Kellanova Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

Key Takeaways

  • Strong Q1 results with 14% organic net sales growth – the 4th straight quarter of double-digit growth, broad-based across all regions and major categories.
  • Operating margins stabilized and improved in Q1, driven by productivity initiatives, revenue growth management and receding supply bottlenecks.
  • Raised full-year outlook: now expecting 6-7% organic net sales growth and narrowed adjusted EPS to a 1-3% decline, reflecting a stronger-than-expected start.
  • On track for the Q4 spin-off into Kelanova (snacks and emerging markets) and W.K. Kellogg (North America cereal), with audited carve-out financials and transition services being finalized.
  • Q1 cash flow declined due to payouts of incentive compensation and spin-off costs, while EPS faced headwinds from higher interest expense and reduced pension income.
AI Generated. May Contain Errors.
Earnings Conference Call
Kellanova Q1 2023
00:00 / 00:00

There are 13 speakers on the call.

Operator

Morning. Welcome to The Kellogg Company's First Quarter 2023 Earnings Conference Call. Please note that you have been placed on mute to prevent 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.

Operator

Remmick, you may begin your conference call.

Speaker 1

Thank you, operator. Good morning, and thank you for joining us today for a review of our Q1 results and an update on our outlook for 2023. I'm joined this morning by Steve Cahillane, our Chairman and Chief Executive Officer and Amit Banati, our Vice Chairman and Chief Financial Officer. Slide number 3 shows our forward looking statements disclaimer. As you are aware, certain statements made today such as project performance are forward looking statements.

Speaker 1

Actual results could be materially different from those projected. Concerning factors that could cause these results to differ, please refer to the 3rd slide of this presentation as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of kelloggandcompany.com. Always, when referring to our results and outlook, unless otherwise noted, we will be referring 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.

Speaker 2

Thanks, John, and good morning, everyone. We're pleased to be able to report a very strong start to the year. In fact, it was stronger than we had anticipated And puts us in the enviable position of being able to raise our outlook for the full year. Our top line growth momentum continues as shown on Slide number 5. This was our 4th consecutive quarter of double digit organic net sales growth and beneath the magnitude of our Q1 growth are promising trends.

Speaker 2

We continue to deliver above our long term growth target. We continue to deliver broad based growth across each Our 4 regions and across each of our 4 major category groups. Our soon to be Kelanova businesses continue to grow strongly, led by Snacks in Emerging Markets, all paced by our highly differentiated world class brands. Our soon to be W. K.

Speaker 2

Kellogg Co. Businesses Continue to show recovery in net sales, consumption and share. We have continued to execute revenue growth management actions across our businesses Right through the Q1 in order to keep up with high input and we have supported our growth with sustained innovation And with the supply improving, increased brand building investment. So we feel very good about our top line growth momentum and outlook. We also feel good about restoring our profit margins.

Speaker 2

We said that this would be a year in which we stabilize and even improve our margins After being pressured the last couple of years by soaring input cost inflation and inefficiencies and costs related to bottlenecks and shortages. The chart on Slide number 6 shows that margins are indeed stabilizing. In fact, better than expected margins are what drove most of the Q1 over delivery versus our expectations. Aside from what we're lapping, what underlying margin performance is what gives us increased confidence in the full year. Firstly, we continue to execute well on productivity initiatives and revenue growth management actions, both of which are starting to more fully catch up with our input cost inflation.

Speaker 2

2nd, we continue to improve our service levels And the bottlenecks and shortages that had created our business are finally receding. So while costs remain high, we are pleased with the profit margin recovery. And it's not just the financials that are off to a good start in 2023. Kellogg's Better Days Promise, Our social and environmental program continues to be a strategic priority for us. And as shown on Slide number 7, we were as active as ever in these areas action oriented approach.

Speaker 2

And the far right column shows that these actions continue to be recognized. We believe ESG is one of Kellogg Company's differentiating strengths and will continue to be when we are Kelanova and W. K. Kellogg. Speaking of Kelanova and W.

Speaker 2

K. Kellogg, we are very pleased with how our spin off work is progressing. Slide number 8 offers a high level timeline of the work we are doing in order to be able to set up both companies for success, provide you with the strategic and financial information you need and execute the transaction. Everything is progressing well. The announcement of new company names has been well received by stakeholders.

Speaker 2

The organizational design work is finishing up and processes for W. K. Kellogg is underway and various post spin transition services continue to be ironed out. Prior year carve out financials are being prepared and we expect to have them audited in the next couple of months. During the Q3, we plan to test run W.

Speaker 2

K. Kellogg on its own from procurement to manufacturing to invoicing to financials and best of all employee sentiment and engagement remain Very high. We expect to be able to provide you with information via a Form 10 sometime in late summer, followed by an investor event likely in late Q3, during which we will be able to share with you the strategies, capital structures and financial outlooks And most importantly, all of this preparation work has only that this spin off creates value for share owners. We are setting up both companies for success. WK Kellogg Co.

Speaker 2

Will benefit from focus and resource prioritization And Kelanova will be a higher growth company with 80% of sales coming from Snacks and Emerging Markets. Now let me turn it over to Amit, who will provide you the financial details of our Q1 and full year outlook.

Speaker 3

Thank you, Steve, and good morning, everyone. Slide number 10, our Q4 financial results. Obviously, it was a very strong start to the year. Our 14% organic net sales growth was driven by sustained growth in price and mix. Net sales were better than expected principally because of volume.

Speaker 3

On profit margins than we had expected, leading to a very strong 18% operating profit on a currency neutral basis. This higher operating profit drove adjusted earnings per share to be 3% higher than last year on a currency neutral basis. Remember, this growth is in spite of significant macro related headwinds In fact, higher interest expense and lower pension accounting income pulled EPS down by about 5 8 percentage points respectively year on year in the quarter. Cash flow in the 1st 3 months year on year as expected. This is related to the payout of 2022's incentive compensation in quarter 1, Cash outlets related to the spin off and the timing of certain working capital items and capital.

Speaker 3

Now let's look at each metric in a little more detail. Slide number 11 lays out the components of our strong net sales growth in quarter 1. Price mix growth was sustained in the mid teens, reflecting revenue growth management initiatives around the world 2022 and right through quarter 1, 2023 as we consider high input cost inflation. Volume declined reflecting price elasticity, though not as much as we had expected for quarter 1. Foreign currency translation reduced net sales by about 3 points, reflecting the stronger U.

Speaker 3

S. Dollar against key currencies versus the prior year. As we'll discuss in a moment, we are raising our organic net sales guidance for the year. Our outlook continues to prudently assume that price elasticities will sustain their upward move towards historical levels. And depending on the direction of input cost inflation, that price mix will begin to lap last year's sizable revenue growth management actions.

Speaker 3

Nonetheless, there's no posting better than expected growth yet again in quarter 1, indicating momentum in our business, giving us good confidence in our outlook. Next, let's review our gross profit Performance on Slide number 12. As we've discussed numerous times, our objective in this high inflation environment Good job at this. Even in the Q4 2021 Productivity and revenue growth management continue to catch up to a high market driven input cost inflation. Bottlenecks and shortages did diminish in the quarter a little sooner than we had projected.

Speaker 3

We did lap a negative residual impact from the fire and strike, but even excluding that estimated impact from last year, Our gross profit dollars increased year on year. We also improved gross profit on a percentage margin basis as we lapped the fire and strike and narrowed our underlying margin decline by more than we expected. Our plan was always to have a better second half than first half due to gradually improving That we can finish the year better than the flattish margin we had discussed previously. Slide number 13 whose quarterly year on year changes this year are greatly affected by year ago comparisons. As expected, Our SG and A in this year's quarter 1 increased at a double digit rate year on year as we lap an unusual decline in the year earlier period.

Speaker 3

That was when brand building had been pulled back because of supply disruptions, most notably during North America cereals inventory rebuild. And as we lapped overhead, that was low because of low travel and meetings during the pandemic. As you can see on the slide, we start to lap A resumption of brand building and travel and meetings in quarter 2, but it was really the second half last full restoration of both and also raised our incentive compensation accruals. But in absolute numbers, we feel good and gross profit were more than enough to cover this year on year rise in SG and A expense resulting in our 18% currency neutral growth Importantly, we have sustained a multi year upward trajectory on operating profit. Even excluding from the year earlier quarter An estimated impact of the fire and strike, we continued to grow our dollars year on year.

Speaker 3

In fact, our quarter 1 than previous year's quarter 1 operating profit as well even dating back to prior to the Keebler divestiture. So obviously a strong start to the year and this gives us the confidence to raise our full year guidance. Moving down the income statement, Slide number 15 shows Growth was more than enough to offset what were severe below the line items. These below the line pressures were expected and will continue through the year. Interest expense increased significantly year on year due to higher interest rates.

Speaker 3

In dollars, we should see Other income decreased sharply year on year reflecting accounting of pension and post retirement plan asset values and interest rates stemming from last year's decline in financial markets. Because of some favorability in some other items in this line, This quarter one figure is probably a little higher than what we will see in the remaining quarters. Our effective tax rate Came in a little higher than expected largely due to country mix and some other differences and it was a little above tax rate of about 22%. Average shares outstanding were up slightly year on year and we would expect that to be the case for the full year as well. In addition, foreign currency translation was a headwind of a little more than 2 foreign currency translation out of our guidance because it is out of our control and difficult to predict.

Speaker 3

But today's exchange rates would suggest So while these below the line items are weighing down EPS as expected, it is important to remember that the operational side of our P and L Through operating profit is very strong. Now let's turn to our cash flow and balance sheet on Slide 16. As I mentioned earlier, our cash flow in quarter 1 was lower than last year's as we had expected. In addition to lapping a particularly year ago period. This quarter, we experienced the payout of 2022's incentive compensation as well as incremental cash outlays related to the spin off.

Speaker 3

Cash flow was also impacted year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year

Speaker 4

on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on year on

Speaker 3

year on year on year on year on year on year. Meanwhile, our net debt has been trending lower, contributing to our strong financial flexibility. So let's now summarize our guidance on Slide 17. Keep in mind that while we expect the spin off in Q4, our guidance assumes it takes place at year end performance in quarter 1, which continue to demonstrate price realization and solid momentum across We maintain our assumption for decelerating growth as the year progresses, which reflects a likely return of elasticity towards historical levels, as well as lapping a particularly substantial revenue growth management actions in the second half of last year. This 6% to 7% organic growth This percentage point increase to the range reflects our stronger than expected quarter 1.

Speaker 3

We feel increasingly confident Based on that improved operating profit outlook, we are raising our adjusted earnings per share guidance as well. Now looking for a year on year decline of 1% to 3%. Remember that this decline is more than explained by the year on year reduction in pension and post retirement income, a non operating non cash item That is expected to have a negative impact of nearly 7 percentage points on EPS this year. The negative impact of higher interest expense due to higher interest rates in the economy is another 4% plus. If it weren't for those 2 macro related impacts, our guidance for EPS would be well above our Our guidance for cash flow remains at $1,000,000,000 to $1,100,000,000 Recall that within this guidance, So to summarize our financial position, sustained price realization continue to generate strong top line growth around the world and across our category groups.

Speaker 3

We like how our businesses are performing and we have confidence in our full year sales outlook. Productivity and revenue growth management actions along with diminishing bottlenecks and shortages and improving service levels have gotten us off to a good start towards improving our profit margins. Our financial flexibility is strong marked by a solid balance sheet and cash flow that remains in good shape even with some adverse timing in the 1st 3 months. Our guidance for 2023 has moved higher continuing to expect net sales growth and operating profit growth that are above our long term targets. The fast start of quarter 1 gives us that much more confidence in this full year outlook, even giving us some flexibility relative to readying ourselves for the spin off.

Speaker 3

We continue to make good progress on setting up both Calanova minimizing standalone costs for W. K. Kellogg and stranded margin for Kelanova, and we are ensuring solid capital structures

Speaker 2

We'll organize our discussion around the businesses that will comprise Kelanova and W. K. Kellogg. Slide number 20 reminds you of the composition of the two businesses. And on the slide, you can see how our top line momentum in quarter 1 continued to span across our portfolio with both Kelanova and WK Kellogg by discussing the Kelownova businesses leading off with our emerging markets regions.

Speaker 2

Slide number 21 shows the financial performance of our EMEA region. As you can see, this region sustained its exceptional momentum in the Q1, posting a 3rd consecutive quarter of organic net sales growth of at least 20%. And equally impressive, it expanded its operating profit margin and accelerated its operating profit growth to 21% year on year and all this in spite of exceedingly high cost inflation and reinvestment into the business. Let's break the region down into key category groups, starting with snacks on Slide 22. Posted yet another quarter of explosive top line growth in the Q1, growing net sales at an organic rate of 26% year on year.

Speaker 2

This growth was broad based across all of our major sub regions and it was led by its biggest brand Pringles. In market, Pringles continues to significantly outpace the high teens growth of the salty snacks category in the region with notable growth and share gains in markets like Australia, Korea, Japan and Thailand. EMEA Cereal also sustained strong momentum. As shown on Slide number 23, this business delivered double digit organic net sales growth again in the Q1. And this growth was broad based with growth across each of our major sub regions, Asia, Australia, Africa and the Middle East, North Africa, Turkey region.

Speaker 2

In market, we have outpaced the cereal categories mid single digit consumption growth in the region, which brings us to noodles and other And Slide number 24, led by Multipro in Nigeria, this business continued to deliver organic net sales growth In excess of 20% in the Q1. Even amidst high inflation and a currency demonetization initiative, Multipro continued to thrive, clear evidence of its competitive advantage and experienced management team. Meanwhile, we continue to expand our Kellogg Noodles business outside of Nigeria. So clearly, Kellogg EMEA is firing on all cylinders. For the full year, we continue to expect sustained momentum across all three category groups, delivering yet another year of organic net sales growth, all while improving our profit margins.

Speaker 2

Now let's discuss Latin America starting on Slide number 26. Kellogg Latin America in the Q1 delivered another quarter of double digit organic net sales growth. This growth was led by Mexico, but we also saw strong growth in Brazil and our Central America and Caribbean sub region. We expanded our operating margin in the Q1, helping to grow our operating profit by 20% year on year, albeit lapping notably high costs in the year earlier quarter. Our snacks business in Latin America continued to deliver double digit organic net sales growth as shown on Slide number 27.

Speaker 2

Portable Wholesome Snacks category in Mexico and stabilized our share in cookies in Brazil. Kellogg Latin America also recorded In market category growth rates remain robust in the region and our consumption has kept pace in Mexico and gained share in Brazil and Puerto Rico. So Latin America continues to perform well. And for the year, we continue to expect this region to sustain strong top line momentum. It will be led by Snacks, but also by growth in Cereal, with both supported by strong innovation and relevant brand news.

Speaker 2

We also expect Latin America to improve its profit margins this year and it plans to do all this while working on separating its Caribbean cereal business as part of the spin off. So both of our emerging markets regions are showing current momentum to go with their outstanding long term prospects. Now let's turn to our developed markets starting with Kellogg Europe and Slide number 30. Here we continued to post strong 8% organic net sales growth in quarter 1 with organic growth across our categories, salty snacks, wholesome snacks and cereal. The Kellogg Europe net sales growth would have been in the double digits were it not for Russia, which we are in the process of divesting.

Speaker 2

Operating profit declined slightly year on year, but it was comparing against an unusually strong year earlier quarter. In addition, if we were to exclude the Russia business, Kellogg Europe's operating profit would have been up year on year in the high single digits. So our underlying European business is performing very well. In snacks, which represents just over half of our sales in Kellogg Europe, We posted another strong quarter as shown on Slide number 31. In fact, the Q1 marked the 7th quarter in the last nine in which we have posted double digit growth in our European snacks business.

Speaker 2

Specifically, our organic net sales growth accelerated sequentially in the Q1 to 14% year on year and this growth would have been almost twice that if it were not for Russia. In market, Pringles has sustained its double digit growth momentum, gaining share in the region led by the United Kingdom and France. And in portable wholesome snacks, we are experiencing double digit consumption growth overall and we have gained 2 full share points In the UK, led by Rice Krispies Squares. Our cereal business in Europe also sustained growth in the Q1 as shown on Slide number 32. The growth was slower than recent quarters as we have seen rising price elasticity as well as intentional reduction of certain less profitable merchandising activities.

Speaker 2

Nevertheless, we continue to execute well in a challenging market. So when we look at the full year for Kellogg Europe, we continue to expect the region to post another year of solid top line growth led by Snacks. In fact, this should be a 6th consecutive year of organic net sales growth in our European snacks business. As mentioned previously, we are navigating through cost and supply pressures, which are particularly heavy in the first half. And now we'll turn to Kellogg North America beginning with Slide number 34.

Speaker 2

As you can see, it was a very strong quarter for Kellogg North America. We recorded organic net sales growth of 14% with price mix accelerating for a 4th consecutive quarter as we continue to implement revenue growth management actions in order to catch up with input cost inflation. This revenue growth management along with productivity Importantly, we again generated organic net sales growth in all three category groups during the Q1. Slide number 35 shows how our largest category group snacks sustained its net sales momentum by growing 15% in the quarter. In market, Pringles well outpaced the U.

Speaker 2

S. Salty snacks categories double digit growth led by our multi packs and our core four flavors. In crackers, Cheez It lapped an exceptionally strong year earlier quarter, but we did see double digit consumption growth by our club and townhouse brands. And in portable Wholesome Snacks, our decision to discontinue various Cashi Bars and the prioritization of capacity constrained Pop Tarts SKUs mass continued momentum in Rice Krispies Treats and a resurgent Special K Bars Business. Our frozen foods business also grew net sales in the Q1 as shown on Slide number 36.

Speaker 2

Here the growth has been more modest in part because of supply disruptions, both in our Eggo frozen breakfast business and especially in our Morningstar Farms plant based foods business. Meantime, both Eggo and Morningstar Farms are leading brands with strong commercial programs planned, so we are confident in our ability to improve our frozen performance as the year progresses. All of the regions and categories we've discussed up to now will be part of Telenova and all of them are showing strong and continued net sales growth to go with progress toward recovering margins. Now we're going to turn to our North America Cereal business, which forms the vast majority of what will be W. K.

Speaker 2

Kellogg Co. As shown on Slide number 37, This business continues to recover rapidly and posted another quarter of double digit organic net sales growth. In the U. S, the cereal category grew at a double digit rate in the quarter and we gained nearly 3 points of share year on year As our resumed commercial activity is producing share gains across our portfolio led by Rice Krispies, Special K, Raisin Bran and Frosted Flakes. This recovery is evident in our U.

Speaker 2

S. Away from home business as well. We gained several points of share across each of our major channels, convenience stores, food service and schools. And in Canada, where the restoration of inventory has come a bit more recently, our consumption growth was even more pronounced And we gained roughly 6 points of share year on year. So the recovery continues in our North America Cereal business.

Speaker 2

Turning to Slide number 38, our North America region is off to a strong start in 2023, giving us confidence in the full year. Snacks is expected to sustain its momentum, while we have plans in place to improve our performance in frozen, And our North America Cereal business continues its recovery. We are off to a good start on a margin recovery in North America, even as we reinvest in our brands. So the business is in good shape as we set up for the spin off of W. K.

Speaker 2

Kellogg. So let me summarize on Slide number 40. We're off to a very strong start to this year. Around the world and across our key categories and brands, We have clearly sustained growth momentum and our profit margins impacted over the last 18 months by accelerated input cost inflation, with a strong Q1 already in the book are what give us increased confidence in a raised full year outlook that had already called for sales and profit growth above our long term targets. But while we are executing our plan and delivering on our current year results, we are also busy creating the future.

Speaker 2

This includes most notably our planned spin off of our North America Cereal business. We are full steam ahead on this work As we work through every detail of this important undertaking, we have become only more confident that this will create real value for our share owners. We'll have a more focused W. K. Kellogg able to leverage its scale in North America Cereal with a fit for purpose strategy, expertise and resource allocation and we'll have greater visibility into a global snacking oriented Kelanova that has been and will continue to be

Operator

Our first question today comes from the line of David Palmer from Evercore ISI. Please go ahead. Your line is now open.

Speaker 5

Thanks. A question on gross spending. I would imagine this is the year That you're getting past a lot of supply chains both supply chain issues both upstream and within the company. And I'm wondering If you could just talk to where the biggest gross spending energy is being applied, whether that's advertising and promotion and innovation in areas of the world and parts of the business? Thanks.

Speaker 2

Yes. Thanks for the question, David. I want to make sure I understand the question. But in terms of reinvesting in the business, we are certainly investing in brand building. There's no question about that.

Speaker 2

We're investing in innovation and we're investing in capacity. And so we are obviously coming out of the pandemic and the supply disruptions, the bottlenecks and shortages As so many other companies are and we're investing for growth. And you see that. You see that in our upgraded guidance for the top line. You see that in the better service levels that we're delivering to our customers.

Speaker 2

You see that in Pringles expansion around the world, which requires CapEx. And so it's really in those main areas. And again, if I understood the question, that's essentially where we're looking to deploy those resources.

Speaker 5

Yes. I mean, I guess, I'm just looking for examples and metrics with regard to the number of new products, The ability for you to get those things on the shelf and whether you're going to be layering in promotion spending as you go through this year, I think there's I'm concerned that volumes in this space don't improve or don't hold up through the year as pricing rolls off. These types of things can help people feel better about those volume metrics as you get later in the year. So Yes.

Speaker 2

I see, David. So I have heard some of the commentary around promotions and so forth, but brand building is up, innovation is up. And this notion that merchandising is returning to pre pandemic levels, We're not quite there yet, but it's improving. And remember, merchandising, which some see as one element of the outcome of price promotion, It gets your product out on the floor, it gets your consumers interrupted in their shopping patterns and we see it as a good thing. In terms of Just going forward in innovation, the bar of innovation, I've said this in the past, has clearly gone up as SKU counts went down during the pandemic.

Speaker 2

So that's been raised. And we are very pleased with our top line performance. We're pleased with our ability That we're being successful in, we're being competitive in. And I think it's a positive environment as we look into the future.

Speaker 5

Thank you.

Operator

Thank you. The next question today comes from the line of Andrew Lazar from Barclays. Please go ahead. Your line is now open.

Speaker 6

Great. Thanks. Good morning, everybody.

Speaker 4

Steve, I guess I've got a bit

Speaker 6

of a higher level sort of

Speaker 4

hi there. Little bit of

Speaker 6

a higher level industry question for you. It looks as though we may finally be heading in earnest towards a more normal operating environment Following 3 plus years of all of the anomalous dynamics. And I guess I'm curious how you think this transition for the group to normal We'll look, again, not just for Kellogg, but for the industry as a whole. I guess, in other words, do you think this transition to normalcy can be made In a somewhat orderly way or should investors have their expectations in check, maybe potentially for more uneven results for some time As pricing has lapped and perhaps it takes more time for volumes to pivot more positively. Based on just trying to assess whether we See more of a like a hard or a soft landing, if you will, for food manufacturers as we kind of move into the a more normal operating phase, if you will?

Speaker 6

Thanks so much.

Speaker 2

Yes. Thanks for the question, Andrew. I love some of the words you used in there normal and predictable and soft landing. Clearly, we've come through the last 3 plus years in facing all these unprecedented challenges. We said as Kellogg that we would exit the pandemic a stronger company.

Speaker 2

And many of our competitors said the same thing, and we certainly have. And I think that puts us And the industry in a good position to actually come into this next kind of era, if you like, in a much Stronger fashion without some of the disruptions and challenges that you alluded to. I mentioned to David in the earlier comment, the Bard innovation has been That is unquestionable. There is no question that innovations have to be better. They have to be performing Right out of the gate, shelf space is more valuable than it's ever been, today in my years in the business.

Speaker 2

Supply chains have had to become more agile. There's no question about that. Our supply chains have all been challenged to a degree they never have before. They've become more agile, but they've also used and utilized new technologies. We're deploying technologies like artificial intelligence, Machine learning, we're getting better and better at predictive, really end to end.

Speaker 2

The relationships with our customers, I think, again, during the pandemic, it was about how do we serve our consumers, our joint consumers in ways that we never had to face before. Shifts with consumers, I think, are more end to end than they've ever been before. And so looking to eliminate friction is something that we talk to our customers all the I'm about joint business plans. Start with how do you eliminate waste end to end. How do you grow the size of the prize Well, we serve the common consumer.

Speaker 2

And I guess the final thing I'd say is the whole world of marketing has changed like The true promise of 1 to 1 marketing that we've been talking about for so many years is upon us with data and analytics, More sophisticated than they've ever been, 1st party data, more robust and more available than it's ever been to really Target consumers in a way that marketers have dreamed of for years. And so you put all these things together and it's not 1987 anymore. I think it is a really it's not to be too rosy about it, but it's a new morning. And it's, I think a very, very promising outlook as we look towards how our industry and how Kellogg will perform in the future. We're very optimistic about the future for all of those reasons.

Speaker 6

Really appreciate the thoughts. Thank you.

Operator

Thank you. The next question today comes from the line of Bryan Spillane from Bank of America. Please go ahead. Your line is now open.

Speaker 7

I'm not sure, I might have missed it, but did you give us an update on where cost of goods inflation was in the quarter and what you're expecting, I guess, For the balance of the year and maybe if you can just give us a little bit of color on kind of what's moving in each direction. I think we're beginning to see some Relief on like resins, some packaging costs. So just if you can just sort of unpack for us a little bit just kind of the COGS basket, Where it stands and kind of what we should be looking at as we go forward?

Speaker 3

Sure. So I think if you look at Costs came in largely in line with expectations from a commodity standpoint. I think our outlook for the year continues to be Mid teens inflation, so no significant change than what we had talked in our last call. Certainly, there are some movement in some commodities. But like we've talked previously, we obviously have a hedging program.

Speaker 3

So some of that would flow through as hedges roll across. Very pleased with the performance in the Q1. I mean, if you look at our gross profit dollars, they were up 16% on a currency neutral basis, so strong double digit growth In our gross profit dollars, no question aided by the fire and strike in quarter 1. But even if you look at it from a full year standpoint, I think based on our quarter one performance, we are now saying that our gross profit dollars would be slightly ahead of our net sales growth. So, we had talked previously of flattish gross margins for the year.

Speaker 3

I think based on what we're seeing right now, we expect our gross margins to be up Slightly for the year.

Speaker 7

Okay, great. Thanks for that. And just as we're thinking about the flow of that, does the inflation moderate as the year goes on? Or is

Speaker 3

I think the lap I'd say overall, it's in the mid teen inflation. I think the lap Would moderate in the second half because that's when we saw commodities kept going up last year. So you'll start lapping that in the second half. So the year on year moderation will certainly be more back half weighted.

Speaker 7

All right. Terrific. Thanks, Amit.

Operator

Thank you. The next question today comes from the line of Ken Goldman from JPMorgan. Please go ahead. Your line is now open.

Speaker 8

Hi, thanks very much. I wanted to ask a quick question on LatAm. The volumes were Down year on year, I think by the largest negative number in a few years. Obviously, a lot of that was to be expected given the pricing. But Just sequentially pricing wasn't up quite as much as 4Q was and the volume comp wasn't I guess that burdensome.

Speaker 8

So I'm just curious how you think about that particular region, some of the tonnage numbers we're seeing there, and how that relates to the maybe

Speaker 2

Yes. Thanks. Ken, I'd start with overall very positively Disposed to our results in Latin America. When you look at the disruption and you look at from a macroeconomic standpoint and all the things that are challenging in emerging markets in general. Latin America has been a pretty, has been a pretty kind of steady place to be for the last several years up until about 2 years ago where we started to see a return to some of the macroeconomic challenges, the geopolitical So with that, we're very pleased with our performance.

Speaker 2

But we are seeing a rise in elasticity in Latin America. And that's no surprise. You see very high price increases to overcome the input cost inflation. And it's worsened by ForEx over the past several quarters as well. It's been most pronounced in cereal, but we continue to perform well in cereal, in Mexico, A couple of years ago in Brazil, put some lines of Pringles in.

Speaker 2

Pringles continues to perform very well in Latin America. So our outlook from Latin America remains strong. We're pleased with the performance there, but it's obviously an emerging market. So it comes with some volatility.

Speaker 9

Great. Thanks,

Operator

Steve. Thank you. The next question today comes from the line of Jason English from Goldman Sachs. Please go ahead. Your line is now open.

Speaker 4

Hey, good morning folks. Thanks for letting me in. The comment you made early, Steve, about CerialCo or W. K. KelloggCo, I think is what we're calling it, maybe not the co at the end.

Speaker 4

But if that business effectively being stood up and running independently in the Q3, it was interesting. How much functional overlap will there still be? And I guess what I'm kind of angling at here is it sounds like you may actually be we're all freaking out about like how big the stranded cost and separation is going to be, what the incremental cost nuggets could be. It sounds like you may actually be absorbing a lot of that In this year's guidance, is that right? Thanks.

Speaker 2

That is right. That is right, Jason. That is in our guidance. The incremental cost is standing that up. We're doing something called company in company, which is essentially running water through the pipes so that we make sure that when we do spin off the business, It's ready to go.

Speaker 2

And what I'd say in terms of stranded cost, stranded margin, obviously, that's coming. But any kind of The way you portrayed that, I would say we're very confident, very confident in our ability to stand up these two companies With strong capital structures and very strong outlooks. And so I think many investors will be quite pleased when they see us come In the summertime during our Investor Day. We can't say much right now, but I'm very confident that those two businesses will be stood up Strong with very strong outlooks. And I think you'll see the value creation and the value unlock will be an moment for those who don't quite get it yet.

Speaker 4

Great. I'll leave it there. Thanks.

Operator

Thank you. The next question today comes from the line of Alexia Howard from Bernstein. Please go ahead. Your line is now open.

Speaker 4

Good morning, everyone.

Speaker 2

Good morning. Good morning, Alexia.

Speaker 4

Hi. I think you mentioned at the beginning of the prepared remarks that Volume came through a little better than expected. I know it's still down, but it sounded as though that was stronger. Can you give us a bit of color about where it was stronger? And do you expect those that volume trajectory to improve as price growth flows through the course of the year?

Speaker 4

Or how much do you expect it to improve?

Speaker 2

Yes. Thanks, Alexia. I'll start and Amit may want to add. And so volume was clearly better. And if you look at it compared to Historical elasticities, it's better everywhere.

Speaker 2

There's no question about that. And that's not unexpected in a world where inflation is across The Board, right? So it's all relative and you have to think about the relativity of our categories versus more discretionary categories. Having said that, very good performance in North America relative to historical elasticities, very strong performance in EMEA Relative to elasticities, I talked about Latin America where we had elasticities rising a bit more. Europe, You see a lot of noise in there based on Russia and so forth, but a little bit more elasticity there.

Speaker 2

And so across the board, very good Standout performance in North America and EMEA relative to overperforming versus elasticities. When we think about the back cap of the year, the remainder of the year. We are prudently assuming that elasticities start to increase in approach not quite historical levels, But on a march towards historical levels and we think that's just a smart planning assumption. We'll see how it unfolds.

Speaker 4

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

Operator

Thank you. The next question today comes from the line of Steve Powers from Deutsche Bank.

Speaker 9

I was actually going to ask a very similar question to the one Jason answered or asked, I think you answered that one pretty clearly. I guess the only thing I'd tack onto it maybe is you mentioned You cited that both Kelanova and W. K. Kellogg pro form a grew low double digits in the quarter and I realize you're constrained by Too much details, but just given that disclosure and I'm thinking about as I think about the 6% to 7% full year Organic growth guide, is there any way you can frame for us a little bit about how you expect those 2 businesses to be contributing to that 6% to 7% on the year, so we can get a little sense of expected momentum as we go into the new regime. Thank you.

Speaker 3

Yes. I'd say, Steve, we've got great momentum in both businesses. I think you've seen the results of Calanova, good broad based growth across All our categories, both in the U. S, internationally and across our categories as well. I think in our North America Cereal, we're very pleased with the recovery that we are seeing there from a share standpoint.

Speaker 3

And that would continue to be the focus for the rest of the year. So there's good momentum across both the businesses.

Speaker 1

Did we understand your question correctly, Steve?

Speaker 9

Sorry, I was on mute. No, yes, thanks. I guess if there's any way to provide a little bit of quantification around sort of the contribution of

Speaker 3

Yes, we don't have that, Steve. So I think what we'll do is probably in the Investor Day, we'll probably give you a lot more details of Each of the two businesses, I mean, obviously, Kelanova is about 85%. So the 6% to 7% that we're talking for the overall company is being driven by Calanova. And I think like on North America Cereal, what you saw in the Q1, we were clearly lapping the fire in So the double digit growth was lapping that. You'd expect that to normalize as we go through the course of the year.

Speaker 3

Yes. And Steve, I

Speaker 2

think maybe if it's helpful. As you look at syndicated data, you can look at the North American cereal business and You see a lot there. And then as Amit said, 85% of the business is Kelanova. You look at the EMEA results, you look at the Europe and look at North America Snacks, You can probably get a pretty good sense of what that looks like.

Speaker 9

Yes. No, I think that's all fair. I was just looking to see if you had if you I get it. Thank you very much.

Operator

The next question today comes from the line of Pamela Kaufman from Morgan Stanley. Please go ahead. Your line is now open.

Speaker 10

Hi, good morning. Good morning, everyone.

Speaker 4

Good morning.

Speaker 10

Just a question on your EPS guidance for the year. Just given the magnitude of the Q1 beat, why not raise your full year guidance by more than 1%? Were Weighing on the EPS growth outlook over the rest of the year that temper the flow through of Q1 upside.

Speaker 3

Yes. I think, like we talked earlier in the call and in the prepared remarks, obviously, very pleased with the Q1 over delivery. I think it's still early in the year. We talked a little bit about being prudent on our elasticity assumptions and price elasticity Assumptions for the rest of the year. We're being prudent from a Separation and spin standpoint, Steve talked a little bit about building into the guidance some of the costs associated And our elasticity assumptions for the year.

Speaker 3

And it's early in the year, but obviously very pleased with the underlying momentum in the business and the strong start.

Speaker 10

Got it. Thank you. And then just on Europe, pricing came in very strong there, but volumes did soften. What are you seeing in terms of consumer behavior in Europe? And have you finalized your price negotiations there?

Speaker 2

Yes, Pamela. So what we're seeing in Europe is, as I mentioned earlier, a little bit more elasticity, a little bit more channel shifting than we're seeing in some of the others. Obviously, a big impact on Russia, which obviously, we stopped shipping in Russia and we're divesting the business in Russia. But getting back to Continental Europe, shoppers are doing some channel shifting as I just mentioned. Hard discounters clearly Growing their businesses, that has a disproportionate benefit to private label.

Speaker 2

Within our portfolios, we're seeing a little bit more and these are modest Coming from small bases, but a little bit more private label growth in Europe, in Europe Cereal than we would be in the rest of the world. So No surprises. Europe is a challenging environment. But again, our results in that Challenging environment or something that we're very proud of, very proud of the way the team has delivered. And as we said in our prepared remarks, when you strip out The effect of Russia, you see even better performance there.

Speaker 2

So one to watch, but one that we're we've got Very, very good plans in place for the back half of the year and even indeed into next year.

Speaker 10

Great. Thank you.

Operator

Thank you. The next question today comes from the line of Max Gunport from BNP Paribas. Please go ahead. Your line is now open.

Speaker 11

Hey, thanks for the question. In the release and in the prepared remarks today, you discussed supply bottlenecks and Shortages that are beginning to moderate. This has been a key pressure point for the industry, both in terms of supply chain disruptions we've seen and also inflation, Given conversion costs associated with upstream suppliers in particular. So I was hoping you could double click on the drivers of the improvement that you're seeing there and also how much Recovery

Speaker 4

is still left to go. Thanks.

Speaker 2

Yes. So Max, I'll start and again Amit can add. I'd say The easy answer the short answer to that question is supply constraints, bottleneck shortages are improving almost everywhere. And so everything from the driver shortages that we talked about, the ocean freight shortages, containers being in the wrong place at the wrong time, All these things that only a year ago, the entire industry was struggling with have become much more normalized. We still have the odd shortages, inventory not being in the right place from some of our suppliers.

Speaker 2

But I mean literally every day it's getting better. We talked, I know, a couple of times on these calls about a control tower approach that we took and things that were elevated to The top of the control tower, if you like, that took manual interventions to get done, those are down dramatically. So the type of automation and the type of Supply chain that we had before the pandemic is much closer to being real today than it was. We're not back to just in time inventories. We're not back to where we were.

Speaker 2

I don't think anybody is. But we're much closer and the outlook going forward Continues to be one definitely much more of optimism than what we saw up to this point. In the second half of the year, we see continued improvement.

Speaker 3

The only thing I'd add is we're seeing that flow through into the P and L. And I think that was one of the drivers of the improved margin performance in quarter 1. And certainly, the reason why we have confidence in raising our guidance for gross margin.

Operator

From Jefferies. Please go ahead. Your line is now open.

Speaker 12

Great. Thanks so much. Maybe just Quick question for you, Amit. Just around your I guess around Steve's comments about kind of the Potentially very attractive momentum in the 2 separate businesses. Remember at CAGNY, you kind of went through some incremental detail, I believe, on the TSA agreement.

Speaker 12

So excuse my ignorance here if everybody already knows this, but I was just kind of looking for kind of maybe Have a clarification how the TSA agreement actually works, because my sense is kind of what I feel is the There's actually a payment to the SnacksCo that provides you time to offset the dis synergies. Does that make sense? Maybe if you could just kind of clarify how that works? That's all I have. Thanks.

Speaker 3

Yes. So we're making good progress on the TSAs or the transitionary service agreements across a number of areas, and we're putting those into place. I mean these TSAs cover areas like IT services, global shared services, transportation, logistics. So those will be the bulk of the transitionary service agreements. They are varying in nature and from a timing standpoint, but Could extend till up to 2 years.

Speaker 3

And obviously, that provides a, Stability, business continuity as well as helps offset dis synergies and long term structures appropriate for their businesses. So that's kind of where we are.

Speaker 1

Operator, we have time for one quick last question.

Operator

The next question today comes from the line of Michael Lavery from Piper Sandler. Please go ahead. Your line is now open.

Speaker 4

Yes, good morning. I was wondering if you could elaborate a little more on the restoration of marketing spending. And specifically, maybe if you're thinking of that in dollar terms Or as a percent of sales, obviously with pricing driven sales growth on a unit basis, the spend Goes a little further if you do it as a percent of sales. Just curious where you land there and how to think about how that all evolves?

Speaker 3

Yes. So we're pleased with the overall level of spending. And we'd expect it to be up, overall SG and A To be up similar to what it was up last year, low single digit rates. I think within the year, obviously, there's a lot of phasing. If you recall, last year, we had pulled back In the Q1 and then even in the Q2 as we were restoring supply on the U.

Speaker 3

S. Cereal business, this year obviously we've got a full commercial plan. And so I think in the quarter, we were up double digit against a low base. I think you'll see that reverse out in the rest of the year. But overall, when you kind of look at it and if you put aside the noise of the lap of the fire and the strike, We are very pleased with the levels of investment, as Steve mentioned.

Speaker 3

We are investing across the world, both in our brands as well as in innovation, and we're pleased with the levels of spend that we have.

Speaker 4

Okay, great. Thanks so much.

Speaker 2

So that is, operator,

Speaker 1

we are at 10:30.

Operator

Thank you. This concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.

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