K
#Thanks, <UNK>
We'll start with our transformation of U.S
Snacks and an update on our DSD transition on slide number 16. I'm very pleased with the execution of this extremely complex undertaking
Customer feedback has been very good, and our operational metrics are all on track
By the end of July, we were shipping completely via warehouse distribution to all customers and exiting our DCs, trucks and equipment and reducing the workforce
We are working diligently with our customer to ensure all details and issues are taken care of
And I'm extremely proud of how our organization has risen to this challenge
From the standpoint of in-market performance, you saw the impact of the transition in our scanner data and we expected this
We pulled right back on promotional activity in order to facilitate the production and shipping of initial inventories to the warehouses of our customers
This resulted in sharp declines in incremental sales, promotional volume and number of displays
Our average number of items are down, too, reflecting our SKU rationalization
Now, as we look forward, we will see momentum build behind a more focused assortment on-shelf and fewer, but bigger, displays with an emphasis on quality positions
All of this will be supported by significant increases in brand-building against our largest brands, as we move from push to pull
The net results of all of this will be an improvement in our in-market performance over the coming weeks and months
From a financial perspective, the transformation of Snacks remains on track
We have already begun to boost our brand-building investment
And, as you can see in our Q3 P&L, the expected overhead reductions are coming through to the bottom line
An undertaking of this magnitude isn't easy
We've come a long way and we still have work to do
But you're starting to see U.S
Snack's future taking shape
There is no question that this will become a stronger, more profitable business
Snack's Q3 results, summarized on slide number 17, came in as expected
Net sales were impacted by the factors we've already discussed: the list price adjustment; the pullback in merchandising; and the rationalization of SKUs
Nevertheless, we also saw a strong increase in operating profit and operating margin
We did boost our brand-building investment in Q3, which bodes well for future performance
And this was more than offset by a ramp-up of overhead savings during the quarter, as we reduced our workforce and exited distribution centers, trucks and equipment
In the fourth quarter, we're working to build momentum
We're increasing brand-building significantly, including in-market promotional support
And we expect to see an improvement in consumption
Meanwhile, we'll be close to a full overhead savings rate, boosting profit
We'll give back some benefits from Q3, including hurricane-related shipments and some brand-building timing, but profit growth will still be very strong
Now, let's turn to slide number 18 and U.S
Morning Foods, where our top-line and in-market performance have been below our expectations
There are some things that have continued to work well
We've continued to gain share in kid-oriented brands like Frosted Flakes and Froot Loops, which have brought to market innovation and brand-building that have excited consumers
And we've continued to improve our profit margins through effective productivity initiatives
Where we've fallen short is on bringing enough excitement to our adult-oriented health and wellness brands
This is the segment that is most holding down the entire cereal category's sales and especially ours
What we have to do is get back to running the playbook that worked well for us before this year and that is working well for our kid-oriented brands to-date
So here's what we're planning for 2018. Firstly, we do have stronger commercial ideas
We have new media that will emphasize the health and wellness credentials of Mini-Wheats and Raisin Bran, two brands that simply didn't have strong enough brand-building this year
We also launched the next phase of the Special K Own It campaign, emphasizing the brand's inner strength credentials and positioning
And we've got great ideas for our kid-oriented brands, emphasizing out of breakfast snacking, for example
Secondly, you will see a step change in innovation next year
We'll renovate and innovate against our core, with news on Frosted Flakes and Froot Loops as well as more fruit-filled Raisin Bran and Special K that moves into probiotics
This is bigger innovation activity than this year
We'll also try some new things that are new to the category
These will lean into health and wellness and into convenience
And you will hear more about them in the months to come
Third, we'll drive bigger in-store excitement, with stronger properties and events and programs that leverage a total Kellogg go-to-market model now that U.S
Snacks is no longer in DSD
Imagine, for example, promotions and displays featuring Rice Krispies and Rice Krispies Treats together
We can now do that seamlessly for the first time
We'll do these three things for Pop-Tarts as well
This brand will come to market with strong food news in January
And we'll follow that up with differentiated innovation around mid-year
We know what needs to be done because we've done it before
Remember, we stabilized U.S
cereal in 2015 and 2016, and we've done it this year in our other three core cereal markets, all following the same playbook
For the rest of 2017, I don't see a change in trend for Morning Foods
But I am encouraged by the strength of our plans and expect much improved performance in 2018. Now, let's talk about Specialty Channels shown on slide number 19. This business posted its ninth straight quarter of sales and profit growth in Q3, a reflection of continued good execution by our team
Sales growth in the quarter was led by both convenience and foodservice channels, Specialty segments like K through 12 schools and cafeterias, with an added pickup from hurricane-related orders
The hybrid direct and broker approach we implemented early this year is giving us greater focus on key accounts and channels, while more economically expanding our reach to new customers
And it gives us confidence in the future growth potential for this business
Margin expansion continued on the strength of ZBB and RGM efforts
These are important and growing channels for us
And our sustained momentum reflects our continued commitment and focus to winning wherever the shopper shops
Turning to slide number 20 and our North American Other segment
We had signaled an improved second half
And this segment certainly delivered, with a return to top line growth in Q3. U.S
Frozen Foods sustained the momentum it started the previous quarter
Eggo accelerated its consumption growth and share gains on the strength of its removal of artificial colors and flavors and the success of Disney-shaped waffles
It also benefited from the exit of a competitor
This was skewed mostly to the east coast, and the brand grew even excluding this
Our Morningstar Farms line has returned to consumption and share growth, too, reflecting focused marketing and in-store support on our core burger offerings during the summer grilling season
Kashi Company continued its sequential improvement in the quarter, as anticipated
Whilst we haven't completely lapped some of the distribution declines on the Kashi brand, we are seeing strong momentum in cereal share led by Bare Naked, which is now the number one granola brand in the U.S
Meanwhile, our renovated snacks offerings are stabilizing share, as we had anticipated, with share getting back up to flat in the quarter
In Canada, we generated continued improvement in consumption, with broad-based share gains in both cereal and snacks
This business has now lapped the elasticity impact of price increases executed last year and is showing consistent improvement as we invest behind strong commercial programming and innovation
So to wrap up North America, I'm encouraged by the way we're executing post-DSD in Snacks
I'm delighted to see our North American Other businesses turning around
And we're sustaining good momentum in Specialty Channels
Cereal is a tough category right now, but we have a stronger commercial plan in place, particularly as we get to 2018. And, of course, I like what we've done to our cost structure, which has driven continued margin expansion
I'll now hand you back to <UNK> for a review of international business
Hey, Ken
Obviously, I'm not going to talk about competitors
We're pretty much focused on doing our job and that's rebuilding momentum
And I feel good about our plan and the strength of our plan in Q4. We're reinvesting in, obviously, significant amounts of brand-building here behind a pull model
We're reinvesting in in-store promotions behind a more focused assortment and we are driving more impactful, larger displays in key positions in stores
When you exit DSD, you're always going to lose some tertiary and secondary displays, but the benefits of shipping through warehouse is that we can drive some big impact displays across our biggest brands as we build momentum into what will be a strong Q1 as well from an innovation point of view and our ability to leverage the Power of K in-store going forward across one delivered platform
So we're focused on getting the momentum back in our brands
And our plans look very strong year-to-go
As it regards Morning Foods and cereal, specifically, we're not seeing points of distribution or things happen at a category level, per se
We are, obviously, disappointed with our performance this year
And we're not hitting our plan
We're hitting our plan on many elements around kids and productivity where we're not hitting our plan has been around our biggest adult brands
And that shortfall on brands like Mini-Wheats and Special K and, to a certain degree, Raisin Bran, is what's driving a softer category performance this year
The category's going be down between 2% and 3%
And some of that, quite frankly, is on us
We need to now pivot and reassert our health and wellness credentials on those adult brands, increasing claims, news and innovation around those brands as we go into next year
So I've mentioned probiotics on Special K
We have news coming on Raisin Bran
And one thing we'll talk to you about in coming months is some more transformational innovation coming to the category around the area of digestive health and convenience as we look to really stimulate adult growth within the cereal category
As you go back over time, this category has always responded, over the past 50 years, to health and wellness, whether it was fortification, fiber, oat bran, low calorie, low fat in the 1990s and 2000s
We need to drive the health credentials of the category
And that's what our plan is as we go into next year, whilst continue to drive fun and taste and versatility, and, as <UNK> said, big consumer excitement engagement through big properties and fun in-store
So that's really where we're headed
And I'm very much focused forward right now on those things
Hey, <UNK>
It's <UNK>
It's hard for me to give you a sense of the exact volume declines, but remember what we said coming into this
There is a 50% to 20% SKU rationalization that will obviously not have that amount of impact on our business, but will have a limited impact
We hope to gain space on some of our core items to get a more powerful assortment there
At the same time, we said and we knew we would get fewer displays as we came out of DSD but more impactful displays
And we pulled right back on promotions and display support through a period of three to four months here to be able to operate effectively in what is a new model for the Snacks team
We have now pivoted
Brand-building was up in Q3 and will be up much more in Q4. Our investment in promotions and in-store support with our customers is now beginning to come to life as we reinvest behind these biggest brands, and that will continue as we go into next year
I'm optimistic we will see consumption improvement in the coming weeks and months on this business
We have a strong innovation pipeline coming at the beginning of the year, so that will accelerate into next year from a consumption point of view
So we're now, if you like, the transition is behind us in many ways
We're now very much focused on operating effectively in a warehouse-delivered model, which we think we can do because we do it across our other businesses
It's a good question, <UNK>
Our business is responding in the way we expected it to
So all of our key metrics are right where the team expected them to be
It takes a lot of work in-store to make sure tags and placement and compliance is there across 20,000-plus stores, which we used to call on twice a week
But so far so good, and we'll continue to improve as we go forward
So there's nothing outside of our assumptions in our business case at the moment that would worry us
Like I say, we're just focused on getting back to growth with our customers and then obviously working with our customers in a new delivered environment, where we can also help them from a cost to serve point of view as we're on one platform now and build those joint value-creating plans in ways that we couldn't before, which I think will be really important looking forward
Absolutely, Brian
When we laid out the business plan when we started this at the beginning of the year, this was really based on a set of consumer-based and shopper-based assumptions, which is exactly what you said
Investing money in a go-to market mechanism or operating model, the consumers don't see the benefit from, quite frankly, was not where we wanted to be
So those resources are now going into focusing on how and where the shopper shops
Whether that's brand-building in old-fashioned ways or new-fashioned ways from a shopper point of view, reaching those shoppers in whichever retail environment they choose to shop, that's exactly what we're doing
We're also investing more resources, people resources, against where the growth channels are in our business
So we're seeing, for example, eCommerce in North America in Q3 grew over 60%
So like every company, winning where the shopper shops in new environments, be that pure play or click-and-collect is right up there on our agenda
And investing in capabilities, whether it be supply chain, marketing, sales in that environment, is where some of these dollars are going
Also remember some of the highest growth potential brands in our portfolio, Pringles, Cheez-It, Rice Krispies Treats, these brands are going get significantly more brand-building, way up there in the double digits for the next year, as we look to accelerate those brands
Whether that's TV, media type investments, whether it's customer focused investments, whether it's capital into pack/price format investments to make sure that we have exactly the right offering in the right channel to fit the consumers and the shoppers' needs
What we said we're doing, we're going to do, and you'll see it come through in the months to come into next year
Thanks, <UNK>
As I look forward on our portfolio, as I emphasized, it's less about absolute money or share of voice as it used to be
It's more about getting the right ideas behind the right brands
We have a great set of existing core brands, the Core 6, as we call them
They cover 70% of the needs when it comes to the category, number one
We have to up our game on brands like Mini-Wheats, Special K, and Raisin Bran to bring, as Steve said, contemporary health and wellness credentials to those brands
We're down the track on Special K
And we're seeing the brand begin to respond, not only in the U.S
but around the world
And we're bringing more, in the way of probiotics to Special K next year
Raisin Bran and Mini-Wheats, we can do a lot more to pull out the wellness credentials of those brands and talk to consumers about them
This isn't category work, per se
This is brand work relevant to consumer needs, brand-on-brand
I've spoken before about how the category's always been driven over time, actually through nutrition
Whether it was fortification back in the 1950s, fiber, oat bran in the 1970s and 1980s, and then for a long while here, low calorie, low fat drove the Special K brand in particular and the category for years
Now, I believe gut health and science is coming back to nutrition and nutrition in the cereal category
We're well placed as a category to actually find tailwinds in nutrition in the months and years to come
It's good for cereal and it's good for our emphasis on health and wellness
You add the Kashi brands and the Kashi business to that as well and we have a on-trend set of brands, I think, for the 10 years to come
The critical thing, though, is finding great commercial ideas, renovation and innovation that can bring to life those trends in unique ways for our brands
Our portfolio and our category is uniquely placed to do that
It's incumbent on us to do it
So that's really where our focus is
35%,36% of the cereal consumption in the U.S
today happens outside of the breakfast occasion
That trend's only increasing and will only continue to increase as you think of demographics and age cohorts going forward here
And so we are agnostic to what time of day we communicate the benefits of our foods
And we'll communicate to everybody, wherever they are throughout the day, these benefits
We've had great success with some of our kid brands against millennials in certain dayparts, like the evening, and we will continue to drive our portfolio where it makes sense to fit people's days
The final thing I'll mention is we do need to still bring transformational innovation to cereal, okay, and to the breakfast occasion, which means investing more, maybe, in new alternatives in the area of digestive health and/or convenience
And we're working hard on that
And hopefully, you'll see some transformational innovation ideas come out of our company over the next few months here that show that we are investing to grow our business across these key categories
