quarter as expected, though it’s declined moderated from the previous quarter. Overall in emerging markets, namely Russia and Central Europe, we experienced a decline in net sales, reflecting challenging economic conditions, particularly in snacks. The good news is that cereal remained in solid growth and Pringles has gained share.

As in our other regions Europe reinvested a good portion of brand building that had been delayed from the first half. This is important for solidifying our competitive positions and we will see this again in quarter four. So we really like how we’ve been executing in Kellogg Europe.

Let’s turn to the Kellogg Latin America in Slide number 21. Given the challenging macro conditions in this region, we’d expect the decelerating net sales growth, instead Kellogg Latin America posted double-digit organic growth, amidst double-digit growth was broad-based across all four sub regions; Mexico, Brazil, Pacific and Caribbean Central America. The growth was again led by double-digit organic net sales growth in cereal, whose consumption growth remained elevated in modern trade channels even if we did see category growth rates decelerate during the quarter.

Snacks, which has been negatively impacted by the pandemics lockdown and recessionary environment bounce back in quarter three with low single-digit organic net sales growth. Leading this growth was our business in Brazil, where local production and a new strategic distribution partner are benefiting Pringles and we continue to gain share in cookies.

Higher net sales more than offset adverse transactional foreign exchange and COVID-related costs, not to mention a significant double-digit increase in brand building. Profit growth also continued to lap last year’s costly distributor transitions, as well as startup of local production in Brazil. So we’re performing well, in spite of tough conditions. We expect decelerating at-home demand to slower cereal sales in quarter four and we faced some uncertainty in Mexico regarding new labeling regulations, which we’ve mentioned previously. And we’ll see another quarter of increased brand building. Nevertheless, we are clearly executing well in Latin America in a difficult macroeconomic environment, while also reinvesting for the future.

And finally, we’ll discuss EMEA shown on Slide number 22. Like Latin America, EMEA turned in better-than-expected double-digit organic net sales growth, growth was broad based across Australia, Asia, Africa and the Middle East and across, cereal, snacks, noodles and other. As you can see on the chart cereal demand remained elevated in many markets. The result was high single-digit organic net sales for cereal in the region, but just as important have been the share gains we realized in key markets like Australia, South Korea, Saudi Arabia and South Africa.

In snacks, double-digit organic net sales growth was led by Pringles, which returned to growth momentum as we restored supply. Category growth rates have moderated, but we gained share in Australia and key markets in Asia, Africa and the Middle East.

In noodles and other products, double-digit organic growth in net sales reflected expansion of our Kellogg’s noodles in the Middle East and South Africa, as well as a strong sequential acceleration in growth for Multipro, the distributor portion of our business in West Africa. This business showed great resilience in a difficult environment in quarter three.

Like our other regions, EMEA increased its brand building at a double-digit rate in the quarter, reflecting investment and we shifted from the first half, but the same sales growth and operating leverage was enough to more than offset this investment. We do expect slower growth in EMEA in quarter four, reflecting not only the deceleration we’ve been seeing in cereal categories throughout the region, but also the impact of COVID-related school closings, which affect the important school programs we supply in North Africa. And it will be tested further by protests currently disrupting business in Nigeria. But there’s no question, we are executing well in EMEA, managing through some challenging macro conditions, while continuing to invest for the long-term.

Let’s wrap up with a brief summary on Slide number 24. First of all, I’m incredibly proud of the way our organization has rallied to execute well through unprecedented and challenging conditions. Everything starts with protecting our people and we are indeed keeping each other safe. We’re also doing a good job supplying the marketplace and we’re supporting our communities. We’re preserving and enhancing our financial flexibility to do all this in a time of turmoil and uncertainty is a testament to the character of this organization.

Second, we’re pleased with our end market performance even having to re-plan our commercial calendar we’re executing well in the marketplace. We’ve expanded household penetration, we’re growing across retail channels, notably in e-commerce and we’re finding ways to adjust to difficult conditions in Away From home Channels. Importantly, we are holding or gaining share in most of our markets, notably in the US, where we held or gained share in the majority of our retail categories and our categories in Away From Home channels, this reflects how we are competing.

Third, we’re pleased by our performance in emerging markets. In spite of challenging conditions, we’ve continued to grow in these markets with much less slowdown than we anticipated. This is a credit to our experienced management teams, our diversified geographic footprint, our local supply chains and the strength and breadth of our portfolio.

And fourth, we’re happy to be over-delivering our financial plan this year. We are again raising our full-year guidance for net sales, operating profit, earnings per share and cash flow, which has us getting ahead of our plans for enhancing financial flexibility and we’re doing this without cutting back on reinvestment in brands and capabilities. In fact, we’ve stepped up our investment, which will help us long into the future

In summary, we are confident that we will emerge from this crisis and even stronger company. We’ve reached new households and supported our most powerful brands. We’ve enhanced capabilities such as data and analytics, e-commerce and revenue growth management, we strengthened our supply chain and we’ve optimized SKUs and we’ve strengthened our portfolio and operations in emerging markets. Our goal is sustained balance between top line and cash flow growth, and we are on firmer footing now more than ever.

And with that we’ll open it up for your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session with publishing analysts. [Operator Instructions] Our first question comes from Nik Modi with RBC Capital Markets. Please go ahead.

Nik Modi — RBC Capital Markets — Analyst

Yes, good morning everyone. Steve I was hoping maybe you can help us get a little more granularity on what you’re exactly doing in terms of this customer retention. Obviously, every company is talking about, hey, we’ve recruited all these consumers and we’re spending behind it. But can you just talk about specifically what you’re doing, because it seems like this is going to be one for at least another six months, if not longer. And so it seems like you have a good window here to really influence consumer behavior. So, any thoughts on that would be really helpful?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes, thanks for the question, Nik. First of all, you can see what we’ve done in terms of our marketing and brand building investment, so we’re concentrating that in the back half of the year as we said we would. So we’ve got lots of funds directed exactly at that. The second thing is, we have really enhanced our data and analytics. So we have a better understanding now more than ever about consumers and occasions at a very granular level. So the messaging that we’re getting out there, digital, social and otherwise is directed in a more micro way against consumers and occasions that drive the type of behaviors that we want. And we’re seeing real results.

So if I gave you just a couple of examples, in terms of penetration, the RTEC category is growing penetration, not quite at 1% and were more than double that at nearly 2% RTEC penetration and we’re also retaining those households, same thing in salty snacks. So it’s really about understanding the consumer — the consumer occasion, what drives behavior and getting that message out there and we’ve got a lot of investment behind that. So more to go, we’re pleased with where we are, but it’s really based on the fundamental improvements in data and analytics and our ability to micro target against those consumers, supplemented with the right level of investment behind it.

Nik Modi — RBC Capital Markets — Analyst

Great. Thanks, Steve. I’ll pass it on.

Operator

The next question is from Steve Powers with Deutsche Bank. Please go ahead.

Steve Powers — Deutsche Bank — Analyst

Yes. Hey, good morning. Thanks. So I wanted to talk about the strong emerging market performance, which was clearly a call out in the quarter. I guess, can you talk and just a bit more around how much of that do you think, you know, was isolated to the quarter versus something that’s more structurally you can build upon in the future. I know you called out some specific headwinds in the fourth quarter in North Africa and Mexico, and maybe you can quantify those. But I’m really asking the question more in terms of the medium term on a normalized basis?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes. So, thanks, Steve. We were very pleased with the performance in emerging markets in this quarter, obviously it was led by cereal, which saw elevated demand based on some of the lockdowns. We continue to expand our noodles business very successfully, so we’re pleased about that. But, you know, in quarter four, obviously, we see the potential for some slowdowns, which is what we talked about, we’ve got unusual situations to school closings in North Africa that’s a big bit of business for us. The labeling regulations in Mexico uncertain how — if and how that will impact the business, it’s across really all consumer packages, so hard to say. And then Nigeria, obviously in the news very much as you can see with protests and disruption, which disrupts our business has disrupted our business there. So always watch-outs in emerging markets to be sure. And when you have this type of environment, coupled with the recessionary environment you always want to stay close and watch it. But very proud of the way the organization in quarter three came through in emerging markets and delivered a better-than-expected performance.

Steve Powers — Deutsche Bank — Analyst

Great, thank you.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Thanks, Steve.

Operator

The next question is from Ken Zaslow with Bank of Montreal. Please go ahead.

Ken Zaslow — BMO Capital Markets — Analyst

Hey, good morning everyone.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Good morning, Kevin.

Amit Banati — Senior Vice President and Chief Financial Officer

Hey.

Ken Zaslow — BMO Capital Markets — Analyst

You made a comment and I always like to hear this comment is you’re going to emerge stronger out of the COVID-19 experience. Can you talk about how that would affect your financial outlook in terms of what that really means in terms of qualitative and as well as quantitative outlook of what you think. What does it mean to emerge stronger? Does it mean a higher growth rate? Does it mean higher margins, is it just mean more spending? How do you frame that and just to put context on that would be very helpful. Thank you.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes. So thanks for the question, Ken, obviously we’re not going to get into any 2021 guidance at this stage, we’re still working through our plans. But when we talked about emerging as a stronger company, we’re making lasting impact of the business. You see that in the financial flexibility of the type of cash we’ve been able to generate. You see that especially in the investment in the brands and capabilities that we’re putting into the marketplace to drive penetration, to drive retention to keep those households. You see that in our digital and e-commerce capability that we’re continuing to invest in. And then our supply chain as I’ve said, very proud of our supply chain in the way they’ve been able to be agile and meet this unheard of, kind of, surge in demand, and this is a lengthy — the length of which it’s occurred, and so we’re investing in capability and capacity in the longer term in our supply chain as well, which we mentioned.

So all of those things give us very good confidence that we are emerging stronger and, you know, when we get to February, we’ll talk about in more detail what that looks like. Amit, do you want to add anything?

Amit Banati — Senior Vice President and Chief Financial Officer

Yes. And I think just to add to that I think, you know, you look at the trend of our cash flow, I think that’s allowed. We always said that, you know, our priority this year would be to reduce our net debt. And I think the strength of our cash flow is allowing us to accelerate that net debt reduction. And so I think, you know, that allows us much more financial flexibility as we emerge out of this crisis.

Ken Zaslow — BMO Capital Markets — Analyst

Okay. And just to be clear, I wasn’t looking for next year’s guidance. I was kind of thinking more about like bigger picture longer-term guidance, your growth algorithm or anything like that, that would be quantitatively different that was, kind of, what I looking at, I wasn’t trying to get that next year’s number. Just any other bigger picture financial outlook, it seems like the reduction of debt, but is there more spending that goes into data analytics? Is there anything else that — and then I’ll leave it there and I appreciate it.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes, I think, I just — exactly its confidence in the trajectory based on the investments that we just talked about. And it’s, as you know, Ken, there’s so much uncertainty right now how long this goes. What consumer behavior really changes and how it lasts. And so we’re leaning into it, we are very much leaning into it, but we believe that this crisis is terrible is it’s been has given us an opportunity to really engage with consumers in meaningful and lasting ways and it make those investments to emerge stronger.

Ken Zaslow — BMO Capital Markets — Analyst

Great, thank you.

Operator

The next question is from Ken Goldman with J.P. Morgan. Please go ahead.

Ken Goldman — J.P. Morgan — Analyst

Thanks. Your guidance assumes that at-home demand continues to decelerate. Doug McMillon though said this week he’s seeing consumer stock up behavior actually rising in certain areas. Are you — I guess, I’m curious, are you seeing any indication that your larger customers are preparing for a wave two of pantry loading? Or is this really not anything you’re anticipating at this time?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes, thanks, Ken. Again, there is so many things that are unknowable right now. And so it’s really our planning assumptions and the — to the best of our ability forward thinking of is the Away From Home channels as we talked about not really recovering very quickly, we’re weighted towards schools and travel and leisure. So the ones that are recovering convenience and so forth. QSR you’re starting to see stabilized, but not where we’re weighted. And then in terms of retail channels, the — we were talking about in the third quarter about a deceleration — it did decelerate, it continues to decelerate at what level it stops and starts to go back up again is an unknowable. We see the same news reports, we obviously see the same terrible trends in the COVID virus and so this is our planning assumption and we hope we hope for a recovery obviously as everybody does in terms of these lockdowns and so forth. But to the best of our ability this is what we see and at a point in time, you just have to make a call and say, the continuation of the deceleration is what we see, but yes to be agile, just in case that changes.

Ken Goldman — J.P. Morgan — Analyst

Thank you.

Operator

The next question is from Bryan Spillane with Bank of America. Please go ahead.

Bryan Spillane — Bank of America Merrill Lynch — Analyst

Hey, good morning and thanks for taking the question.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Good morning, Bryan.

Bryan Spillane — Bank of America Merrill Lynch — Analyst

Steve, wanted to ask about Incogmeato it’s — we’ve noticed seeing the — that the advertising presence as you’ve launched the product. And so I guess a couple of questions; one, just as you look at the strategy tactically as you’ve launched the product, do you think there is an opportunity there in terms of just having a better specialty traditional media presence versus the existing, kind of, established brand?

And then second, if you can talk a little bit about shelf space and just how far along you are in terms of distribution? And then finally just you touched on capacity constraints, so just what the plans are there to expand capacity as you build out distribution?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes. Thanks, Brian. So the first thing, I’d say is it’s early days, obviously and we’re all learning what it means to launch a new brand in a pandemic environment, where shoppers’ behaviors are different, right? And so we’ve talked about how big brands are resonating, people trust big brands, they get in and out, the shopping experience as quickly as they can. And so we do believe that launching Incogmeato under the halo of the MorningStar Farms brand gives us a real advantage. And when you look at MorningStar Farms, up and I think it’s 27% year-to-date through quarter three, obviously really strong growth and again launching Incogmeato underneath that, and it was really scheduled for March 31 launch, we had to delay that based on retailer resets. We have got our Berger our ground brought bratwurst and sausage products off. We’re launching our Disney chicken nuggets, we’re very strong in chicken and obviously the Disney franchise and this is a Mickey offering, we think we’ll get a lot of traction.

And so the national distribution is really just building as we speak. But we’re pleased with where we are, we’re pleased with the early returns, but it is very early. So everything that we talked about in terms of the strategy we think holds true, particularly the strength of the product offering itself and the strength of launching under the MorningStar Farms halo, we believe still remain very relevant. But we’re vigilant, we’ve got our sales organization out there each and every day checking on placements in doing everything they can to advance the visibility of Incogmeato in the marketplace.

Bryan Spillane — Bank of America Merrill Lynch — Analyst

And then just capacity, just [Speech Overlap]

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes, so capacity, we ran up against capacity, nobody planned for 27% growth, obviously, but we’ve got in the short-term really working on crewing and getting everything we can in terms of throughput. And as we enter 2021, we do have plans for additional lines and so more significant capacity coming on. So in short-term, it’s about crewing and throughput in the longer term or the medium term, which is really next year it’s about additional lines to really add to capacity, because we see this as a lasting, you’re not going to see this type of elevated demand, I would suspect going forward. But plant-based is a real megatrend it was before the pandemic and the type of trial that you’re seeing is really going to think — we think accelerate what was already a meaningful trend in this space.

Bryan Spillane — Bank of America Merrill Lynch — Analyst

Thanks. Thanks, Steve.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes.

Operator

The next question is from Eric Larson with Seaport Global Securities. Please go ahead.

Eric Larson — Seaport Global Securities — Analyst

Yes. Thank you. Thanks for the question everyone and hope all as well. I just want to drill down a little bit more on your cash flow, that’s sort of the important metrics that I’m focused on. And so you’ve — looks like you may be deferred a piece of your capital expenditures, which will obviously come back next year. And I’m curious also, if you’re running your plants yet to just meet demand or if you now have enough capacity to kind of rebuild maybe some inventory here. So in that difference in your guidance of $1 billion to $1.3 billion, $1.4 billion, how much of that goes away with increased capex next year, and maybe some working capital rebuild. So what is sort of the net cash flow improvement that we can look for?

Amit Banati — Senior Vice President and Chief Financial Officer

Yes. So I think just on the cash flow, right? There are number of factors that are driving our improved cash flow, right? So part of it is driven by just higher earnings, higher adjusted earnings, a significant reduction in restructuring outlays, good working capital management that we’ve seen across all our businesses. And then the capital expenditure, some of which has been delayed. Now, we are hoping to catch up on capital expenditure in quarter four and that is being reflected in our outlook with planned downtime to get some of the capex away and some of it will be delayed.

But I think as Steve mentioned, right, from a capex standpoint, I think our focus is on getting the capacity in all our constrained platforms as quickly as possible. So I would say, part of it — part of the cash flow is timing and phasing, but equally a part of it is as well just sustained improvement in our earnings, in our reduction, in restructuring as well as working capital, which we would expect to sustain.

Eric Larson — Seaport Global Securities — Analyst

Yes, just so to finish up on the one part of the question, this would — I’ll be done with this — after this. So, are you able to run your plants today to help build some of your inventory and maybe some at retail too, we know those inventories are depleted? Or are you still just running to, kind of, meet current demand?

Amit Banati — Senior Vice President and Chief Financial Officer

I think it depends on the platform and I think it depends. So, you know, in some platforms we are running flat out to service the elevated demand, in others where we can, we are taking the opportunity to catch up on capital expenditure. So I think, you know, it varies across the platforms.

Eric Larson — Seaport Global Securities — Analyst

Okay, understood. Thank you.

Operator

The next question is from Michael Lavery with Piper Sandler. Please go ahead.

Michael Lavery — Piper Sandler — Analyst

Good morning. Thank you. I just want to actually go back to MorningStar Farms clearly about the outstanding growth and stands out against your other categories. How do you think about the opportunity outside the US, we’ve seen competitors make a push there, certainly there is some scale, that’s not the same as you have in the US. But what are your ambitions to launch internationally?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes, thanks for the question, Michael. What I’d say is, right now the priority is the United States, it’s a huge opportunity MorningStar Farms is a very big brand. So clearly winning in the US is and competing in the US is a number one priority for us. We are outside the US, in Australia, New Zealand currently. And so we are experimenting and we’ll see what the opportunity is and how it presents itself, but we believe that priority one is the United States, because of the size of the market and because of the advantage we have — having MorningStar Farms is a very established brand.

Michael Lavery — Piper Sandler — Analyst

Okay, great. Thanks very much.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Thanks, Mike.

Operator

The next question is from David Palmer with Evercore ISI. Please go ahead.

David Palmer — Evercore ISI — Analyst

Thanks and good morning. Steve, you mentioned investing for future in your summary slide, and certainly that’s not new to Kellogg’s this year, it seems three plus years you’ve been doing a lot of heavy lifting in your business, particularly in the US, the rolling thunder of investments in snacks and cereal and frozen this year, and it seems like you’ve done some good repositioning that — in addition to COVID-related demand maybe creating additional room to invest or reinvest. So I’m wondering how you’re thinking longer-term about the need to reinvest versus the investment rates you’ve been doing in recent years? And what are you reviewing as you get through COVID to assess that need to reinvest? Thanks.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes, thanks David. So we have put money behind our brands, we put investment behind our brands and we’ve seen the benefits of that flowing through. And we are singularly focused on balanced growth, so we’re pleased with the topline performance pre-COVID and obviously we get the bump from COVID. And when you look at the financial results of this year based on the new guidance that we just updated today, you see a P&L that looks very solid and very balanced with good top line growth, margins improving and a nice bottom line performance. And so we also like the type of investment that we have currently behind our brands when you think about it as a percentage of net sales, for example.

And so as we think forward we like where we are in terms of our brand-building spend and we would see that continuing. So we don’t see any great need for a big insurgent into any particular area. We’ve benefited from being able to invest this year. In particular, when you think about the level of investment in the second half of the year, because of the COVID crisis, we have this concentration of lots of consumer messaging going into the back half of this year into the fourth quarter, we believe will allow us to enter 2021 with lots of good momentum and lots of brand-building and equity that’s been invested into our brands and so we like where we stand today in terms of the health of our brands and the momentum of our brands.

David Palmer — Evercore ISI — Analyst

Thank you.

Operator

The next question is from Chris Growe with Stifel. Please go ahead.

Chris Growe — Stifel — Analyst

Hi, good morning.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Good morning, Chris.

Amit Banati — Senior Vice President and Chief Financial Officer

Hi.

Chris Growe — Stifel — Analyst

Hi, I just had a question for you in relation to the progress you’ve made towards that $60 million spending that you talked about from the first half shortfall and I know you have double-digit this quarter and expect to be in the fourth quarter as well. Can you say how much of that you’ve got done in the third quarter? And I’m curious if that maybe not so much of that figure, but if your rate of spending overall has changed, has it gone up at all by chance just given the rate of elevated demand and the returns you’re seeing from that investment?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes. Thanks, Chris. So roughly speaking, we got about one-third of it off in the third quarter. And so we’re obviously planning on two-thirds of it off in the fourth quarter, which leads to double-digit brand-building against various platforms, that’s on top of what we had already planned. And so that’s — what I was just saying in the previous question, that’s why we’ve got this concentration of really good brand messaging happening in the back half of the year and with good ROIs, and so we’re very pleased with the type of performance we are getting from it. But remember too, that these are a lot of this is to build the longer-term equity of our brands and enter 2021 with good momentum.

Now having said all that, there is all this uncertainty, right? And so what happens with everything from movie releases to college football goals in the fourth quarter remains an uncertainty. So we’ll continue to have to be agile in how we think about where the right places to invest are. But we’re determined to invest against our brands to continue to build the equity to drive the right ROIs and to enter 2021 with real solid momentum.

Chris Growe — Stifel — Analyst

Thank you.

Operator

The next question is from Robert Moskow with Credit Suisse. Please go ahead.

Robert Moskow — Credit Suisse — Analyst

Hi, thank you. Steve or Amit, I was wondering if you could give us a sense of what total advertising will be for the year? Is it going to be up a lot or because you’re getting first half, second half, kind of, information, but it’s hard for us to put in context for the whole year. And also when you look at the 10-K, your advertising was down 10% last year. So on a percentage of sales basis, can you give us some color on what you think the right level is?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes. Thanks, Rob. So for the full-year will be up mid single-digits, ex the divestiture, right? And will be up, as I just mentioned double digits in the second half of the year and so that’s why I talked about 2021 entering with real momentum. And we believe that gives us the right level from a percentage of sales, roughly speaking of where we want to be. Now we always reserve the right with great ROIs and great ideas to go plus or minus, but when you look at the momentum that we’ve got in our net sales pre-COVID and what we built last year, we felt like we were getting significantly good returns on our advertising spend last year and if you recall, we exited fourth quarter with 2.7% growth and that was pre-COVID.

So we were clearly getting the benefit of the type of investments that we’re making over the course of the last three years really. And so — and it came with some surges and some tactical movements around. But if you just go back to the top line and see the top line momentum that was building over the course of last year, we feel like we were deploying that advertising spending in very good ways with good returns that we’re getting us exactly what we wanted. And obviously this year everything went completely into re-planning after COVID, but again we’ll finish the year with mid single-digit advertising spend ex-divestiture with real momentum in the back half of the year, because of the concentration than double digit nature of the investment in quarter three, quarter four.

Robert Moskow — Credit Suisse — Analyst

And just a follow-up. Is mid single-digit pretty much what you’re expecting to do? Or did you increase it beyond? Because you’ve made a lot of comments here about now is the time. So is this an increase versus the original plan?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

It’s a slight increase, Rob, to the original plan, but pretty close. And so if you recall last quarter on our earnings, I talked about how we were bound and determined to spend what we had planned on spending, and that gives us the type of concentration in the second half and the momentum. So up slightly from even that, but just slightly. But you can think about it, kind of, in terms of spending our full-year allocated budget against our brands.

Robert Moskow — Credit Suisse — Analyst

Great. Thank you.

Operator

The next question is from Jason English with Goldman Sachs. Please go ahead.

Jason English — Goldman Sachs — Analyst

Hey, good morning, folks. Congrats on another strong quarter.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Good morning, Jason.

Jason English — Goldman Sachs — Analyst

A couple of quick questions for me. First, the — we’ve obviously seen cereal sales decelerate where they were last quarter, but a sub-1% growth figure from you this quarter did surprise me. Is that reflective of maybe some inventory that had to come down after you restock last quarter? Or is it foodservice now or the education facilities becoming a bigger part of the business? What exactly is driving that weakness?

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes, Jason. It really — you didn’t point to the double-digit declines in Away From Home channels, and that’s a sizable portion of our business, as well as the on-the-go pack formats. If you take away those declines in Away From Home in particular, the rest of the business was up mid single-digits, right? And if you look at our consumption, you can see that as well, up mid single-digits. So it really is the Away From Home channels that drove that.

Jason English — Goldman Sachs — Analyst

And is Away From Home a bigger piece of the business as we get into the school year?

Amit Banati — Senior Vice President and Chief Financial Officer

Yes.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Yes. The answer to that is yes. And now there’s a great deal of uncertainty, obviously, with what really happens with schools. And we all see that in our daily lives. Schools going back and then going into hybrid and then getting shut down. And so it’s a very fluid situation. But from a consumption standpoint, we still see the elevated demand, and we still see the benefits of COVID, but it is definitely counter-balanced by the Away From Home softness.

Jason English — Goldman Sachs — Analyst

Sure. My next question is on trade spend. It’s — a lots of other folks in the industry are seeing really good price realization right now, because promotional levels are still subdued. The Nielsen data certainly suggests promotion levels are equally subdued for you, but we’re not seeing the same type of price benefit. Why is that? Is your trade spend not coming down? And if it’s not coming down, if it’s staying where it is, where is the money going if it’s not funding promotions?

Amit Banati — Senior Vice President and Chief Financial Officer

So Jason, we don’t — we won’t get into the specifics of trade. But I think from an overall standpoint, we’re seeing the price mix come through. I think within that, there is a very marked category shift. I think we talked that in our last call, just the mix between cereal and snacks and different rates there — different rates between the channels. I think that’s probably driving some of the negatives. But overall, we’re seeing price mix come through.

Jason English — Goldman Sachs — Analyst

Okay. Thanks a lot, guys. I’ll pass it on.

Steven Cahillane — Chairman of the Board and Chief Executive Officer

Thanks, Jason.

John Renwick — Vice President of Investor Relations and Corporate Planning

Operator, we are at 10:30. So we’re going to have to wrap it up.

Operator

Okay. This concludes our question-and-answer session. I would like to turn the conference back over to John Renwick for any closing remarks.

John Renwick — Vice President of Investor Relations and Corporate Planning

Thanks everyone for your interest. And if you have follow-up questions, please do not hesitate to call us.

Operator

[Operator Closing Remarks]