John Renwick:

Thank you, operator. Good morning, everyone, and thank you for joining us today for a review of our second quarter results as well as an update on our outlook for 2024. I am joined this morning by Steve Cahillane, our Chairman, President 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 projections for Kellanova's future performance are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of www.kellanova.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. Also, remember that our 2023 results have been recast to treat the spun off W.K. Kellogg Co. as a discontinued operation in accordance with applicable accounting guidelines. Those recast statements can be found in our Q4 2023 earnings press release from February 8 of this year. And now I'll turn it over to Steve.

Amit Banati:

Thank you, Steve and hello everyone. Slide number 17 summarizes our key financial results for quarter two and the first half. As Steve said, we delivered another quarter of on algorithm results and another quarter of results that exceeded our expectations across all of these key metrics. Our organic growth in net sales in quarter two came in at 4%, remaining within our long-term target range. On a currency-neutral basis, our adjusted operating profit grew by 16% year-on-year, driven by the organic net sales growth and continued improvement in margins in spite of a double-digit increase in brand building. Our below-the-line items continue to be a modest year-on-year headwind, though less than anticipated, resulting in growth in earnings per share of 14% on a currency-neutral basis. Meanwhile, free cash flow also continued to increase year-on-year. Slide number 18 shows the major components of our year-on-year net sales growth in quarter two and the first half. Price/mix growth continued to drive organic net sales growth even as it moderated as expected outside of Nigeria, where we executed price increases in quarter one. Volume declined on elasticity impacts around the world, but especially in Nigeria. As Steve mentioned, that market accounted for virtually all of our volume decline in quarter two. So, the rest of our portfolio is clearly delivering on planned sequential improvement and even turn to growth in two of our regions. Moving along the graph, the small impact from last year's divestiture of our Russia business is now behind us as the transaction anniversaries at the start of quarter three. Foreign currency translation clipped net sales growth by about 8 percentage points in quarter two, principally reflecting the Nigerian Naira. Now, let's discuss profitability, starting with our gross profit on Slide number 19. The adjusted basis gross profit continued to increase year-on-year during quarter two, up 9%, excluding currency and up 5% with currency. This sustains a strong trend, as you can see on the slide. Meanwhile, we also continue to improve our gross profit margin with quarter two's margin up close to 340 basis points year-on-year. As we've discussed previously, the discontinued operations accounting used to recast 2022 and the first three quarters of 2023 takes into account only the expenses associated with our transition services agreement and not the pass-through of those expenses to W.K. Kellogg Company. Year-on-year, this comparison item again contributed about 100 basis points of our margin expansion during quarter two. And as we've also discussed previously, currency devaluations affected our country mix, contributing a year-on-year margin benefit in quarter two of approximately 150 basis points, a little less than quarter one and something that should moderate more meaningfully in the second half as we lap last year's largest devaluation of the Naira. Leaving out these two transitory items, our gross margin was still up by around 1 percentage point year-on-year, a recovery that continues to be aided by a resumed higher level of productivity and moderating input cost inflation. The fact that this gross margin restoration has continued to run ahead of pace gives us additional confidence in our full year outlook of more than 35%. We're experiencing growth and margin expansion at the operating profit line to, as shown on slide number 20. Operating profit in quarter two grew 16%, excluding currency and 13% with currency, sustaining a trend of year-on-year growth. Even if you exclude the impact of the year ago absence of transition services expense pass-through, our operating profit grew by more than 6% on this currency-neutral basis, remaining on our algorithm. This underlying growth was driven by an improving gross profit margin and good discipline on overhead, all of which more than offset the impact of a double-digit increase in brand building investment. Even with increased investment, we are improving our profitability and marching solidly towards our guidance for an operating profit margin of over 14% in 2024 and a target of 15% by 2026. Moving down the P&L, we come to our earnings per share walk on slide number 21. As you can see, all of our EPS growth quarter two was attributable to our growth in operating profit, just as it was in quarter one. Looking at our below-the-line items, we can see that they, again, largely offset each other. Interest expense again increased meaningfully year-on-year, reflecting higher interest rates. This was partially offset by an increase in other income, principally reflecting interest income and investment gains. Our effective tax rate remained in the mid-22% range. Joint venture earnings and minority interests were relatively immaterial year-on-year. Our average shares outstanding were flat. The result of these items was an increase in adjusted basis EPS of 12% in quarter two and 14% on a currency-neutral basis. Let's now turn to slide number 22, which shows our free cash flow and net debt position through quarter two. We remain ahead of last year on free cash flow through the first half though as we mentioned previously, some of this is related to the timing of a planned distribution from a post-retirement fund, which is expected to be offset later in the year. Even aside from that, though, our cash flow generation remains. Meantime, we have continued to trim our net debt even as we return sizable cash to share owners, mostly through our dividend. And our debt leverage remains well below our targeted ratio of net debt to trailing EBITDA of three times giving us excellent financial flexibility. Now let's discuss our increased guidance for the full year 2024, as shown on slide number 23. With half the year behind us, it is time to narrow the ranges we first gave at our Day at K Investor event 12 months ago. And because of the strength of our first half performance, we are in a position to raise this guidance. For net sales, we now expect organic growth of about 3.5%, an increase from our previous guidance that reflects our better than expected first half performance. We are prudently keeping our second half assumptions largely unchanged. Organic growth, of course, excludes currency translation, which based on exchange rates we saw during quarter two, would be a headwind of about 7% for the full year. For adjusted basis operating profit, we are raising and narrowing the range to $1.875 billion to $1.9 billion, again, primarily reflecting our first half delivery. We continue to expect margin expansion for the year, reaching above 35% for gross margin and about 14% for operating margin, though the year-on-year impacts moderate in second half, mainly because of what we are lapping then. We don't provide guidance on currency translation, but to give you an idea, if the exchange rate experienced during quarter two hold for the year, it would be about a negative 3% headwind to our operating profit. Guidance for adjusted basis earnings per share increases to a range of $3.65 and to $3.75, which incorporates the higher operating profit and other income that we experienced in the first half. Specifically, other income should retain its first upside before settling back to a run rate of $15 million to $20 million per quarter in the second half. Our effective tax rate is now expected to be in the mid-22% range, only slightly better than we previously communicated. These factors are partially offset by interest expense now expected to be higher given quarter two's run rate and joint venture earnings and minority interest collectively should run a little bit more negative in the second half than the first and we are raising our outlook for free cash flow to just above $1 billion with year-on-year growth driven by operating profit and despite capital expenditure temporarily elevated as a percentage of sales for expanded Pringles capacity in emerging markets as well as usual cash outlays related to our two network optimization projects. So we remain in a very good financial position. Our quarter one and quarter two results came in better than expected, enabling us to raise our guidance for the full year, and we are confident in the second half. We have solid commercial plans that already are improving our volume performance around the world, and this is starting to show up more plainly in our in-market data as well. Our profit margins continue to improve, progressing faster than planned, enabling us to reinvest in our brands and our balance sheet and cash flow remain in strong shape. And with that, let me now turn it back to Steve for a run-through of our businesses around the world.

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Rob Dickerson with Jefferies. Your line is open. Please go ahead.

Steve Cahillane:

Yes. Thanks for the question, Rob. What I'd tell you is we've talked about getting back to full commercial activation. And that's really the story in North America. It's really led by Pringles, which returned first and has terrific momentum. It includes increased distribution with new shelf resets in the second quarter as you mentioned. It includes a full commercial innovation activation. We're back to levels that we haven't seen since pre-pandemic. And it's really that, Rob. It's a full commercial activation, gaining momentum. We returned to volume growth in the second quarter in North America. That will continue into the third and fourth quarter actually improve as activation around Cheez-It and some of our other brands starts to catch up to what we've done with Pringles, and in terms of pricing, we had to take, as you well know, a lot of price in the last two years. And so we're returning to the type of price promotion activity more or less that we saw pre-pandemic in a very rational environment. So bright spot for us is the second half of the year and the volume that we've seen in North America.

Operator:

We now turn to Chris Carey with Wells Fargo Securities. Your line is open. Please go ahead.

Steve Cahillane:

Yeah, Chris, I'd start with, Europe is a tough environment, always has been. It's tough this year. But in the second quarter, we faced our toughest comps, particularly with Pringles. And you heard us say in the prepared remarks that we have a lot of confidence, we're going to continue to grow in Europe, and that's going to be in the back half of the year. So we've got great back half plans. Our football sponsorship has really started late in this quarter, so that will continue into this quarter. So lots of confidence in Europe, lots of confidence in Europe continuing to grow. You saw that snacks did grow in the in the second quarter that will accelerate third and fourth quarter based on the activations. And we are very excited about the Cheez-It launch in the fourth quarter. And when I say very excited, it's just a great program that they put together in the UK. The customers are excited about it. The consumer testing of product is outstanding. And so we see big things for Cheez-It in the next couple of years. It's going to be a real growth driver for us, so bullish on Europe despite a challenging environment. I know that makes us a little different than some others, but our team has delivered now seven years of growth in Europe, and so that will continue this year.

Steve Cahillane:

We see pricing remaining very rational in the environment. Remember, we're lapping a real dearth of activity last year. So that's what you see when you see our year-over-year comparisons. We've talked about it quite a lot. We pulled back on commercial activation because of the bottleneck shortages. We were perhaps a little late compared to others in returning, but we've returned, but it's all very, very rational, prudent, and we see good volume growth and a good balance between price mix volume in the back half of the year for North America.

Operator:

Our next question comes from Peter Galbo with Bank of America. Your line is open. Please go ahead.

Steve Cahillane:

Good morning.

Steve Cahillane:

Yes. So it was a good quarter in Latin America. Cereal and Snacks, all growing. Mexico having a terrific quarter, kind of record shares in the cereal business in Mexico and Pringles continuing to do extremely well, despite being somewhat capacity constrained because we're sourcing out of Jackson, Tennessee. Next year, we'll be sourcing out of Mexico, so really bullish on Pringles future opportunities in Mexico because of local sourcing. Brazil, you have to remember, Brazil was really impacted by some pretty devastating floods, but the underlying business in Brazil remains strong, really driven also by Pringles. Pringles' Momentum in Brazil is very, very good. So the Brazilian business is strong, but impacted by pretty devastating floods that obviously we all saw on news.

Robert Moskow:

Hi, Thank you. I was wondering if you could talk about North America price sensitivity in terms of like pack sizes and the price points. One of your competitors said that when points get above a certain level, like above $4, it's led to consumers actually exiting the category, and they've made some pretty substantial changes to adjust to that. Would you agree with that? Or is it just not really affecting your portfolio? Thanks.

Robert Moskow:

And can I ask a follow-up? How meaningful is your Pringles launch, that's the mix Pringles launch in the back half? And what was the insight that made you think that coming -- introducing something out of the can is going to compete well in that very competitive marketplace.

Robert Moskow:

Great. Thank you.

David Palmer:

Thanks. I wanted just to ask a couple of questions on North America Snacks. You said in your comments, Steve, that there was consumption growth in the quarter, in 2Q. Was that -- we see consumption being down a bit? I assume maybe there was some growth in Canada or beyond the measured channels that we can't see. Maybe you can comment on that. But more importantly, I'm just wondering in the data that we are going to be tracking, are you expecting a return to at least that low single-digit growth that you're expecting in the beginning of the year for the second half in just the consumption, middle plus type stuff that has pretty good coverage. Would you expect that? And would the improvement -- if so, would the improvement be in the areas you were targeting earlier in the year around some of the merchandising and innovation on Cheez-It Rice Krispies Treats. Thank you.

David Palmer:

Great. Thank you.

Michael Lavery:

Thank you. Good morning.

Michael Lavery:

Yes. Thanks. Just wanted to on Nigeria. Just wanted to touch on Nigeria. And obviously, with the pricing, you've got big lift, but of course, the currency and volumes are a big offset. I know you called out the volume momentum executing that, but what are you seeing there maybe sequentially, when could that improve? Have you seen any kind of digestion of the pricing that the consumers are adjusting and maybe the last are starting to mitigate? Just trying to understand, obviously, that's part of your emerging market footprint, you called out as growth drivers that ordinarily wouldn't be kind of a of a point stress. When can that turn and really be proper volume growth driver again?

Amit Banati:

No, I think the only thing I'd add is that elasticities came in better than expected. So while the volume declines were in the teens, it was definitely better than what we had expected in the quarter. I think we need to continue to take some more pricing in some of our other categories. And so I think we've assumed that elasticity would be there in the second half. And we'll see -- we're encouraged by what we saw in the second quarter, but we are being prudent about the rest of the year.

Operator:

We now turn to Thomas Palmer with Citi. Your line is open. Please go ahead.

Amit Banati:

So not really. I mean, I think if you kind of look at, and we've talked this previously as well, right, the gross margin progression will moderate in the second half as some of the things that we lapped start moderating. We obviously had the TSA pass through last year in quarter four. So that's -- so we'll be lapping that I think the bottlenecks and shortages, which was a big driver of improved gross margin, particularly in quarter one, I think that's firmly behind us. We saw a little bit of that in quarter two, but it was largely in quarter one. So you won't have that in the second half. And then the country mix impact driven by the naira in Nigeria will also -- you'll start lapping that. If you recall, last year, the biggest devaluation in the Naira was kind of around this time, so in quarter three. So you're going to start lapping that. So we continue to -- we're very pleased with the progress that we're making on the margins. It's coming in better than expected. But we continue to see progression, but not as much as we saw in the first half because of some of the items that we are lapping. So I'd say that's probably the biggest driver of brand building, we saw a good double-digit increase in the first half. That's going to moderate in the second half because if you recall last year, in the second half, we had ramped up brand building. So the absolute pressure continues to be very good. But when you look at it versus the ramp up in the second half, the growth moderates. So I think those are some of the puts and takes in terms of the second half operating profit.

Amit Banati:

No real change. I think that continues to be our outlook to be neutral to slightly inflationary. I think costs are coming in pretty much as we had expected. Obviously, in Nigeria, we are seeing inflation come through probably at a higher rate. But other than that, costs are coming in pretty much in line with expectations.

Operator:

Our next question comes from Ken Goldman with JPMorgan. Your line is open. Please go ahead.

Steve Cahillane:

Yeah. Thanks for the question, Ken. Obviously, we all want to focus on gross margins because it’s what drives the health of the business. And we're doing it through productivity. We're doing it by getting back to where we were in some ways because of the bottlenecks and the shortages, and we're increasing our brand building investment quite substantially, which really helps put together winning retail programs. So what we need to do is grow faster than the retailers' same-store sales through great activation, great commercial activation have the right price point for the consumers, so we meet them where they are. And then you get into a much more constructive dialogue with customers versus who's taking what share of the pie. And so yeah, we are growing our gross margins, but against a backdrop of where we were, and we are increasing our brand-building investments, which helps our customers drive volume through their outlets. So that's how -- that's basically how we would look at that.

Operator:

We now turn to Alexia Howard with Sanford Bernstein. Your line is open. Please go ahead.

Steve Cahillane:

Yeah. Thanks, Alexia. So let's work backwards. We always release guidance at our February earnings, and that's what we'll do again this time. In terms of innovation, we don't really release numbers against that, but we are back to where we were pre-pandemic, as you saw on the slide. And that's actually going to get better because that obviously includes a Cheez-It launch, it includes the Pringles Mingles launch, and there's a whole host of innovations really by category, by brand group. So it's meaningfully different than it was in the last couple of years back to where we were in 2019 and 2018. 2019 was the Snap launch, which was a good year for us, and we're beating that. So we feel very good about innovating, and we've got a great calendar for next year as well when we get to February, we'll talk about not only guidance for the year, but would give some outlook as to exactly the innovations that will be launched in 2025.

Operator:

Our next question comes from Steve Powers with Deutsche Bank. Your line is open. Please go ahead.

Steve Cahillane:

Yes. No, we don't really get into breaking that down in terms of a forecast. But I think we're returning to the type of balance that we seek. And the most important really is getting back to volume because it's a little bit aberrant when you look at it because of what we're lapping. We're lapping these enormous prices and these declines in volume. So now we're looking at better volume and less price. And so when you look at what you're lapping, it's just kind of strange. So we're getting back to volume growth, which I think is going to drive NSV growth, then you can kind of back into what that might look like.

Steve Cahillane:

Go ahead, Amit.

Steve Powers:

Okay. That all makes sense. I guess the follow-up, though, is that you've had good returns on this sort of return to activation and promotional investment that you've made so far. But as I'm sure you're aware, a lot of your direct, indirect competitors, some of them reported today, some of some of them for earliest week reported earlier in the month, all have talked about kind of incremental step-ups in investment as we go through the back half. So you've talked about the environment as rational. Do you view those comments as rational and amidst the competitive set arguably leaning in a bit more the back half, do you expect the same kind of return on your run rate investments.

Steve Powers:

Okay, very good. Thanks so much. Appreciate it.

Operator:

Our last question comes from Max Gumport with BNP Paribas. Your line is open, please go ahead.

Steve Cahillane:

Yes, Max, I'd just point you to we had a terrific second quarter. We raised our guidance. We've got great confidence. You can't speak to where everybody else is, but we feel we feel very, very good about where we are, good about our innovations. We feel good about the return we're getting from our brand building. We feel good about our geographic portfolio. And I hope that you heard that come through in not only the results but the outlook. And so I'd just point you right to there and say, we don't feel like we're missing anything. We don't feel like we need to do anything on the pricing front that we're not already doing that you haven't seen because again, we -- here we are today announcing good results, very good results and raising guidance. So, I just would ended that.

John Renwick:

Maybe one more.

Andrew Lazar:

Great. Just a super quick one. Steve, with all of the activation, commercial activation back up to more normal levels, we're hearing a lot of that, about more normal levels of promotional activity from peers as well. It's all off of obviously much higher list pricing. So, promoted price points are still quite a bit higher. So, I'm just curious what you're seeing around lift on promotional activity, if it's kind of where you have always seen it? Is it better, worse or how that's trending? That's it. Thanks so much.

Andrew Lazar:

Thanks so much.

John Renwick:

Okay. Well, thank you, everyone, for your interest and your time. And if you do have follow-up questions, please do not hesitate to call us. Have a great day.

John Renwick:

Thank you, operator. Good morning, everyone, and thank you for joining us today for a review of our first quarter results as well as an update on our outlook for 2024. I'm joined this morning by Steve Cahillane, our Chairman, President and Chief Executive Officer; and Amit Banati, our Vice Chairman and Chief Financial Officer. Slide 3 shows our forward-looking statements disclaimer. As you are aware, certain statements made today such as projections for Kellanova's future performance are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the investor page of www.kellanova.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. Also, remember that our 2023 results have been recast to treat the spun-off WK Kellogg Co. as a discontinued operation in accordance with applicable accounting guidelines. Those recast statements can be found in our Q4 2023 earnings press release from February 8 of this year. And now I'll turn it over to Steve.

Amit Banati:

Thank you, Steve, and hello, everyone. Slide 13 summarizes our key financial results for quarter 1. As Steve said, we are pleased to report another quarter of on-algorithm results and the fact that these results exceeded our expectations gives us even more confidence in our full year outlook. Our organic growth in net sales was towards the top end of our long-term target range, with much of this organic growth attributable to pricing to offset currency devaluation. But even outside of that, our sales and volume came in a little better than planned. On a currency-neutral basis, our adjusted operating profit grew strongly year-on-year. If you normalize the year ago recast base, to also include the pass-through of transition services expenses, this year-on-year growth would still be in the double digits on a currency-neutral basis, and it was driven by a restoration of gross profit margin that more than covered increased brand-building investment. Our below-the-line items, more or less offset each other, resulting in growth in earnings per share that was similar to the operating profit and a very good start to the year. Meanwhile, free cash flow is also off to a good start. Slide 14 walks you through the major components of our year-on-year net sales growth. As you can see, our 5% organic growth was primarily driven by price mix, which itself was led by revenue growth management actions taken over the past 12 months to cover what had been rising input cost inflation as well as pricing actions taken more recently in Nigeria to cover currency devaluation. As expected, our overall price/mix growth decelerated sequentially again in quarter 1, and it should continue to do so as the year goes on. Volume declined on elasticity impacts around the world. Sequentially, from quarter 4, our overall volume decline was affected by Nigeria experiencing less accelerated orders than last quarter. However, in most of our other regions, we're encouraged by the pace of what we have always planned to be a gradual stabilization and recovery. Moving along the graphs, the small impact from last year's divestiture of our Russia business will continue for one more quarter as the transaction anniversaries at the start of quarter 3. Foreign currency translation clipped net sales growth by a larger-than-expected nine percentage points in quarter 1, principally reflecting the Nigerian Naira. If exchange rates experienced during quarter one were to hold the full year's currency impact, would be around negative 7%. Now let's look at gross profit on Slide 15. As we've discussed previously, the discontinued operations accounting used to recast 2022 and the first three quarters of 2023 takes into account only the expenses associated with our transition services agreement and not the pass-through of those expenses to WK Kellogg Co. Year-on-year, this contributed about 110 basis points of our margin expansion during quarter 1. Currency devaluations affected our country mix, contributing a year-on-year margin benefit in quarter one of approximately 170 basis points. But as you can see, even without these recast and country mix impacts, we continued a multi-quarter trend of increased gross profit dollars and improvement in our gross profit margin. Driving this margin recovery have been a number of factors, including the improved supply environment, a resumed higher level of productivity and last year's revenue growth management actions against moderating input cost inflation. The fact that this gross margin restoration has continued to run ahead of pace gives us additional confidence in our full year outlook of more than 35%. The same holds true for operating profit shown on Slide 16. This was driven by our top line growth and recovering gross profit margin, which were enough to fund advertising and consumer promotion that increased faster than net sales. The absence of TSA reimbursement from the year ago recast base was a year-on-year impact of roughly $45 million at the operating profit line, which explains a little less than 150 basis points of the margin expansion and the currency-related mix shift had the effect of adding less than 100 basis points of the margin expansion. Even if we exclude these two factors, we still continue to grow operating profit in dollars and in margin and quite substantially. Like our gross profit, this operating profit performance was better than expected, another promising sign for the full year. This strong quarter one margin performance lends confidence to our outlook for an operating profit margin of over 14% for the full year. Moving down the P&L, we come to our earnings per share walk on Slide 17. As you can see, all of our EPS growth in quarter one was attributable to our growth in operating profit as below the line items offset each other. Interest expense increased meaningfully year-on-year, reflecting higher interest rates. This was offset by a similar increase in other income, reflecting currency translation gains. As expected, our effective tax rate came in at about 22.6%, and joint venture earnings and minority interests were collectively about a $0.01 drag on EPS. Our average shares outstanding decreased modestly year-on-year, reflecting share buybacks that we accelerated into the previous quarter. Let's turn to Slide 18 and look at our free cash flow and net debt. We're off to a good start on free cash flow, even in what is normally a small quarter for this metric, though some of this is timing related, specifically the timing of a planned distribution from a post-retirement fund, which is expected to be offset later in the year. Meantime, we've continued to pay down debt even as we return sizable cash to share-owners, mostly through our dividend. Our debt leverage remains well below our targeted ratio of net debt to trailing EBITDA of 3x. On Slide 19, you can see that we are making no changes to our 2024 financial guidance. For net sales, we continue to expect organic growth within our long-term targeted range, specifically calling for 3% growth or better in 2024. Outside of Nigeria, we still assume that price mix growth will moderate as we continue to lap prior year actions, that industry-wide elasticities will fade gradually during the year and that our return to full commercial activity will result in volume stabilization and improvement as the year progresses. The exception is Nigeria, where currency influence pricing actions have continued and where we assume we will start to see meaningful elasticity impact on volume. Organic growth, of course, excludes currency translation which based on exchange rates we saw during quarter 1, would be a headwind of about 7% for the full year. For adjusted basis operating profit, we again reaffirmed the range of $1.85 billion to $1.9 billion. This incorporates a worsened negative impact from currency translation, which based on exchange rates experienced during quarter one would be about negative 2% to 3% for the full year. This operating profit guidance still implies continued margin expansion as an improving gross profit margin more than offset a strong increase in brand investment. In fact, we are taking advantage of our strong quarter one to increase our reinvestment in brands and capabilities. Adjusted basis, earnings per share is still expected to be in the range of $3.55 to $3.65. Interest expense for the year now should be around $315 million versus the $310 million we signaled last quarter and currency translation is running worse than previously expected. On the other hand, other income's favorable quarter one brings up the full year, even as remaining quarters are still expected to run at around $15 million per quarter. We also estimate that our effective tax rate will come in below the 23% we previously guided to something more like what we saw in quarter 1. And the collective impact of joint venture earnings and minority interest may continue to run at a similar rate as in quarter 1. And we are reaffirming our outlook for free cash flow of approximately $1 billion with year-on-year growth driven by operating profit and despite capital expenditure temporarily elevated as a percentage of sales for expanded Pringles capacity in emerging markets as well as usual cash outlays related to our two network optimization projects. Our strong start to the year across all of these metrics gives us increased confidence in this guidance while still allowing some room for potential risks such as further currency devaluations or disruptions in the Middle East as well as the opportunity to add some investment behind brands and capabilities. So in summary, our financial position is solid. We kicked off 2024 with results in the first quarter that were ahead of plan. Our commercial activities are starting to be reflected in improving end market performance and our profit margins are recovering ahead of pace. Plus, we continue to address our future margins and return on invested capital, making progress on network optimization projects, all of which gives us increased confidence in the full year guidance we first provided last August and allows us to increase reinvestment. Our cash flow and balance sheet are giving us enhanced financial flexibility, and we continue to return cash to share-owners, not only in the form of the opportunistic share buybacks we made late last year, but also the increase in our dividend that we announced just last week. And with that, let me now turn it back to Steve for a run-through of our businesses around the world.

Operator:

[Operator Instructions] Our first question today is from the line of Ken Goldman of JPMorgan. Please go ahead.

Steve Cahillane:

Hi, Ken.

Steve Cahillane:

Yes, thanks for the question, Ken. We don't really see the same thing that you're talking about in terms of private label. It's been a little bumpy, to be honest with you. And if you look back to, say, 2019 all the way through this year, there's no meaningful moves in private label in the categories that you mentioned. And if you look at PWS, portable wholesome snacks, there might be a little bit more movement there. But I think it's really a story of not much to see there when you take all the noise out, because you do have private label last year spring a little bit more due to supply disruptions, bottleneck shortages. So there's some of that's just coming back to where it was. I think equally, there is in the non-measured channels, as you said, growing faster, so you can't always look at the syndicated data as a complete proxy for our own top line performance because of that growth. And the growth in away-from-home channels as well, which has been very good. So I think not to be - I hope you don't take that as a dismissive comment, but I think it's not as much to see as you might really think, as you really analyze the fulsomeness of the data.

Steve Cahillane:

Yes, we do Ken. And you hit it right on the head, the lower-income consumers, as you know and have seen are under a lot more pressure than the balance of the consumers, and that continues where probably as we get into the back half of the year going to be past the worst of that because of the Snap benefits, because of the restoration of having to pay student loans, because of the improving economic environment overall from an employment standpoint and from a wage standpoint. I think we've seen the last of it. So we always forecast elasticities, to be the most challenging in the first half of the year, and to improve in the back half of the year. For us, we're actually seeing a better performance than that. So, if you look at the syndicated data, again, I dismissed it on one hand, but not entirely. You can see that our performance is improving. We're getting back to full merchandising activity, which we had said, so we're moving from really telling everybody what we're going to do to showing what we're doing, and you actually see that in our improvement. So, we feel much more confident in our volume performance. I'm speaking about North America now, even into the second quarter. And certainly, that - we see that continuing into the back half of the year. So overall category, I think, back half of the year improvement for us even sooner than that.

Operator:

Our next question today is from the line of Max Gumport of BNP Paribas. Please go ahead. Your line is open

Amit Banati:

Yes. Yes. I think you've got that right. I think the TSA reimbursement was around $45 million, and that split between gross profit and SG&A is about right.

Amit Banati:

I think nevertheless, even if - yes, I think even if you exclude that, we saw strong double-digit growth in our operating profit. You saw our gross margin even if you exclude the TSA, as well as the ForEx impact, our gross margins were up 190 basis points in the quarter. I think from a go-forward standpoint, we'd expect TSAs to continue, to be in that range, but starting to ratchet down in quarter two. As I've mentioned previously, we are transitioning the distribution centers into WKKC. So that process is underway. It's going really well. Service levels are high as we are doing the transition. So as that transition happens through the course of 2024, you'll see some of the TSA costs move directly, to WKKC. And so, that will start ratcheting down through the year. And of course, in quarter four, you'll anniversary that. So that's what's built into the guidance.

Steve Cahillane:

Yes. I think you're clearly seeing value-seeking behavior. And discretionary income, the consumers under the most pressure from a discretionary income standpoint are eating out less. I think that's clear. And they are returning to the at-home channels, but they're still seeking value even among that. So you see growth in different channels that better cater or really focus against the value-seeking consumer. You continue to see lower packs - seeking price points. And so, we're trying more and more not to vacate those very attractive price points. But yes, that's exactly what we're seeing. And as I said in the earlier comment, I think in the back half of the year, that pressure will start to abate.

Operator:

Our next question today is from the line of Alexia Howard of Bernstein. Please go ahead.

Steve Cahillane:

Good morning, Alexia.

Steve Cahillane:

Yes. I think Alexia, it really comes down to the simple fact. It's only the first quarter. So there's always uncertainty with three quarters to remain. But it really gives us the very strong confidence that we're going to deliver a very good year. And what I mean by that is it allows us to really think about the best levels of reinvestment that we can do. And I'll give you some examples of that route to market in Latin America and EMEA continues to be really exciting for us. We're going to invest a little bit more in route to market, everything around digital transformation and artificial intelligence allows us, to lean in more than we had planned, and we were already leading in this year in our plans. We can lean in even more on that. And then brand, especially brand building. I'll give you a real-life example of that. I talked about the Pop-Tarts movie. It really is an exceptional movie. And when a comedic genius and icon like Jerry Seinfeld, makes a movie about - full feature length movie about your product, with a star-studded cast, that gives you an opportunity, we didn't know about it, and we're leaning into it. We've got displays going up all over the place. We've got a special pack with Jerry's picture on it, and we've got a 90-second video shot, by Jerry that's airing right now. None of that was in the budget, and we were able to lean in, in a meaningful way to really accelerate the Pop-Tarts momentum. So, we're in that type of position right now. So, there's nothing looming on the horizon that's scaring us. It just allows us to really set up the year for an exceptional performance.

Steve Cahillane:

Yes. So we like the health of our balance sheet without a doubt. Our net debt continues to go down. Our leverage ratios continue to go down. So, we have the capacity to do something if it creates share-owner value. And we're always on the lookout for anything that does create share-owner value. So you're right, Snacks is - we talk about being a snacking led powerhouse. 50% of our business is outside the U.S. So, we could do something domestically for outside. We're not really looking to change to proactively change, to be more international or more domestic. We would look at the absolute best deal out there. And we have the capacity to do it. Equally, we're very excited about organic opportunities, which I just mentioned Pop-Tarts, but Cheez-It internationally continues to be a priority for us. Adding Pringles capacity is very much a part of our capital plan this year, building two new factories, one in Latin America, another one in Asia. So, we've got good uses for our capital with high ROIs, but M&A could factor into that as well.

Operator:

Our next question today is from the line of Tom Palmer of Citi. Please go ahead. Your line is open.

Amit Banati:

Yes. I think very strong performance in our North America business this quarter, so very pleased with that. I think it's all the factors that you mentioned. So it's the benefit of the revenue growth actions that, we took last year. It's a moderating cost environment. So, we're seeing that play out. I think this quarter, the supply chain performed well. And from a lapping standpoint, this was the biggest lap from the shortages and bottlenecks. So, those were kind of some of the drivers. We continue to expect to see strong profit performance, both gross and operating through the year, probably not at the pace in - we saw in quarter one, because we're lapping bulk of the shortages and bottlenecks, we lap that was predominantly in quarter one. And then some of the mechanical elements like the currency impact was most pronounced in quarter one. That will probably moderate in the rest of the year. I mentioned earlier that we lap - or we anniversary, the TSA reimbursements in quarter four. So, we'd expect continued good performance through the year, but not as pronounced as we saw in quarter one.

Amit Banati:

I'd say broadly in line with what we do. So no major changes. I think it's coming slightly better than expected. Currency in Nigeria is obviously devalued more than we thought, and the teams there are pricing to recover that. So some changes, but overall, broadly, I'd say, in line with our - in line with the long-term algo that we had guided to.

Operator:

Our next question today is from the line of Andrew Lazar of Barclays. Your line is up. Please go ahead.

Amit Banati:

Yes. I think, Andrew, it was a headwind. But like I said, I think the improved supply chain performance more than offset that. So while the volume line was a bit of a headwind. By far, the biggest driver was the lapping of the improved supply chain performance, the improved service levels. And so, I think that's kind of more than offset that. And of course, we'd expect the volume leverage to start improving as the volume trends start improving, in the latter part of the year. The benefit of the lapping of the bottlenecks will moderate, some volume leverage would pick up. So that's kind of the shape of the year.

Steve Cahillane:

Yes, Andrew, I think that's exactly right. We talked, I think, in the last quarter and probably the last two quarters about those very reference price points and talking about the consumer will walk by four or five trips, and not just be able to accept that new reference price point. So, I think we're there or thereabout, probably the seventh or eighth inning, if you like. At the same time, companies like us continue to also work RGM initiatives, and it's not shrink-inflation. It's making sure that you can hold your margin and hit a price point, and sometimes that means a smaller size. And so, I think the combination of all of those things working together leads us to believe that the second half of the year, is going to be the inflection [ph] point for the consumer. And for us, as I said, I think we get there even faster than that, because of what we're lapping, because we admittedly came back to merchandising activity perhaps later than we otherwise would have, knowing what we know today. But the fact of the matter is we are there now. We are merchandising more effectively. We've got more quality displays. We like our price points. We do like our price points and where they are with consumers. And so, we see all that leading to a better back half of the year, although still not without pressure. So I don't want to be pollyannish about it. The consumer is still under a good bit of pressure, but I do think that there is brightness on the horizon.

Operator:

Next question today is from the line of Michael Lavery of Piper Sandler. Please go ahead.

Steve Cahillane:

Yes. So I think if you step back and look at everything, I don't think that there has been volume destruction, right? If there is a caloric reduction in the population, it is quite minimal. And a couple of quarters ago, everybody wanted to talk about the GLP-1 drugs. I think that's faded as well. So if you start with the premise that more or less the caloric state remains the same, then the volume goes somewhere. And I think those with the best full commercial activation, with brands that matter to consumers are going to be the ultimate winners. And that's why we're excited about where we are in terms of our ability to reinvest, and continue to step up our investment against the consumer and against household penetration. And making sure that we're delighting our consumers all along the way, because we think the volume potential is still very real, and hasn't had any full diminishment, if you like.

Steve Cahillane:

Yes. I think it's interesting, because you all on this call and we and all of our peers have been in search of where that volume is, right? And there's been a lot of hypotheses. And I think the fact is it's probably a lot of things that are hard to measure. One is managing the household pantry, less leftovers, more creativity. I think all those things have been coming into play, but they're now -- if you think about it, they're in the base, right? You can only work that pantry so long, the pantry is not an infinite supply of stuff in the corners, so that's been worked. But I think this new consumer behavior around less food waste and more - making sure that leftovers are really used is probably consumer behavior as far as we can tell, that will remain. But again, it's in the base. And so, I think there's a normal, if you like. Now as the economy improves, if it does improve, if discretionary income keeps growing faster than inflation, you'll likely see a return to kind of the pre-inflationary times as people become a little bit more comfortable. I think that would be a natural outcome. But right now, I think we see the continuation of that behavior, recognizing that it's in the base.

Amit Banati:

I think it's largely behind us. And so yes - but overall, we're seeing good momentum in our LATAM business, both in Mexico as well as in Brazil.

Operator:

Our next question today is from the line of David Palmer of Evercore ISI. Please go ahead.

Steve Cahillane:

Yes, David, I think if you look at what's happened in the last 18 months, two years, been too much price and not enough volume for obvious reasons. And now we're seeing the - we're starting to see the reversal of that in North America. And as I mentioned several times on the call now, we're seeing a better volume performance. You can see that in the latest published data. We're seeing a gradual recovery in that. And we are very confident in the back half of the year based on what we see in - right now in terms of our volume performance. So, we like the balance that we see returning to our business, and we have a lot of optimism that, that's going to continue.

Steve Cahillane:

I would just - I don't want to go too deep into individual regions and volume price/mix beyond what we said, and that is, it's getting a lot better. The volume performance continues to get a lot better. For us, the return to full merchandising activity, which we mentioned several times, is the real driver of that volume recovery. And we like what we see in terms of that balance. We like what we're seeing with the reinvestments in our brands. We like what we're seeing in terms of our share improvements in the marketplace, all those things combining to give us the confidence that we've been talking about.

Steve Cahillane:

David, I would just say I wouldn't say that our supply chain was disadvantaged in the past. What we did say is we were perhaps more conservative than others in wanting to keep our supply fill rates at a very high level and therefore, did not return to full merchandising commercial activation as some of our peers did. Our supply chain right now is performing at a very high level, like think about pre-pandemic high watermarks in terms of on-time in full. So that's where we are, and that's why we have the confidence. In terms of productivity, we're back to the type of productivity initiatives that we were pre-pandemic as well. So that's been very, very positive. We announced worldwide a couple of productivity initiatives that we talked about last quarter that are proceeding very, very well. And so, we like where our supply chain is in North America, and we like where our supply chain is globally.

Operator:

Our next question is from the line of Steve Powers of Deutsche Bank. Steve, your line is up and please go ahead.

Amit Banati:

Yes. I think, Steve, there are a number of things playing through in the margin, right? And like I mentioned earlier, right, we're confident that our gross margins will be more than 35%. Within that, there are a number of moving parts. Obviously, inflation, which we set and continue, the guide continues to be neutral-ish across a number of cost elements. So that's playing through the improved performance of the supply chain, is a tailwind this year. I think from a price standpoint, the price/mix is obviously moderating. So I think it's a combination of those factors. Now we should start seeing some volume leverage as the volume trends improve. But all of that kind of factors into the - to our expectation that we continue to see gross margin expansion, not at the rate we saw in quarter 1, but we'd expect that the gross margins will continue to be - continue to improve and be north of 35% for the year.

Steve Cahillane:

Yes. So we are excited about the Cheez-It and their international prospects. We've got Cheez-It now in Canada, Mexico, Brazil. We're applying those learnings to the launch in Europe later this year, particularly in the U.K. And the U.K. team is very excited about it. The initial research on product and on positioning is very strong. And so this is not anything that's going to really affect your models per se, because we're taking it in a very pragmatic way market-by-market, continuing to build the playbook. So each next month is more successful than the one that came for it. And so '24, will be the European launch. And then later in '24, we'll talk about additional markets for '25, and beyond.

John Renwick:

Well, thank you, everyone, for your time and your interest. And if you do have follow-up calls, please do not hesitate to call us. Have a great day.

John Renwick:

Thank you, operator. Good morning and thank you for joining us today for a review of our fourth quarter results and a discussion of our outlook for 2024. I'm joined this morning by Steve Cahillane, our Chairman, President 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 projections for Kellanova's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of www.kellanova.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. Included in our press release, our financial results for the fourth quarter 2023 as well as the first three quarters and full years of 2023 and 2022 recasting W.K. Kellogg Co in those periods as discontinued operations in accordance with applicable accounting guidelines. These recast financials will be the basis of comparison used in the year-on-year growth rates we provide today for all items except free cash flow, which was not recast. Keep in mind that the accounting guidelines for discontinued operations are such that the recast financials for the periods prior to the spinoff include expenses related to providing transition services to WKKC such as warehousing and IT-related expenses, but they do not include the reimbursement for those expenses, which Kellanova is receiving from WKKC under a transition services agreement. For periods after the spin-off, that is from Q4 2023 on, both the expenses and the reimbursements will be included, which will impact year-on-year comparisons. This also creates a difference from the carve-out financials that you would have seen from WKKC as different accounting guidelines apply to carve-out financials. And now I'll turn it over to Steve.

Amit Banati:

Thanks, Steve. Good morning, everyone. Slide Number 12 summarizes our results for the fourth quarter and full year for Kellanova. As John indicated, the year-on-year growth rates are based on recast results for the four quarters of 2022 and the first three quarters of 2023. As you can see, our results for the quarter came in above the guidance we had provided, and they complete a full year in which we maintained our focus on delivering consistent, on algorithm results even amidst the incremental work of executing the spinoff. Net sales increased by about 7% on an organic and recast basis in quarter four, featuring decelerating volume declines and price mix growth that is moderating as we lap significant revenue growth management actions in the prior year. For the full year, Kellanova's organic net sales growth was about 8%, well above our long-term growth target. Operating profit in quarter four increased by 30% on an adjusted and currency-neutral basis and comparing against a recast 2022. This was driven by the solid top line growth as well as by a restoration of our underlying gross profit margin and reimbursement for expenses related to transition services we are providing to W.K. Kellogg Company. For the full year, Kellanova's operating profit increased by 18% on the same recast basis. Even taking into account the year-over-year impact of expense reimbursement for transition services, provided to WKKC in quarter four, 2023, which did not exist in the year earlier quarter, our year-on-year growth in operating profit was still in double digits for the quarter and the year, well ahead of our long-term target. Earnings per share on an adjusted and currency-neutral basis increased by about 19% year-on-year in quarter four and by 7% year-to-date as strong operating profit performance more than covered significant headwinds from macroeconomic factors that drove up interest expense and pull down pension income. Finally, free cash flow came in higher than we had expected in quarter four, finishing the year at $968 million. Free cash flow is not recast for discontinued operations. So the decrease from last year's solely related to onetime outlays related to the spin-off and the absence of North America cereals cash flow in the fourth quarter. Now let's take a look at each metric in closer detail starting with our net sales growth on Slide Number 13. As expected, price elasticities continue to rise around the world in quarter four, putting pressure on volume though this volume, again, came in better than projected due to better performance in our emerging markets. Price/mix continued to moderate sequentially from recent quarters as expected as we lap some of our largest revenue growth management actions last year. The result was another quarter of elevated organic net sales growth, though, to be clear, about half of that came from our Africa joint ventures where substantial pricing is needed to cover devaluing currency and shipments were unusually strong. That said, even excluding that business, we sustained organic growth that was in line with our long-term target. Moving across to the nonorganic drivers of net sales, the divestiture of our Russia business, which occurred in July, clipped about a percentage point from our overall net sales growth in quarter four, just as it did in quarter three. Foreign currency translation was a headwind of about negative six percentage points in quarter four and about negative four percentage points for the full year. This reflected primarily the Nigerian Naira, which continued to devalue during the fourth quarter and was only partially offset by strength in the euro, pound sterling and Mexican peso. While we don't provide guidance on foreign exchange rates, if today's rates held for the year, we would likely experience an impact on net sales that is similar to the impact that we saw in quarter four. Now let's discuss our profit margin recovery, starting with gross profit on Slide Number 14. In quarter four, we continue to grow gross profit and restore gross profit margins. As in the previous quarters, this restoration of margins was aided by revenue growth management, productivity and improved supply and service levels. In addition, the other half of the quarter's margin expansion was driven by reimbursement of expenses related to transition services provided to WKKC, which did not exist in the year ago quarter. You’ll notice that at 34% in quarter four, Kellanova's gross margin is structurally higher than Kellogg Company's margin, and it continued to come in higher than we had anticipated. We expect to continue to improve gross margin in 2024. Turning to Slide Number 15, we see that in quarter four and the full year, we also grew operating profit, driven by growth in net sales and the higher gross profit margin. Meantime, operating profit margin improved year-on-year in quarter four and the full year. Remember, the 12.3% margin you see for 2023 is recast for discontinued operations so it does not include reimbursement for transition service expenses during the first three quarters. We expect our operating profit margin to reach 14% in 2024. Moving down the income statement, Slide Number 16 shows how our adjusted basis earnings per share growth in 2023, even on a recast basis fell the year-on-year effects of macro-related headwinds within our non-operating, below-the-line items. These below-the-line pressures were expected and were experienced year-on-year in quarter four and the full year, even comparing to a recast 2022, and for all the reasons we have discussed previously. Foreign currency translation was modestly positive to earnings per share in 2023, including quarter four as strength in European and Mexican currencies more than offset what is a relatively small impact from Nigeria naira at the EPS level. Recall that due to our ownership structure, while the naira had a large impact on net sales its impact on operating profit and EPS is much smaller. Turning to Slide number 17. We are pleased with our cash flow generation and balance sheet. Noting that we have not recast free cash flow for discontinued items, we finished 2023 only modestly below 2022. Despite the absence of the spun-off North America cereal cash flows for a quarter, and despite one-time cash outlays related to the spin-off. In fact, the combination of these spin-off factors amounted to about $300 million of negative impact. If you added that back, you can see that our free cash flow would have come in above 2022 levels. Our balance sheet after the transfer of net debt to WKKC remains solid with debt leverage remaining well below our targeted ratio of net debt to trailing EBITDA of 3x. Now let's discuss our 2024 guidance shown on Slide number 18. The 2023 base is recast for discontinued operations. And because these figures may differ from WKKC carve-out figures and our internal management figures, we've chosen to continue to provide you with absolute dollar guidance for operating profit and earnings per share in 2024. After all, 2024 is what is really important as it is the first full year in our current P&L structure. Let's go through each metric. For net sales, we affirm our guidance for growth within our long-term targeted range, specifically calling for a 3% growth or better in 2024. Across most of our businesses, price mix growth will moderate as we continue to lap prior actions and industry-wide elasticities will fade gradually during the year. The exception is Nigeria where currency influence pricing actions will likely continue, which we assume produce meaningful elasticity impact on volume. Organic growth, of course, excludes currency translation, which based on today's exchange rates, would be a headwind of 5% to 6%. For adjusted basis operating profit, we continue to provide absolute dollar guidance because year-on-year growth rate can be impacted by discontinued operations accounting. We are affirming the range of $1.85 billion to $1.9 billion. This incorporates a negative impact from currency translation, which based on today's exchange rates, would be approximately 2%, versus recast 2023 figures, this implies growth in operating profit in the mid-teens. After taking into account the year-over-year impact of expense reimbursement for transition services provided to WKKC for four quarters in 2024 versus only in the fourth quarter in 2023, this year-on-year growth is still in the mid single-digits, solidly on our long-term target. Our guidance implies continued margin expansion as an improving gross profit margin more than offsets a strong increase in brand investment. We expect to reach a 14% operating margin in 2024. Adjusted basis, earnings per share is still expected to be in the range of $3.55 to $3.65. We make no change to our previously communicated expectation for an increase in our effective tax rate to 23%. Our outlook for interest expense is about $310 million and we expect other income to be around $50 million. And we are affirming our outlook for free cash flow of approximately $1 billion with year-on-year growth driven by operating profit partially offset by capital expenditure temporarily elevated for expanded Pringles capacity in emerging markets and modest cash outlays related to our two network optimization projects. These network optimization projects are addressed on Slide number 19. At our Day@K Investor event in August, we cited network optimization as one of the drivers of our margin expansion, and we are now ready to discuss specific initiatives. The two projects we are announcing today are both high return projects. Only about half of the project's upfront costs are cash even before asset sales and the projects collectively become cash neutral by 2025. In 2024, specifically, upfront costs will amount to about $160 million with less than $40 million of that in cash, and this has been incorporated into our cash flow guidance. Savings for the project start very quickly with a small portion of the overall $75 million coming as soon as the second half of 2024. And this too is incorporated into our guidance. In fact, this is a contributor to our operating profit margin expanding to 14% this year, as implied by our operating profit guidance. Importantly, with this announcement, we can also now be more specific about the timing of our medium-term goal of a 15% operating margin. We expect to reach that margin in 2026. So let's summarize our financial condition on Slide number 20. In what was our debut quarter as Kellanova, our fourth quarter results came in as guided from net sales to earnings per share. The business remains in good shape with margin restoration proceeding ahead of pace and volume performance on a path of gradual improvement. Consequently, we have affirmed our guidance for 2024, even amidst challenging industry and macroeconomic conditions. Our medium-term goal of attaining a 15% operating profit margin has been accelerated to 2026 as ongoing margin expansion drivers are now augmented by network optimization initiatives, which get started this year subject to consultation. And we continue to generate strong free cash flow that, along with our deleveraged balance sheet gives us financial flexibility. This flexibility has been on display in the form of opportunistic share buybacks during quarter four and in our decision to elevate capital investment to expand capacity for our rapidly growing Pringles business. So we enter 2024 in a strong financial condition. Let me now turn it back to Steve for a run-through of our businesses around the world.

Operator:

Thank you. We will now begin the question-and-answer session with publishing analysts. [Operator Instructions] Thank you. Our first question for today comes from Peter Galbo of Bank of America. Peter, your line is now open. Please go ahead.

Steve Cahillane:

Peter, he didn't survive the bowl game, in case you weren't watching.

Amit Banati:

Yes. Peter, that does include the – operating profit does include the currency headwind, so just confirming that. Like I mentioned, it's approximately around 2% at today's rates. So that 2% is built into the dollar numbers that we've given.

Amit Banati:

Yes.

Amit Banati:

EPS is probably slightly lesser.

Operator:

Thank you. Our next question comes from Robert Moskow of TD Cowen. Your line is now open. Please go ahead.

Steve Cahillane:

Yes. It’s going to – Rob, thanks for the question. It’s going to be throughout the year. Really, we started with displays coming back to prior years, better than prior year in the fourth quarter. In the first quarter, we’re going to see the quality of those displays improving. That will continue into the second quarter as well. And just to remind you, 2023 was a year of pullback on innovation, culling of SKUs, clearly focused on supply and making sure that we could have that supply in the market. In the U.S., though, for example, we’ve got Pringles Harvest Blends, which we brought in the second half of 2023. We’ve got Cheez-It innovations, Cheez-It Crunchy, which is hitting now. We’ve got Pop-Tarts crunchy poppers. We’ve got innovations around Nutri-Grain. We’ve got a Rice Krispies Treats with peanut butter. We’ve just got many more innovations than we’ve had in prior years, and that will roll throughout the year. We’ve also got distribution growing where it had been declining. So you should see momentum growing really starting now and picking up all through the year. And that gives us really good confidence in the top-line guide that we gave. The other thing I’d add, Rob, is a higher brand building investment as well, which we phased into the first half of this year as well to really drive that quality to display and that quality merchandising.

Steve Cahillane:

There’s not really an inflection point per se. I think you’re going to see a cumulative improvement with probably the third quarter being the one where it be most notable and then we’ll exit the year with lots of momentum. So it will be cumulative throughout the year and growing from the second into the third quarter.

Operator:

Thank you. Our next question comes from Chris Carey of Wells Fargo. Chris, your line is now open and please go ahead.

Steve Cahillane:

Yes. Thanks, Chris. So it really – it’s not – it’s much less the core than it is some of the innovations that we really didn’t support with quality display merchandising. And so if you look at Cheez-It, the Snap’d and Puff’d, and if you were to look at the cases on display for those dramatically down as we focused on the core supply. And we have owned it. We returned to merchandising later than our competitors. We were more conservative when it came to that merchandising overly focused on making sure that we had high 90s fill rates before we return to merchandising. So that’s what you see in the share. We don’t see any deterioration in our brand health. In fact, we see our brand health really at very high watermarks across Cheez-It, Pringles, Pop-Tarts, Rice Krispies Treats. And so that gives us the confidence to talk about the quality of merchandising returning and our share performance improving as we go throughout 2024, again, coupled with more brand investments in the first half of the year. When you look at our brand investment, we never – we didn’t pull back in 2023. We publish advertising only on a full year basis. You’ll see advertising up in 2023, that’s going to continue into 2024.

Steve Cahillane:

Yes, that’s right, because I mean, the comparisons are going to be against the year where we really didn’t innovate and now we’re getting back to kind of pre-COVID levels of innovation.

Steve Cahillane:

Yes. So you’re probably asking about the U.S., the frequency of promotions continues to return to pre-pandemic levels, so 2019 levels. The depth of those promotions is really kind of back to approaching those levels off a higher base. And so I’d say the whole market is pretty benign and stable. You don’t see – I’ve heard some of the noise around because volumes are down, is there going to be high levels of discounting and increased frequency of promotion. We’re not really seeing that. For us, we’re getting – we’re trying to get back to the pre-2019 levels, as I’ve mentioned a couple of times now in terms of frequency to drive quality promotional displays. But not seeing anything other than that really.

Operator:

Thank you. Our next question comes from Tom Palmer of Citi. Tom, your line is now open. Please go ahead.

Amit Banati:

Yes. At the Day at K, we had kind of given you the absolute dollar guidance just to kind of help set up your models. I think we don’t intend to provide regional guidance going forward on an ongoing basis. But that said, I would say that all the regions for 2024, we’d expect them to be within their long-term algorithms growth rates that we had shared at Day at K.

Steve Cahillane:

There’s a little bit of that, but really it’s more. If you think about what we’ve been through as an industry focused on supply, focused on getting through the pandemic, focused on bottlenecks and shortages, the ability to really dedicate resources towards effectiveness programs and efficiency programs like this was challenging. And so we’re through that right now, and we see good opportunities in the frozen business. So we’ll be closing a plant and moving production to our more efficient plants in the UK, subject to consultation. We’ve got our Manchester plant, which is a very large plant, which is underutilized. We can move that production into two facilities. So straightforward programs in terms of the type of efficiencies they’ll drive. We’re confident that they’re terrific programs. But it’s really a matter of having the bandwidth pre or post pandemic, post bottlenecks and shortages that will allow us to ongoing look for programs like this to continue to drive effectiveness and efficiency.

Operator:

Thank you. Our next question comes from Rob Dickerson of Jefferies. Your line is now open. Please go ahead.

Steve Cahillane:

Yes, Rob. We get asked a lot, why is Cheez-It primarily a U.S. brand? Why not expand it 10 years ago? And I think that’s a fair question. The company was very busy expanding Pringles around the world. And you see, obviously now it’s a global brand growing all around the world, recognized everywhere. And that’s the long-term ambition for something like Cheez-It, which is the next out of the gate. But you start with Cheese [ph]. And we launched in Canada, we launched in Brazil and Mexico, and this year, the back half of the year, we’ll be launching in major markets in Europe. And so it’s a long-term play. It’s in our guidance, it’s not really – it’s not going to be a material driver of top line. But five years from now, it’s going to be a much bigger brand internationally than it is today. And that’s really the plan. We learned from the Canada launch. We applied those learnings to Brazil, then to Mexico, and we’ve got a terrific plan for the back half of the year in Europe. And so it’s a long-term play. Then you look at the rest of our portfolio. Rice Krispies Treats is already a multi-country brand, growing nicely in Europe, growing nicely in Australia and New Zealand. You look at Pop-Tarts, there’s potentially room for that to be an international brand down the road. So we look at our portfolio, we like what we see in terms of international expansion, but we’re going to do it in a very prudent and pragmatic and practical way to drive long-term growth.

Amit Banati:

Gross margins have come in better than expected, and so I think the supply chain is performing well. We’re seeing costs come out of the supply chain that had gone in the last couple of years. In quarter four, first quarter of Kellanova, our gross margin came in at 34%, and we’d expect that in 2024, we’d be approaching 35%. So that’s kind of the outlook for the year. So pleased with the progress that we are making, and certainly the progress that we’re making the gross margins is ahead of what we had shared at Day at K. That’s allowed us to continue to be on our guidance on an operating profit basis. I think in terms of the drivers, you’ll obviously have the benefit of wraparound pricing and some continued revenue growth management into this year. The input costs, I would say deflationary on commodities, a couple of commodities continue to be inflationary, net-net slightly deflationary. You look at labor and other parts of our supply chain where there is inflation overall, I'd say costs are broadly neutral. So that combination should drive continued progress on gross margin. And I think it'll be fairly balanced across the quarters. We'd expect our A&P to be more front loaded as we get back to full innovation. But the gross margin progress should be fairly balanced across the quarters.

Operator:

Thank you. Our next question comes from Max Gumport of BNP Paribas. Your line is now open. Please go ahead.

Amit Banati:

I think to organic net sales as well.

Amit Banati:

Yes. North America. I'll just start. North America will probably be towards the low end of that range, so probably more low-single digit. But as Steve elaborated, its return to merchandising, innovation, all of that should result in low-single digit growth in North America.

Amit Banati:

Yes. So a couple of things driving the strong volume growth in EMEA, and it was all in Africa JVs. One is we are expanding our noodles business across the continent in South Africa as well as in Egypt. So we're seeing strong volume growth. And that expansion is seeing good traction in terms of share and leading share positions in South Africa as well as in Egypt. So that's a source of volume growth, and that will continue in 2024. I think in Nigeria specifically, we've had to take a lot of pricing given what's happened with the currency and the elasticities have been pretty good and better than expected. There has been some ordering by our customers at older prices. So you're seeing acceleration of the orders to take benefit of the oil pricing. And in an environment where you're taking successive price increases, you kind of see that timing of shipments play through. Hard to kind of predict when that would unwind because as you know, the currency is devalued further in January, and we'd be taking further pricing. But we'd expect that to adjust during the course of 2024.

Operator:

Thank you. Our next question comes from Michael Lavery of Piper Sandler. Your line is now open. Please go ahead.

Amit Banati:

Good morning, Michael.

Amit Banati:

Yes. So just on the 12% versus the 13% at Day@K, they are on a different basis. So the 12% that you see right now is on the discontinued operations basis, which is – we've now done that work, and that's what we'll be reporting against. The 13%, which we had given at Day@K was an internal management estimate, and really the difference is the 12% does not include reimbursement for the first nine months, the TSA reimbursements for services that we're providing to WKKC, that's the way the discontinued operations accounting works. So that's really the difference between the 12% and the 13%. And I think, like I said, we expect in 2024 to be at 14% margin, so very pleased with that, obviously. And I think that's structurally higher than where we were as Kellogg's. And I think it's just a proof point of higher growth and higher profit portfolio that we have in Kellanova. And then I think to our confidence in getting to the 15% margin by 2026, yes, the network optimization projects are a contributing factor. And we'll continue to look at further opportunities but all the other drivers, advantage brands, our Top 5 brands have higher margins. They are 50% of our sales. We'd expect them to grow faster, scale in emerging markets, getting back to a full productivity program in our supply chain, some continued revenue growth management. All of those would also be contributing factors to get to that 15%.

Amit Banati:

Yes. So it's about $40 million to $50 million a quarter, right? So it will flow through all of 2024. I think as we stop providing those services to WKKC and as WKKC contracts for those services directly, those costs will drop off from Kellanova and the reimbursement will drop off as well. So the vast majority, as this thing kind of concludes, right, as we step down from the TSAs, we'd expect the cost to stop and the reimbursement to stop. I mean, I think a good example of that is warehousing. Right now, the warehousing, we are providing the warehousing. So we are incurring the costs and then WKKC is reimbursing that to us. Once the TSA is done, they'll have their own warehousing and they'll pay for the warehousing cost directly. So the cost will stop, the reimbursement will stop. Is it a 100% 1:1? No. But I think the vast majority of that is variable. There is a small fixed element. And I think we've got plans to address that, and that's included in the 15% by size target?

Amit Banati:

No, I think it's just timing because the growth rate – so when you look at 2024, right, we are getting reimbursement for all four quarters. In 2023, we got reimbursement only in quarter four because that was when the spin happened. So the reason why it's in the teens growth rate is in 2024, you've got four quarters in 2023, you've got one quarter. So it's purely because of the way the timing of the spin and the difference coming from there.

Amit Banati:

Yes.

Ken Goldman:

Hi, thank you. I just wanted to make sure 100% because I think I'm still getting some questions about this. And you mentioned, Amit, that the operating profit number, the one -- the $1,850 to $1,900 does include the headwind of 2% from FX. In the press release, it does say though that these impacts and you're talking about mark-to-market adjustments and foreign currency translation are not included in the guidance provided. Am I just misinterpreting one of those? Or they seem to be in content with each other, but I'm sure I'm just missing something?

Ken Goldman:

Perfect. Thank you for that clarification. And then not to harp too much on the reimbursements, but – is it – and I know you're not going to talk explicitly about 2025 yet, but it would seem that if you're getting a, I don't know, roughly $140 million benefit in 2024, that some of that kind of goes away because you didn't have – and again, it's not exactly maybe that much, it could depend on the timing of everything. But is it fair to say you'll have some kind of headwind in 2025 as those roll off. Again, with the caveat that it's too early to really discuss specifics.

Ken Goldman:

No, I get that. I think – and I'll ask this off-line. I think I'm more asking about the growth percentage. I'll ask it offline. I know – what type of clarification. Thank you.

Ken Goldman:

Yes. No I get it. I'll ask later. It's not worth holding it up the call for it. Thank you.

John Renwick:

Okay. Well, that is up to 10:30. If you do have follow-up questions, please do not hesitate to call us. And thank you everyone, for your interest.

John Renwick :

Thank you, operator. Good morning, and thank you for joining us today for a review of our third quarter results when we were Kellogg Company and a discussion of our outlook for the fourth quarter of 2023, during which we will be post spin-off Kellanova. I'm joined this morning by Steve Cahillane, our Chairman, President 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 projections for Kellanova's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of www.kellanova.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. Please note that we will have discontinued operations impacts to Kellanova's historical financial statements available during our fourth quarter earnings release in February 2024. Until then, any commentary about Kellanova performance is based on estimates and should therefore be viewed as directional. And now I'll turn it over to Steve.

Amit Banati:

Thanks, Steve. Good morning, everyone. Slide number 12 summarizes the results of Kellogg Company because the spin-off occurred after the quarter ended. Net sales increased by about 4% on an organic basis in quarter three, which is right on the second half pace implied by our full year guidance. Year-to-date, this translates into 8% organic growth. Operating profit increased by 10% on an adjusted and currency-neutral basis, sustaining double-digit growth in spite of higher A&P investment and the divestiture of our Russia business. Year-to-date, this translates to 14% growth, which is ahead of the pace implied by our full year guidance. Earnings per share on an adjusted and currency-neutral basis decreased by about 2% year-on-year in quarter three and increased by 2% year-to-date. This is ahead of the pace implied by our full year guidance, delivering year-on-year growth in spite of some 11 to 12 percentage points of headwind from macroeconomic factors driving higher interest expense and lower pension income. And free cash flow came in at $894 million, which is higher than last year, even in spite of onetime outlays related to the spin-off. This put cash flow well on pace towards our full year guidance for Kellogg Company. So as you step back, you see that our growth in net sales and operating profit were on algorithm or better in the quarter and year-to-date period, and EPS would have been as well were it not for the macro-related pressures on our non-operating items. And we were well on pace to achieve the full year guidance we had given for the Kellogg Company. Now, let's take a look at each metric in closer detail, starting with our net sales growth on slide number 13. As expected, price elasticities rose around the world, putting pressure on volume, though this volume did come in modestly better than projected. Price/mix moderated sequentially from recent quarters as we began to lap some of our largest revenue growth management actions last year. The divestiture of our Russia business, which occurred in July, clipped about 1 percentage point from our overall net sales growth in quarter three and will do so again in quarter four. Foreign currency translation once again was a headwind of about negative 3 percentage points. And based on where rates are today, we are probably facing a similar headwind in quarter four. Most of this is related to the devaluation of the Nigerian naira, partially offset by strength in the euro, pound sterling and Mexican peso. We estimate that portions of the business that represent Kellanova generated better organic growth than total Kellogg Company in the third quarter. So even with the long anticipated rise in elasticities and the lapping of last year's pricing actions, our organic net sales growth remains within our long-term target range. Now, let's discuss gross profit, starting with slide number 14. As we've stated many times, our focus during the period of heightened input cost inflation and supply bottlenecks and shortages was on growing gross profit dollars. And as you can see, we have done just that every quarter this year. And as you can see on slide number 15, we have also made good progress in restoring our gross profit margin as well. We're still not back to our 2019 pre-pandemic levels, but this restoration of margins is proceeding faster than expected with year-on-year expansion in each quarter so far this year. This progress also applies to the Kellanova business, which gets an immediate lift from the absence of North America cereal, and should continue to benefit from the same drivers going forward price realization catching up to input cost inflation, improving supply chain conditions, and the ongoing combination of productivity, revenue growth management and mix shift towards our most differentiated brands. Slide number 16 shows how our sustained top line growth and margin expansion resulted in another quarter of double-digit growth in operating profit. Keep in mind that, this growth includes the divestiture of Russia, and it also includes a double-digit increase in brand building on a currency-neutral basis. Slide number 17 indicates that we are not only restoring our margins at the gross profit level, but at the operating profit level as well. We have delivered year-on-year expansion in operating margin in each quarter of this year, putting our year-to-date margin a full 100 basis points ahead of last year and ahead of our own projections as Kellanova will start immediately with a modestly higher operating margin just from the absence of North America cereal. And we expect to continue to improve our margin going forward as we discussed at our Day@K Investor event. This, along with top line growth propelled by our strong brands and growth-oriented categories and markets, give us confidence in sustaining profit growth. Moving down the income statement. Slide number 18 shows that our adjusted basis earnings per share growth in quarter three was once again mostly attributable to operating profit, which has grown enough to more than offset what are severe macro-related headwinds within our below-the-line items. Those below-the-line pressures were expected and will continue through the year. Interest expense increased significantly year-on-year in the quarter and the year-to-date period due to higher interest rates. Other income decreased sharply year-on-year in each of the first three quarters this year, reflecting the accounting of pension and post-retirement plan asset values stemming from last year's decline in the financial markets and the rising interest rates. Our effective tax rate in quarter three was up year-on-year, keeping our year-to-date rate at the 22% we've been expecting for the full year. Average shares outstanding were again up slightly year-on-year in quarter three, and we would expect that to be the case for the full year as well. Foreign currency translation was positive to earnings per share in quarter three as strength in European and Mexican currencies more than offset what is a relatively small impact from Nigerian Naira at the EPS level. Turning to slide number 19. We see that our free cash flow year-to-date is ahead of the prior year, even in spite of one-time cash outlays related to the spin-off and despite lapping a year ago period in which our capital expenditure was delayed because of supply disruptions. We are pleased with our cash flow conversion, which is higher than last year despite deal factors. This year-to-date free cash flow performance put us well on our way to achieving the full year guidance of $1 billion to $1.1 billion that we had communicated for the Kellogg Company. Meanwhile, we continue to reduce our debt leverage year-on-year, further enhancing our financial flexibility. The slide shows how our net debt continued to decrease even as we continue to deliver higher operating profit and therefore EBITDA. This was our net debt at the end of quarter prior to the spin-off. Upon the spin-off, the transfer of net debt to W.K. Kellogg Company was executed and is estimated to be approximately $600 million. Now, let's discuss our outlook at Kellanova now that W.K. Kellogg Company, our North America cereal business, is no longer in our portfolio. Work is underway to prepare Kellanova financials for all four quarters of 2022 and the first three quarters of 2023, treating W.K. KC as a discontinued operation. We will have those completed a few months from now, and we plan to share them with you at our next quarterly earnings release in early February. In the meantime, slide number 20 offers estimates in absolute dollars for the fourth quarter, our initial quarter at Kellanova. Kellanova was projected to deliver net sales of approximately $3.1 billion in the quarter. Excluding W.K. KC from the base and excluding about 1% negative impact of the Russia divestiture and foreign currency translation that at current rates would be similar to the negative impact we saw on net sales in quarter three, we believe organic net sales growth will be within our long-term growth target even as we assume continued elasticity impact and the lapping of the year-on-year price increases. We expect the restoration of gross profit margin to continue, increasing year-on-year and reaching a level in quarter four of just over 33%. We project adjusted basis operating profit of approximately $380 million to $390 million, which we estimate will translate into year-on-year growth that is within our long-term growth target. Excluding W.K. KC from the base and excluding the small impacts of this year's Russia divestiture and currency translation. We project adjusted basis earnings per share of approximately $0.73 to $0.76 after accounting for interest expense of around $85 million and other income of around $25 million, both of which will continue to reflect the year-on-year headwinds we've experienced all year. In short, we expect Kellanova's quarter four 2023 to remain within our long-term algorithm for net sales and operating profit growth. Looking to 2024. As indicated at our Day at K investor event a few months ago, we expect to sustain on-algorithm growth on sales and profit. We are still in our budgeting process, and we will provide those details at our normal time in February. Allow me to summarize on slide number 21. We feel very good about our financial performance and conditions heading into quarter four as the new Kellanova. Our top line growth remains ahead of our long-term target. Our profit margins continue to recover more quickly than we had anticipated. Our balance sheet is solid as is our free cash flow even as we executed a transformational spin-off. Let me now turn it back to Steve for a run-through of our businesses around the world.

Operator:

Thank you. [Operator Instructions] Our first question for today comes from Jason English of Goldman Sachs. Your line is open. Please go ahead.

Amit Banati:

Hi, Jason.

Amit Banati:

I think, Jason, we will update the details when we get to our normal cycle in February once we've had this year's actual latest foreign exchange rates. So I think we'll update the absolutes as we kind of get to February. We're right in the middle of our budgeting process right now. But as I mentioned in our prepared remarks, we fully expect to be on our algorithm growth rates we had shared in August.

Amit Banati:

No, we are on track, I mean, from a 2023 standpoint, right? We are ahead of pace in the first nine months. And like I mentioned, we are on track from a 2023 standpoint. So we'll share the specific details when we get to February.

Jason English:

Yes, which is why I'm still trying to anchor to it just because as is evident in today's press release, it's really muddy, right? There's a lot of noise here. So, I'm just trying to keep it simple. Okay. And sticking with the long-term--

Jason English:

Yes, that's good to hear. And I think it came through our results, but there is a lot of noise. And sticking with the long-term algo, I think Steve mentioned this upfront. Your diversified business with a diversified global footprint and you've got long-term algo by each segment, but there time where some are going to lag and some are going to do better. And it now feels like it's one of those points in time where the developed world, particularly North America, is lagging. I don't think it's structural, but at a moment in time, your emerging market businesses are doing quite well. Investors are concerned that you're not going to able to hit LTL algo across all segments next year. Is it reasonable to say that? That shouldn't be a concern. You don't need to LTL algo across all segments next year. It could look very much like what we're seeing right now, where perhaps North America does lag, but the strength you have elsewhere could offset that. Or do you actually -- do you really expect and are you entering to a return to a long-term algo in North America?

Jason English:

Appreciate it. Thank you guys. I'll pass it on.

Nik Modi:

Thank you. Good morning everyone. Steve, I was hoping you could comment on volume growth. Obviously, revenue has been very strong driven by pricing, but volumes continue to lag. Some of your global snacking peers have actually posted volume growth. So, I just wanted to get some context from you on how you're thinking about that. And then just a second question, and this is more of a kind of an abstract question that I was just thinking about. One of the big growth drivers in the future for Kellanova will be white space and global expansion with some of your existing brands. And I wondered if, do you have global P&Ls for your key brands? Or is that something that still needs to be developed as you spin out the company? Thanks.

Nik Modi:

Excellent. I’ll pass it on. Thank you.

David Palmer:

Thank you. Good morning. Question on the fourth quarter. You mentioned organic revenue growth would be within algo. I assume that'd be 2% to 4% up, including the Russia drag. And I'm also wondering, how you're thinking about a 4Q sales breakdown between North America and other segments. And the reason I'm asking about that is really the scanner data quarter-to-date. It shows down roughly 4.5% in what we see in terms of US measured channels. So, it would look like you would have to be pretty heavy lifting for international for that to stay that way and for that to reflect what sort of organic revenue growth you'd have in North America in 4Q or put a lot of burden on international. So any thoughts about what we're seeing there or thoughts about improvement in North America, what we're seeing is not real or perhaps any particularly strong growth internationally would be helpful.

David Palmer:

My follow-up to that is, if it's down -- if North America were down 4%, then the international would have to be something like up 10%. So that's why I'm asking. It just seems like you must be expecting North America to improve from now. I know back at the Analyst Day in August, you were talking about merchandising activity for Cheez-It and some marketing coming through. So I'm wondering, are you expecting a meaningful improvement? Or do you expect that sort of heavy lifting from international?

David Palmer:

Great. Thank you.

Ken Goldman:

Hi. Thank you. With the caveat that you're not quite ready to talk about certain details in 2024 yet, The Street is -- and it's great to hear that you're expecting an on-algo year. But The Street is looking for volume growth as soon as the second quarter of next year, and I wasn't quite sure if that was reasonable. And I don't know, if I'm asking a question that you can even answer at this point in time. But I'm -- my hope is that Street numbers can maybe be a little more reasonable at some point. If that's the case, just given some of that -- you'll still have some pricing flowing through and there's still certain challenges around the world, I just wouldn't want people to come out and have numbers that are too high and disappointed. So I didn't know if you could talk about that at this point, if there's any kind of commentary you could provide on volume growth into next year at this time, given the lack of visibility, I understand.

Ken Goldman:

Okay. Thank you.

Michael Lavery:

Hey, good morning. You touched on some of the margin drivers, the pricing now offsetting inflation better, the productivity, the normalization of where the supply chain disruptions had been. Can you maybe give a sense of order of magnitude or -- really trying to understand what are the most sustainable and how to think about looking ahead. And then part of that, is there any way to quantify -- you mentioned some of the additional costs from the parallel operations but still had -- against our expectations, still a nice margin performance. Can you quantify some of that? Was that significant and obviously lapping that? Or are you putting that in the rearview? How much of a lift should that be looking ahead as well?

Michael Lavery:

Okay. That's helpful. And just a follow-up on your color on the consumer, just in the release and prepared remarks talking about how they're stretched or elasticities are getting sharper. Can you just maybe give us a sense of how much visibility you have on the broader dynamic in terms of trading down from food away from home? That would, in theory, give a lift to packaged food, but then obviously, the pressure you are seeing with either trade-down, just some of the consumer dynamics and where that all nets out for you? And we've seen in this quarter, obviously, what that looked like, but maybe some of what you expect in the fourth quarter or looking ahead. Is it better? Is it worse? Is it more of the same? You touched a little bit on the volume thoughts for 2024. But just curious for the consumer perspective behind that, that you see as the real driver.

Michael Lavery:

Okay. Great. Thanks so much.

Max Gumport:

Hey. Thanks for the question. Just on the volume in North America. You've given some color already. I know you've touched on the slower return to merchandising and innovation and also the lapping of trade inventory build last year. So I was just hoping you could maybe quantify some of those buckets in terms of just order of magnitude. How much of the decline was due to the lap? How much was due to the lower return? And then maybe how much is due to just slower category growth or share performance? I realize this is all very tough to do, just hoping for a bit more color there. Thanks very much.

Max Gumport:

Got it. And then one more on the US, there was a large grocery retailer this morning that reported results, and they called out that they now have evidence that the emergency allotments of Snap rolling off, maybe have been a bigger impact than expected. I think their numbers were -- initially would have expected the minus 200 basis point impact on sales, and now it's looking more like a minus 400 basis point impact on sales growth. Just curious if you're seeing a similar type of impact among your lower-income consumers.

Operator:

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

Amit Banati:

Yes. So I think, Bryan, we'll give you the details when we close out 2023, right? I think from a growth rate standpoint, like I said, we fully expect to be on long-term growth algorithm for 2024. I think as you'd appreciate, right, currencies will be different when we close out 2023 versus the assumptions that we had made in August. Like I had mentioned on 2023, we are -- at the end of nine months, we are ahead of pace versus the guidance that we had given. And so where we close out from a 2023 standpoint. So I think those kind of pace and currency adjustments would cause the absolute to differ, but we were right in the middle of that work as part of our budget. And I fully expect our long-term growth rates to be on algorithm.

Amit Banati:

Yes. So it's currency-neutral, right? The overall rates that we had given for the company included a view of currency, right? So that's for the total Kellogg Company, the ones that we had given in our preliminary 2024 guidance. Where there are currency-neutral numbers, those won't be impacted by those view of the long-term rates. But the rates number base change, right, depending on where we end up on 2023.

Amit Banati:

Yes. We talked that as we kind of complete the budgeting process, Bryan. I think it's a bit premature for me to comment on that. But yes, margin recovery is recovering faster. You'll see that in our results. And we'll give you the specifics on 2024 when we get to it.

Operator:

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

Amit Banati:

Good morning, Alexia.

Steve Cahillane:

No, I wouldn't say you'd see pricing down. I think you just see a return to quality merchandising off of what are inescapably higher list prices. And so that's really the dynamic that you'll see.

Amit Banati:

Yes. So firstly, I think, we like the organic opportunity that's in front of us. And I think despite the short-term volume discussion, right, I think the growth potential of our portfolio is strong. We've got plenty of organic growth opportunities. I think from a capital allocation standpoint, prioritizing investments into the organic opportunity, particularly in capacity expansion in Pringles in emerging markets, is kind of the immediate priority. We'd always evaluate M&A opportunities, I think largely in the areas of snacking and emerging markets. So if something -- we run a very disciplined process, and so we continue to evaluate opportunities come.

Operator:

Thank you. Our next question comes from Robert Dickerson of Jefferies. Your line is now open. Please go ahead.

Steven Cahillane:

Yes. So a couple of things, Rob. First, the biggest impact was in Latin America, where we made very purposeful SKU reductions, price package architecture to improve profitability. And we're very pleased with the program and how that worked out. In North America, there's also elements. We've gotten out of some lower-margin cracker business, for example. We did rationalize SKUs when we had severe shortages and bottlenecks and -- last year to get better performance in the plants. And so we'll be lapping that. But biggest headline is definitely Latin America followed North America.

Steve Cahillane:

Yes. I'd say a couple of things. First, in the developed markets, we're looking at a more benign inflationary environment going forward. And we certainly feel like the consumer has taken enough pricing and are working hard to mitigate any potential needs to take more pricing going forward. And again, returning to quality merchandising means promotional activity and benefits to the consumer. In the emerging markets, generally, every year, we're going to be taking pricing. Whether that’d be currency, whether that’d be inflation, just cost of doing business, that's fairly routine. And we see the same thing happening in our emerging markets for next year, although not to the same levels that we've seen over the course of the last two years. And we'll exercise all the RGM levers that we have in those emerging markets to maintain affordability, to maintain -- in the shopping baskets of our consumers in the emerging markets. But it's more of a -- I would say, a more normalized environment in emerging markets relative to the past two years. But that doesn't mean deflationary and it doesn't mean flat. It means just more measured price increases going forward.

John Renwick:

And we may have time for one last question, if it’s there.

Steve Powers:

Okay. Great. Maybe just a pick up on that last question from Rob, specific to AMEA. For a while, pricing was running well above the currency headwinds. So, you were seeing double-digit US dollar growth. Now pricing is running below. So you're seeing the double-digit organic growth, but you're seeing kind of double-digit declines in US dollars. So could you frame for us what's going on there? Maybe give us a little bit more of a tutorial around sort of timing of when pricing has been or can be taken in that market relative to currency fluctuations? And then just how you -- net of all that, how you're thinking about kind of real growth in that market in dollar terms over time? Thank you.

Steve Powers :

Okay, okay. That's great. And just real quick, you talked about similar currency headwinds in the fourth quarter relative to the third quarter. So we take that to mean around about like a $0.04 drag on EPS from FX?

Steve Powers :

Understood. Thank you very much.

Operator:

Thank you for joining today's call. You may now disconnect your lines.

John Renwick:

Thank you, operator. Good morning and thank you for joining us today for a review of our second quarter results and an update on our outlook for 2023. I am joined this morning by

Amit Banati:

Thank you, Steve, and good morning, everyone. Slide number 10 provides a summary of our second quarter and first half results. Net sales growth in quarter two was 7% on an organic basis. Importantly, this growth remained broad-based across category groups and regions, and paces us a little ahead of our previous full-year outlook. Operating profit grew 14% on an adjusted basis. This growth came on top of last year's 10% currency neutral growth, and it featured the sooner than expected recovery in gross profit margin that Steve discussed. This operating profit performance puts us a little ahead of our previous full year outlook. Earnings per share grew 5% on an adjusted basis, sustaining mid-single-digit growth in spite of macro-related headwinds versus last year on below-the-line items such as interest expense and pension income. Cash flow through the first half is down year-on-year because of outlays related to the pending spin-off but on track for the full year. Let's now discuss each of these in more detail. Slide number 11 splits our year-on-year net sales growth into its components. Price mix growth was sustained in the mid-teens with growth in both developed markets and emerging markets. As expected, price elasticities continued to move higher around the world, and this weighed down our volume. Also contributing to our volume decline was lapping last year's replenishment of trade inventories, particularly as we recovered from the serial strike. Foreign currency translation continued to negatively impact net sales growth by nearly 3% year-on-year in the quarter. If today's exchange rates versus the US dollar were to hold, we would expect to see a similar impact in the second half, as the favorable impact of lapping last year's dollar strengthening is offset by the recent devaluation of the Nigerian naira. So our top line growth in quarter two supports our long-standing planning assumptions for elasticities to rise and for revenue growth management actions to begin to anniversary. Next, let's discuss gross profit shown on slide number 12. As we've discussed numerous times, our objective in this high inflation environment has been to protect gross profit dollars via productivity savings and revenue growth management. In quarter two, our adjusted gross profit increased by 9% year-on-year. On top of a year ago quarter that itself was up more than 6% on a currency-neutral basis. From a margin perspective, recall that our expectation was for a gradual improvement as the year progresses. But as Steve mentioned, we are ahead of pace in this recovery with year-on-year expansion coming sooner than expected. Much of this is driven by bottlenecks and shortages receding, which eliminates many of the inefficiencies and incremental costs experienced over the past year or more. In addition, productivity and revenue growth management continue to catch up to a high market-driven input cost inflation. So while we have a ways to go before we get back to pre-pandemic levels, this performance gives us increased confidence in our ability to recover margins. For 2023, there is no change to our outlook for expansion in the second half, but Q2's better-than-expected performance moves up our full year outlook for gross margin to be somewhere around 50 basis points of expansion year-on-year. Operating profit, as shown on slide number 13, grew 14% year-on-year in quarter two, even as it laps a robust 10% gain in the year earlier quarter, and even with advertising and promotion investment increasing year-on-year. Through the first half, our operating profit was up 16% year-on-year. Our second half comparisons get a little tougher, and we have begun to run W.K. Kellogg Company in parallel requiring incremental expenses year-on-year that are already baked into our guidance. That, we are ahead of pace, and this gives us the confidence to raise our full year operating profit guidance. Moving down the income statement. Slide number 14 shows that our earnings per share growth has been attributable to operating profit, which has grown enough to more than offset what are severe macro-related headwinds in within our 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. In the second half, we expect to see modestly lower interest expense than we recorded in the first half, owing to the timing of cash flow. Other income decreased sharply year-on-year in each of the first two quarters this year. reflecting the accounting of pension and postretirement plan asset values and interest rates stemming from last year's declines in financial markets. Owing to favorability in some other items in the slide, Q2 came in higher than both Q1 and the run rate we would expect for the remaining quarters. Our effective tax rate in quarter two was back to the kind of 22% rate we would expect for the full year after being a bit above that in quarter one. Average shares outstanding were up slightly year-on-year in both quarter one and quarter two. And we would expect that to be the case for the full year as well. Foreign currency translation turned slightly positive to EPS in quarter two, finishing the half with about a negative 1% impact. We leave foreign currency translation out of our guidance because it is out of our control and difficult to predict. But if we took today's exchange rates, including a substantially devalued Nigerian Naira partially offset by the lapping of other currencies a year ago weakening, we would estimate a similar impact for the full year as that of the first half. A key message here is that these below the line items are collectively weighing down EPS as expected, but it is important to remember that the operational side of our P&L through operating profit remains very strong. Turning to slide number 15, we see that cash flow is below last year's high level. This is due to three factors. First, one-time cash outlays related to the spin-off amounting to roughly $130 million. Secondly, lapping unusually strong inflows in the year-ago period, including some related to derivatives. And thirdly, timing of capital expenditure, which last year was much more weighted to the second half due to supply disruptions earlier that year. So while it is down from a high level last year, we believe cash flow is right on track to achieve our full year guidance. Meanwhile, we continue to reduce our debt leverage year-on-year, further enhancing our financial flexibility. All in, our second quarter performance puts us slightly ahead of pace for the full year. Accordingly, we are once again moving up our full year guidance as shown on slide number 16. We are raising our guidance for organic net sales growth to approximately 7%, which is the high end of our previous guidance range. Our quarter two performance was consistent with our assumption of decelerating growth as the year progresses, which reflects a likely return of elasticity towards historical levels as well as lapping of particularly substantial revenue growth management actions in the second half of last year. This 7% organic growth is well above our long-term target. We are raising our guidance for adjusted operating profit growth to 9%-10% on a currency-neutral basis, which is the upper half of our previous guidance range. This raise reflects a stronger-than-expected Q2 performance, particularly our earlier recovery in gross profit margin, and yet still accounts for some investment shifts into the second half as well as incremental costs in the second half for operating WK Kellogg Company in parallel as a company within a company. We expect to improve margins this year which combined with our above target net sales growth will deliver operating profit growth that is also above our long-term target. Based on the 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 2%, the upper portion of our previous guidance range. Remember that all and more of this decline is 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% on EPS this year. The negative impact of higher interest expense due to higher interest rates in the economy is another negative impact of more than 4%. If it weren't for these two macro-related impacts, our guidance for EPS growth would also be well above a long-term growth rate. Our guidance for cash flow remains at $1 to $1.1 billion. Recall that, within this guidance, we are expecting a year-on-year increase in our underlying cash flow offset by one-time cash costs and capital related to the spin-off. A couple of elements to keep in mind regarding this guidance. First, while we expect the spin-off to be transacted during quarter four our guidance assumes it takes place at year-end purely for simplicity reasons. And secondly, the impact of our recently completed divestiture of our Russian business does not have a material impact on our guidance. So to summarize our financial position on slide number 17, quarter two was yet another quarter of over-delivery and we have plans in place to sustain our earnings momentum. Accordingly, we are again raising our full year guidance for 2023. Our profit margins have expanded sooner than anticipated and this should continue, particularly as our service levels return to normal. Our net sales growth remains strong and while we are keeping our assumption of rising elasticity in the second half, along with lapping sizable revenue growth management actions, we are confident enough in our top-line growth to raise our full-year outlook. 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 first half. We continue to make good progress on setting up both Kellanova and WK Kellogg for operational and financial success, and we are looking forward to sharing with you the two companies' exciting strategies, capital structures, and financial outlooks next week. And with that, I'll turn it back to Steve to walk you through our individual businesses.

Operator:

Thank you. We will now begin the question-and-answer session with publishing analysts. [Operator Instructions] Our first question for today comes from Andrew Lazar of Barclays. Your line is now open. Please go ahead.

A – Steve Cahillane:

Yes. Thanks for the question, Andrew. I'd say a couple of things. The consumer behavior is pretty much in line with our expectations. And I know probably underlying your question is also some volume questions around what's happening in North America, which was also in line with our expectations. You have to remember, obviously, we've taken such significant pricing over the last several years and elasticities have been almost nonexistent. So we've been forecasting their return for quite some time. And so in line with our expectations, we're also lapping inventory replenishment from last year. So it's pretty much where we expected it to be. In terms of consumer behavior, I'd say the shift that we're starting to see is consumers are really maximizing their pantries. They're closely managing their household inventories, their pantry inventories, zealously guarding against waste, as you would expect in this environment. And so we haven't seen shifts out of our category really. We haven't seen meaningful moves in private label or anything like that. I would just say a consumer that's ever more conscious of the strains on their household budgets, and we would expect that to continue moving forward. And as we look at our promotional activities for the balance of the year, we're also taking that into account. And we're pleased our service levels are going back up and allowing us to be a little bit more front-footed as we think about display execution, quality, merchandising and things of that nature.

A – Steve Cahillane:

Thank you.

Cody Ross:

Hey, good morning. Thank you for taking our questions.

Cody Ross:

I just want to talk a little bit about the volume growth. Hey, good morning. I just want to talk about your volume performance in the quarter as that's what investors are really primarily focusing on these days. Your volume in developed markets, particularly the US came in below what we expected. How are you thinking about volume growth moving forward into the back half and into next year? And how much visibility do you have to return to volume growth? And what would those levers be to drive it? And then I have a follow-up.

Amit Banati:

Yeah. So just a couple of further builds, right? I think the one thing I'd point out is in quarter two, the inventory lap was the most pronounced. So I think that was most pronounced in this quarter. And so I think going forward, that will be lesser of an impact. I think from a rest of the year, we continue to focus decelerating sales growth. That's what's been implied. That's what's implied in our guidance. And it's a couple of things that's driving that. One is, we obviously start lapping last year's substantial revenue growth management actions, which were that much higher in the second half. And we continue to prudently assume higher elasticities for the rest of the year.

Steve Cahillane:

Yes, I'd say a good bit due to the replenishment and we're potentially seeing some retailer de-stocking. It's really hard to pin down when you're talking about a quarter. And we see that as a good thing, Cody. Obviously, service levels for the last year plus have been below normal levels, which required safety stock across the supply chain. As we get to service levels back above 95%, you'd see a renewed confidence, a growing confidence at retail and therefore, not needing to carry the same days of supply. And again, we don't see that as a negative. And we see, as we said, from a go-forward perspective, lots of confidence in our plans, which has led to us raising our guidance for the top line slightly.

Steve Cahillane:

See you next week.

David Palmer:

Thanks. Good morning. I think you said gross margins should be up 50 basis points year-over-year for the full year. I think I heard that right. If that's right, that implies something like a 30-plus basis point gross margin decline in the second half. What are some of the puts and takes we should be thinking about for gross margin and maybe a change in trend? And I have a quick follow-up.

David Palmer:

And then I know from your filing, North America cereal adjusted gross margin was about 26% in the first quarter. I don't know, if it's too early for you to have that for the second quarter. But I'm just wondering, I know obviously, we'll be talking more next week, but how are you thinking about gross margin potential for that business? I would have thought a large-scale cereal business like yours, would be just naturally living at a much higher gross margin level. Just any thoughts? And of course, we'll see you next week. Thank you.

Steve Cahillane:

Stay tuned for an exciting event next week, David.

Operator:

Thank you. Our next question comes from Pamela Kaufman of Morgan Stanley. The line is now open. Please go ahead.

Steve Cahillane:

Yeah, Pam, maybe I'll start and then flip it to Amit. I'd say we have clearly increased our investment in A&P in the first half of the year as we said we would. We were maybe a little bit more judicious as we continue to work through bottlenecks and shortages and get our confidence in our supply chain back to where it needs to be to really drive the type of quality merchandising that we want to drive. And so we see more ambitious plans in the second half. So we'll see an increase above the run rate that we had in the first half as we drive really good program against Pringles and Cheez-It, our cereal business and so forth. So, continued investment in the brands in a constructive way to drive good quality displays, and promotions on the floor into the second half. And so that's what you see happening. A little bit of dynamism going forward, but a confidence in our supply chain is a lot more solid than I'd say it's been really since the pandemic. I don't know, Amit, if you want to?

Pamela Kaufman:

Great. Thank you. And just wanted to ask what you're seeing -- what you're observing from the consumer outside of the US your results, especially in Europe were very strong. So, maybe if you could touch on what you're seeing in terms of consumer behavior across your geographies?

Pamela Kaufman:

Thank you.

Steve Powers:

Yes. Hey. Thanks. Good morning. I guess I just want to go back to -- I think it was David Palmer's question on the second half gross margin I didn't -- maybe it is me, I just didn't quite follow the answer. I do think the math suggests essentially no gross margin expansion in the back half, but you sound confident about the momentum you've got going into the back half. So, I just wanted to revisit that, if I could. And then a different topic entirely, but just on Nigeria, it sounded like from the way you described it that you didn't anticipate taking any incremental pricing from here post-devaluation that you've kind of been proactive on. I just wanted to play that back and talk through what the dynamics are and just kind of validate whether -- what the pricing outlook is in the context of devaluation going forward?

Amit Banati:

Yeah. Thanks, Steve. So I think the devaluation that we are seeing right now is more of a catch-up in the official rate at which we translate, I think operationally, like Steve mentioned, we've been operating against the de facto devaluation that's happened. And you can see that in our pricing. And you can see that in our NSV growth, which has been north of 20% for the last few quarters. I think from a translation standpoint, Nigeria is about 10% of our sales. So with the devaluation, it's about a 4% impact on our overall NSV, which will be split between the two years, 2% this year and 2% next year. This has been incorporated into our ForEx guidance. So the guidance that I gave based on today's rates, of course, of around a 3% impact on NSV that incorporates the Naira devaluation. I'd also say that the impact on OP and EPS is less than 1%, and that's also been incorporated into the 1% negative impact of currency on the EPS. So that's Nigeria. I think from a gross margin standpoint, no, we're not -- we continue to expect gross margins to expand in the second half. So there's no change in trend. I think there's a little bit of variation based on seasonality between the quarters. But I think from an underlying standpoint, we continue to expect gross margin to be up in the second half.

Operator:

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

Amit Banati:

Yeah, that's our intent. So I think our intent is to talk both give you a preliminary guidance given it's early on 2024, talk about long-term growth rates across key measures.

Amit Banati:

Yes.

Operator:

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

A – Amit Banati:

Yeah. I think, so firstly, there's been some phasing, right, when you compare it versus 2020 versus 2022. And we talked that, we started the year saying it will be much more first half weighted. I think that has shifted a little bit between first half and second half. I think to your question around levels of advertising, we're pleased with the levels of advertising. So I don't think we expect any rebasing needed going forward. On SG&A, we are catching up as meetings, travel, business returns to pre-pandemic levels. So I think that you'll see that catch-up I'd say that overall, you'd expect overheads to be up mid-single digits is to be up slightly higher than what we increased in 2022. So in 2022, we were up we'd probably be up this year as well at a slightly higher rate.

A – Amit Banati:

Yeah. I mean, there's been a lot of pricing that has come through. So I think we've been in this period of exceptional pricing. So, some of the ratios probably are displaced a little bit as that pricing has worked its way through the P&L.

Operator:

Thank you. Our next question comes from Robert Dickerson of Jefferies. Your line is now open. Please go ahead.

Q – Robert Dickerson:

Hello? Can you hear me?

Q – Robert Dickerson:

I am sorry. Yeah. Yes, I just want to ask a broader question around [indiscernible] strike. If you think for like two quarters it seems kind of habitability as to why do you think that actually fully recovered, [indiscernible]?

Q – Robert Dickerson:

Okay. Super. And then I guess just one quick follow-up is kind of pertaining, I guess, to Mr. Palmer's question earlier, just on the North America cereal profitability, that you provided us in Form 10. Is there anything kind of inherent within those profitability margins that could have been, let's say, kind of weighing on profitability potential again, more broadly speaking, relative to maybe what could come?

Q – Robert Dickerson:

Fair enough. Thanks a lot.

Q – MichaelLavery:

Thank you. Good morning. Just wanted to understand a couple of things on volumes. You've walked through the sales growth split by category and ways that would add up to W.K. Kellogg and Kellanova. But can you give how the volume split would have looked for each of those on a company NewCo basis for the second quarter?

A – SteveCahillane:

We haven't split that, Michael. Next week, we will -- I mean, you're going to get a lot of detail next week about what it looks like and what our forecasts are going forward. But in terms of category splits on volume, it's not a level of detail that we've provided.

A – AmitBanati:

Yes. I think we've seen elasticities rising in the quarter, right? We had expected that. We had focused that, and this quarter, in quarter two, we saw that. And I think we saw it in talking on EMEA or Latin America. In Latin America, we saw it in our cereal business, our cookies and crackers business in Brazil. We also did some rationalization of low-margin SKUs as part of our revenue growth management. So you're seeing that come through in the quarter. And I think it's really elasticities given the pricing that we've taken, and we talked a little bit about currency in Nigeria, where we've had to price not just for commodities, but also currency. So you're seeing the elasticities come through. I think going forward, from a lever standpoint, I think Steve talked about we've got -- we're excited about the commercial plan that we have in the second half. And I think as you start lapping the pricing, there'll be more balance between volume and price mix.

Operator:

Thank you. Our next question comes from Matt Smith of Stifel. Your line is now open. Please go ahead.

A – Steve Cahillane:

Yes. I think a couple of things. First, it's a bit of a tough comparison when you think about in North America cereal versus our snacks business because our cereal is obviously coming out of a very depressed environment because of the fire and the strike, really no promotional activity, no merchandising activity, and so we've got a ways to go to get back to where it was on a pre-pandemic basis, but we have every confidence that we're moving in that direction -- as our supply chain is working. I mean, it's working really at a pre-pandemic level in cereal, which is terrific. I already mentioned the replenishment of SKUs, the growth of distribution points and ACV. So we see that really moving in the right direction. From a snacking perspective, it's always been a very highly impulsive category. And so coming out of bottlenecks and shortages and low service levels, you don't get the type of quality display that really drives the type that we're used to seeing if your service levels aren't above the 95 percentage rate. And so as we think about the back half of the year and some of the things I've mentioned around quality merchandising and our confidence in our supply chain, we see that as a big opportunity for us going forward for brands like Pringles, Cheez-It, Rice Krispies treats, which are highly impulsive. Front end is important. Display disruption opportunities throughout the store is really important. And so we see -- we're really pleased with the type of plans that we have in place for the back half of the year that we think will drive continued good performance, which is why we're more constructive about volume going forward. And look at this past quarter's volume performance is in North America, as whether you call it a high watermark or a low watermark, but moving better -- moving clearly in a better direction based on everything that we see.

A – Steve Cahillane:

Okay. Thank you.

Operator:

Thank you for joining today's call. You may now disconnect your lines.

John Renwick:

Thank you, operator. Good morning, and thank you, for joining us today for a review of our first quarter 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 projections for Kellogg Company's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation, as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of kelloggcompany.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. And now, I'll turn it over to Steve.

Amit Banati:

Thank you, Steve, and good morning, everyone. Slide number 10, provides a summary of our first quarter 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. As Steve mentioned, we also performed better on profit margins than we had expected, leading to a very strong 18% increase in adjusted 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 on our below the line items. In fact, higher interest expense and lower pension accounting income pulled EPS down by about 5 and 8 percentage points respectively, year-on-year in the quarter. Cash flow in the first three months decreased year-on-year as expected. This is related to the payout of 2022s incentive compensation in quarter one, cash outlets related to their spin-off and the timing of certain working capital items and capital expenditure. 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 one. Price mix growth was sustained in the mid-teens, reflecting revenue growth management initiatives around the world, which we implemented during 2022 and right through quarter one 2023 as we continue to work to offset high input cost inflation. Volume declined reflecting price elasticity, though not as much as we had expected for quarter one. Foreign currency translation reduced net sales by about 3 points, reflecting the stronger U.S. dollar against key currencies versus the prior year. As we will 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. Nonetheless, there is no question that posting better than expected growth yet again in quarter one indicates strong underlying 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 has been to protect gross profit dollars via productivity savings and revenue growth management. As you can see on the chart, we have done a good job at this even considering the large and transitory impact in quarter four, 2021 and quarter one, 2022 of a fire and strike. And we've done this in spite of economy-wide bottlenecks and shortages, which have created significant inefficiencies and incremental costs. In the first quarter, we made our most progress yet. Productivity and revenue growth management continued 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. 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 lap 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 supply conditions and the lapping of accelerated input cost inflation. This quarter one performance gives us that much more confidence that we can finish the year better than the flattish margin we had discussed previously. Slide number 13 depicts our SG&A expense, whose quarterly year-on-year changes this year are greatly affected by year-ago comparisons. As expected, our SG&A in this year's quarter one increased at a double-digit rate year-on-year as we lap in unusual decline in the year earlier period. 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 two, but it was really the second half last year when we move toward full restoration of both and also raised our incentive compensation accruals. But in absolute numbers, we feel good about our levels of investment in brands and capabilities and we remain on track for the full-year. Moving to Slide number 14, we can see that our growth in net sales and gross profit were more than enough to cover this year-on-year rise in SG&A expense, resulting in our 18% currency-neutral growth in adjusted basis operating profit. This is a fourth straight quarter of solid year-on-year 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 in quarter one. In fact, our quarter one operating profit was higher than previous years quarter one 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 statements, Slide number 15 shows that our operating profit growth was more than enough to offset what were severe headwinds within our 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. In dollars, we should see something close to this in each of the remaining three quarters of the year. 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 a 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%, believe foreign currency translation out of our guidance because it is out of our control and difficult to predict, but today's exchange rates would suggest a sequentially smaller impact in each remaining quarter, finishing the year with a negative impact of 1% to 2%. 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&L through operating profit is very strong. Now let's turn to our cash flow and balance sheet and Slide number 16. As I mentioned earlier, our cash flow in quarter one was lower than last year's as we had expected. In addition to lapping a particularly strong year-ago period, this quarter, we experienced the payout of 2022s incentive compensation as well as incremental cash outlays related to the spin-off. Cash flow was also impacted year-on-year by timing of working capital and capital expenditure. We remain on track for our full-year guidance. Meanwhile, our net debt has been trending lower, contributing to our strong financial flexibility. So let's now summarize our guidance on Slide number 17. Keep in mind that while we expect the spin-off to be transacted during quarter four, our guidance assumes it takes place at year-end purely for simplicity reasons. Similarly, while the divestiture of our Russian business awaits government approval, our guidance assumes it remains in our portfolio for the full-year and the divestiture impact will be immaterial to adjusted basis EPS. We are raising our guidance for organic net sales growth to 6% to 7%, reflecting our better than expected performance in quarter one, which continue to demonstrate price realization and solid momentum across our portfolio. We maintained 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 is well above our long-term target. We are raising our guidance for adjusted operating profit growth to 8% to 10% on a currency-neutral basis. This percentage point increase to the range reflects our stronger than expected quarter one. We feel increasingly confident in our ability to improve margins this year, which combined with our above target net sales growth will deliver operating profit growth that is also above our long-term target. 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 two macro-related impacts, our guidance for EPS would be well above our long-term growth target. Our guidance for cash flow remains at $1 billion to $1.1 billion. Recall that within this guidance, we are expecting a year-on-year increase in our underlying cash flow, offset by one-time cash costs and capital related to the spin-off. So to summarize our financial position, sustained price realization continue to generate strong topline growth around the world and across our category groups. 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 first three 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 one gives us that much more confidence in this full-year outlook, even giving us some flexibility relative to readying ourselves for the spin-off. We continue to make good progress on setting up both Kellanova and WK Kellogg for financial success. In addition to carving out of their financials, we are managing upfront expenditures, minimizing standalone costs for WK Kellogg and stranded margin for Kellanova, and we are ensuring solid capital structures and financial flexibility for both. And with that, I'll turn it back to Steve to walk you through our individual businesses.

Operator:

Thank you. We now begin the question-and-answer session with publishing analysts. [Operator Instructions] Our first question today comes from the line of David Palmer from Evercore ISI. Please go ahead. Your line is now open.

Steven Cahillane:

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. 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 topline, you see that in the better service levels that we're delivering to our customers, 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.

Steven Cahillane:

Yes. 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 is one element of the outcome of price promotion, get your product out on the floor, 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. So that's been raised. And we are very pleased with our topline performance. We're pleased with our ability to raise that guidance. And we're pleased with our margins where they are in the recovery in margins. So all that being said, I think the environment is a good environment. It's an environment 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.

Operator:

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

Steven Cahillane:

Yes. Thanks for the question, Andrew. I love some of the words you used in their normal and predictable and soft landing. Clearly, we've come through the last three-plus years in facing all these unprecedented challenges. We said as Kellogg that we would exit the pandemic a stronger company. 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 BARDA innovation has been raised. 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, supply chains have had to become more agile. There's no question about that. Our supply chains have all been challenged to the 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. 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. We had all sorts of challenges with respect to that. But now supply chains have come through stronger as well and the relationships 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 time about joint business plans start with how do you eliminate waste end to end, how do you grow the size of the prize, while we serve the common consumer. And I guess the final thing I'd say is the whole world of marketing has changed like it never has before. The true promise of one-to-one 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, first-party data, more robust and more available than it's ever been to really target consumers in a way that marketers have dreamed up 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.

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.

Amit Banati:

Sure. So I think if you look at cost 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. So some of that would flow through as hedges roll across. Very pleased with the performance in the first quarter. 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 one. 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. I think based on what we're seeing right now, we expect our gross margins to be up slightly for the year.

Amit Banati:

I think the lap – I'd say, overall, it's in the mid-teens 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.

Operator:

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

Steven Cahillane:

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 kind of steady place to be for the last several years up until about two years ago where we started to see a return to some of the macroeconomic challenges, the geopolitical challenges and so forth. So with that, we're very pleased with our performance. 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 transactional 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, especially big cereal business. And then when you look at our Pringles business in key markets, doing very well. Obviously, we added some capacity a couple of years ago in Brazil, put some lines of Pringles in. Pringles continues to perform very well in Latin America. So our outlook for Latin America remains strong, we're pleased with the performance there, but it's obviously an emerging market. So it comes with some volatility.

Operator:

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

Jason English:

That is right, Jason. That is in our guidance, the incremental cost of standing that up. We're doing something called company and 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. And what I'd say in terms of stranded costs, trended margin, obviously, that's coming, but any kind of – the way you portray 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 summer time during our Investor Day. We can't say much right now. But I'm very confident that those two businesses will be stood up, stood up strong with very strong outlooks. And I think you'll see the value creation and the value unlock will be an aha, aha moment for those who don't quite get it yet.

Operator:

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

Steven Cahillane:

Good morning, Alexia.

Steven Cahillane:

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. 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. And so across the board, very good performance, standout performance in North America and EMEA relative to overperforming versus elasticities. When we think about the back half of the year, the remainder of the year, we are prudently assuming that elasticities start to increase and 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.

Operator:

Thank you. The next question today comes from the line of Steve Powers from Deutsche Bank. Please go ahead. Your line is now open.

Amit Banati:

Yes. I'd say, Steve, we've got great momentum in both businesses. I think you've seen the results of Kellanova, good broad-based growth across all our categories, both in the U.S., internationally and across our categories as well. I think North America cereal, we're very pleased with the recovery that we are seeing there from a share standpoint, and that would continue to be the focus for the rest of the year. So there's good momentum across both the businesses.

Stephen Powers:

Sorry, I was on mute. Yes. Thanks. I guess, if there's any way to provide a little bit of quantification around sort of the contribution of each of those businesses to that 6% to 7% on the year, that would be helpful. Thank you.

Stephen Powers:

Yes. Okay. Thank you.

Stephen Powers:

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:

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

Steven Cahillane:

Good morning.

Amit Banati:

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 with the spin in quarter three. So I think it's a balance of being prudent on our volume assumptions and our elasticity assumptions for the year. And it's early in the year, but obviously, very pleased with the underlying momentum in the business and the strong start.

Steven Cahillane:

Yes, Pam. 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. 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 are 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. 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.

Operator:

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

Steven Cahillane:

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 had become much more normalized. We still have the odd shortages, inventory not being in the right place from some of our suppliers. 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. 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.

Max Gumport:

It's all great to hear. Thanks very much.

Robert Dickerson:

Great. Thanks so much. Maybe just a quick question for you, Amit. Just around your – I guess, around Steve's comments, about kind of the potentially very attractive momentum in the two separate businesses. Remember, CAGNY, you kind of went through some incremental detail, I believe, in the TSA agreement. So excuse my ignorance here if everybody already knows this, but I was just kind of looking for kind of maybe a kind of 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 Snacks Co. that provides you time to offset dis-synergies, if that makes sense. And maybe if you could just kind of clarify how that works? That's all I have. Thanks.

Robert Dickerson:

All right. Super. That's all. Thank you.

Operator:

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

Steven Cahillane:

Good morning.

Amit Banati:

Yes. So we're pleased with the overall level of spending. And we'd expect it to be up, overall SG&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 first quarter. And then even in the second quarter, as we were restoring supply on the U.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're very pleased with the levels of investment. As Steve mentioned, we're 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.

Operator:

Thank you.

Operator:

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

John Renwick:

Thank you, operator. Good morning and thank you for joining us today for a review of our fourth quarter and full year 2022 results as well as 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 projections for Kellogg Company's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation, as well as to our public SEC filings. This is a particular note amidst the current operating environment, which includes unusually high input cost inflation, global supply disruptions, and other uncertain global macroeconomic conditions, all of whose direction, length, and severity are so difficult to predict. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of kelloggcompany.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. And now, I'll turn it over to Steve.

Amit Banati:

Thanks, Steve, and good morning, everyone. Slide Number 10 provides a summary of our 2022 financial results. A better than expected performance in quarter four drove us to hit or exceed our guidance for the full year. Our net sales led the way accelerating to 16% organic growth in the fourth quarter and resulting in 12% organic growth for the year, which was higher than expected. This top line growth more than offset a sizable year-on-year increase in investment resulting in our adjusted basis operating profit growing 20% on a currency neutral basis in quarter four. This brought our full year growth to 7%, also exceeding expectations. Our adjusted basis earnings per share increased 17% on a currency neutral basis in quarter four despite being weighed down by the as anticipated increase in interest expense and reduction in pension income related to the decline in financial markets. This quarter four performance resulted in full year EPS growth of 5% on a currency neutral adjusted basis, ahead of our expectations. Cash flow came in at about $1.2 billion and increased from the prior year and in line with our expectations. Excluded from our currency neutral results of course is foreign currency translation, which reduced our net sales, operating profit, and earnings per share by about four percentage points in quarter four and about the same for the full year EPS. Now let's look at each metric in a little more detail. Slide Number 11 plays out the components of our strong net sales growth. Our double-digit organic growth and net sales in 2022 was driven by price mix which accelerated in the second half as we continued to execute revenue growth management actions around the world to cover accelerated input cost inflation. Volume grew slightly in the quarter due to continued recovery in North America Cereal and declined only modestly for the full year, reflecting both price elasticity that has not moved up as much or as soon as we had expected, as well as our replenishment of trade inventories during the year as our supply improved. Foreign currency translation was a headwind all year, with particularly adverse impacts in quarter three and quarter four. Let’s discuss gross profit on Slide Number 12. Supply disruptions created incremental costs and inefficiencies throughout the year and input cost inflation accelerated across the year. Yet because of productivity efforts and effective revenue growth management actions around the world, we were able to largely offset the dollar impact of those higher input costs and we grew our overall gross profit dollars this year. In fact, our gross profit dollars came in higher than expected both in quarter four and the full year. From a percentage margin perspective, though, there is a mechanical impact of matching input cost inflation which price realization. And because we could not cover the unpredictable inefficiencies from economy wide bottlenecks and shortages. We did see year-on-year increase in gross profit margin in quarter four as we lapped the first of two quarters impacted by the fire and strike and we finished the full year in line with expectations we had communicated. In 2023 we expect to continue to grow gross profit dollars while our margin stabilizes and improves slightly during the year. Some of this is related to the fire and strike impact being one time in nature largely isolated to quarter four 2021 and quarter one 2022. And some of it will come from bottlenecks and shortages gradually diminishing. But this improved margin performance will also be driven by price realization catching up to input cost inflation that is expected to moderate in the back half of the year. Moving down the income statement on Slide Number 13, we see how our SG&A accelerated its year-on-year increase across the year just as we said it would. After having been curved during severe supply disruptions including the fire and strike in North America our advertising and promotion investment was ramped back in the second half and finished the year roughly flat with 2021. Overhead meanwhile increased year-on-year in all four quarters as we gradually returned to travel and meetings and as we accrued higher incentive compensation related to our above budget financial performance. In 2023 the quarterly phasing of SG&A expense will be affected by lapping last year’s North America’s Cereal pull back on brand building in the first half and rapid ramp up in the second half. Slide Number 14 shows our continued upward trajectory on operating profit. Operating profit in the fourth quarter was up 16% year-on-year including a negative currency translation impact of almost 4 percentage points. While it was lapping a year earlier decline due to last year’s fire and strike, this year’s quarter four profits was above that of two years ago. Importantly it featured exceptional topline growth and a significant year-on-year increase in investment. For the full year our operating profit increased by 4% after a negative 3% impact for currency translation. As you can see on the slide, this operating profit was not only higher than 2021, it was also higher than two and three years ago. Slide Number 15 shows are below the line items which were again collectively negative to EPS growth in the quarter and therefore the full year. Driven by non-operating factors, they will be an even larger headwind in 2023. Interest expense was up sharply year-on-year in quarter four as rising interest rates affected the roughly one fifth of our debt that is floating. The quarterly run rate for 2023 interest expense will likely be a bit higher than this quarter four level. Other income decreased in quarter four and the full year. Most of this was related to the media remeasurement of certain U.S. benefit plans, though in quarter four it was partially offset by better than expected FOREX gains and interest income that we do not expect to repeat. As we have discussed previously, the decline in benefit plan income is related to 2022's fall in financial markets, which reduced the value of planned assets and raised interest rates. We remeasured about half of our planned exposure in the second-half of 2022 and 2023 will feel the impact of remeasuring all of our plans. Hence, we could see a year-on-year decline in other income in 2023 that is almost twice the decrease we recorded in 2022. Our effective tax rate came in a little higher than expected in quarter four and therefore the full year, mostly reflecting geography mix. For 2023, we expect the tax rate to be approximately 22%. Our JV earnings and minority interests were collectively flattish year-on-year in quarter four, finishing the year higher than last year, led by good performance by our joint ventures. Collectively, these are expected to be relatively flat in 2023. And average shares outstanding were flattish in 2022 as increased options exercises by employees over the course of the year offset the benefit of share buyback executed early in the year. Our cash flow and balance sheet also remained in very good shape as shown on Slide Number 16. Our cash flow increased year-on-year despite year-on-year swings in sales and receivables in December as we lapped last year’s fire and strike. This increase in cash flow over the past few years has helped us to reduce our debt right through 2022, leading to lower leverage ratios. This has given us enhanced financial flexibility even as we have continued to increase cash return to shareowners in the form of an increased dividend and buybacks this year. Let's now pivot to 2023, starting with Slide Number 17 and some key assumptions behind our guidance. First and most importantly, we expect to sustain a strong business momentum. Between price realization, the momentum of our categories, and the strength of our brand plans we are confident we can achieve another year of above algorithm net sales growth. And while input costs inflation remains high, it should decelerate year-on-year in the second half, and the same can be said for bottlenecks and shortages. Therefore, we expect to generate above algorithm growth for operating profit as well in 2023. Next, our guidance reflects the impact of headwinds on our non-operating below the line items. Interest expense will increase substantially because of the rise in interest rates worldwide. And non-cash pension income will drop sharply owing to lower asset values entering the year and to a higher interest charge reflecting the rise in interest rates. The pending spinoff of North America Cereal Co, is still targeted to be executed towards the end of the year. For simplicity reasons only our guidance assumes it remains in our results for the full year. Slide Number 18 shows our guidance by key metric. Organic growth in net sales is forecast to be in the 5% to 7% range, another strong year. Given the cost environment this growth will be weighted towards price mix, reflecting revenue growth actions from both 2022 and this year. Importantly, this net sales growth is expected to be broad based across our portfolio and led by momentum in snacks and in emerging markets. On an adjusted basis and excluding currency, we expect operating profit to grow in the 7% to 9% range. This above target growth will be driven by the strong net sales, which drives the growth in gross profit dollars that fuel increased brand building. At the earnings per share level, the strong operating profit growth will be more than offset by the pension and interest headwinds we discussed earlier. The impact of the accounting re-measurement of pension and post retirement alone is negative 7 percentage points to EPS growth. Again, it should be emphasized that this is a noncash, non-operating item, and it was driven by what was a rare steep decline in the financial markets in 2022. Without that item, our EPS would be up 3% to 5%, even despite the higher interest expense and tax rate. Cash flow is expected to come in somewhere between $1 billion and $1.1 billion. Our underlying base business cash flow will continue to grow year-on-year, reaching $1.3 billion to $1.4 billion, but there will be roughly $300 million plus of cash outlays related to the pending spin-off. This is a combination of cash costs and capital expenditure, all onetime in nature and all related to executing the transaction and setting up the stand-alone business. So to summarize on Slide Number 19, we continue to feel very good about how we are performing and about our financial condition. Across our regions and category groups, we sustained solid momentum in 2022, and we expect that momentum to continue in 2023. Amidst high cost inflation across inputs and energy, we were able to protect profit dollars through productivity and revenue growth management in 2022, and we will do so again in 2023. In an environment of disruptions up and down the supply chain, we have executed well and steadily improved service levels in 2022 and will continue to do so in 2023. In 2022, we delivered above-target growth in currency-neutral, net sales and operating profit, and we plan on doing that again in 2023. We have increased our cash flow and further deleveraged our balance sheet, giving us excellent financial flexibility going into 2023. And we remain as confident as ever in the value that can be created by spinning off North America Cereal Co. Not only will that business thrive amidst increased focus, but the strength of the remaining global snacking co. will be significantly more visible. So we are looking forward to another good year in 2023. And with that, I'll turn it back to Steve to discuss our individual businesses.

Operator:

Thank you. [Operator Instructions]. Our first question for today comes from Jason English of Goldman Sachs. Jason, your line is now open. Please go ahead.

Amit Banati:

Yes. I think, Jason, just looking at the current rates, we'd say probably 1% to 2% impact on EPS and OP, maybe on sales around 3%. So that's kind of the outlook if you look at where the rates are today.

Steven Cahillane:

Yes. Sure, Jason. In Europe, it's essentially, we're catching up, right? The inflation came fast and furious, and our ability to catch up to it was impacted in the third and fourth quarter. We also had, obviously, the Russia impact primarily, in the third quarter. Higher A&P continued to bolster our top line, which we're committed to doing. And so we're catching up. It's still going to be a bit of a pressure in the first half, as we mentioned, but our underlying business is very, very solid. And our ability to get price -- earned price has also been solid. It's never easy anywhere, but the European dynamics can be challenging, but we've been making our way through it. And so we have good confidence in the underlying momentum of the business. It's really just -- took a little time to catch up.

Steven Cahillane:

Yes, we're in reasonable shape right now, Jason. We don't like to talk too much about individual negotiations with our customers. They're doing everything that they always do, which is protect the consumer. We want to protect the consumer as well, be as affordable as possible, but we need to maintain our margins. And we're having those adult conversations, and they're proceeding constructively.

Operator:

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

Steven Cahillane:

Good morning.

Steven Cahillane:

Yes, Alexia. So for us in North America in the fourth quarter, volume was up. And obviously, overall revenue was up nicely. We did have a fairly easy comparison, particularly in North American cereal because of the fire and strike. On a two-year basis, though, we -- well, first of all, the trajectory of our North American cereal business is very, very solid, and we're very, very pleased with it. On a two-year basis, NSV is also up. I'm not sure what you're looking at, but it is up. Volume is down slightly as the category is. But our NSV on a two-year basis and a one-year basis is up in cereal. And we're very confident about the plans in 2023 that we have in place. We're confident about the distribution that we've been able to gain. We're confident about our shelf sets. Our consumer promotions are, as I said, really back on track. You can see Jalen Hurts and Tony the Tiger on television right now as a matter of fact, which is lucky for us that Jalen is in the Super Bowl. So feeling very good about our North American cereal recovery on a one year and two-year basis.

Alexia Howard:

Thank you very much. I will pass it on.

Michael Lavery:

Thank you, good morning. Just wanted to follow up on the volume piece at a little bit higher level. Contrasting the declines you've had globally throughout the year with the relatively stronger performance in North America, excluding the 1Q hit from cereal obviously, but can you just unpack a little bit of what you're seeing differently and is it stimulus and sort of savings drawdown that supported volumes in the U.S. that now maybe is rolling over, just maybe inform how you think about the differences in the U.S. consumer versus what you're seeing around the world?

Michael Lavery:

Okay. That's helpful color. And can I just squeeze in a housekeeping follow-up on the pensions, that's a big below the line item for you this year, obviously, but is there any meaningful split between cereal and the legacy, the rest of the company and just trying to understand when that happens. Does one side of the business or the other have a disproportionate impact from that?

Michael Lavery:

Okay, thank you.

Robert Dickerson:

Great, thanks so much. I guess just kind of first question housekeeping is, when should we expect to get a little bit more information on the spend? And then the second question simplistically is just around cash and CAPEX side. I don't know if I heard it. But in terms of the $300 million from the upfront charges and CAPEX of the spin, just provide a little clarity as to kind of where -- what's driving that?

Robert Dickerson:

Okay, I will follow-up. Thanks so much.

Kenneth Goldman:

Hi, I just wanted to ask about your guidance for a -- I think the word was stabilizing gross margin this year. Just curious, does stabilizing mean down versus 2022 but at a maybe decelerating rate of decline? And I'm just curious, rather, what it implies for SG&A either as a percentage of sales or on a dollar basis. It would seem to imply that both would have to come down a little bit but just curious what your thoughts were on there?

Kenneth Goldman:

Great, thank you so much.

Andrew Lazar:

Great, thanks so much. Steve, there's a concern, I think, among investors for the group as a whole, right, that supply constraints ease and the benefit from pricing wanes, food companies will somehow choose to sort of ramp promotional spending to maybe more irrational levels to drive volume. And I guess this concern seems particularly acute, I think, in really cereal space, partly because Kellogg is obviously heading towards a split of the business. And I'm just curious how you'd kind of respond to that concern and get a sense for what your plans are in terms of in-market sort of activity as you go through the year? Thanks so much.

Andrew Lazar:

Thanks so much.

Robert Moskow:

Hi, thanks. Amit, I was hoping for a little more color on the phasing for your operating profit growth by quarter. Like first quarter, for example, I think you have an easy comparison on gross profit dollars, but then you're going to increase SG&A investment. So do you think first quarter profit growth is higher than your annual average or is it not really much different?

Robert Moskow:

Okay. A quick follow-up, can you give a little more color on what your process was for pursuing the spin-off of Morningstar, did you also seek a buyer in this process, and what do you think the results will be like in 2023, can it improve off of 2022 or expect a weak year?

Robert Moskow:

Thank you.

Bryan Spillane:

Thanks operator. Good morning everyone. Steve, maybe just to take a step back on the snacking business. And obviously, there's a lot of focus on getting these businesses separated. But as we look forward, like how do you -- how opportunistic or how aggressive can you be in M&A, there's a lot of opportunities for acquisitions in snacking, it's definitely proven to be a very resilient category through everything we've been through the last couple of years, so just trying to get a sense of how quickly you might be able to begin adding to the portfolio or it's not really part of what you think the strategy will be going forward?

Bryan Spillane:

Okay. And then just as a follow-up, just as we're thinking about the split going forward, how dependent -- like is there any risk that if the markets really melt down or valuations change or just what's the risk that you decide to pull it or is there -- like what conditions would create a scenario where you delay it or pull it?

Bryan Spillane:

Great, thanks. We look forward to see you guys on a CAGNY.

Operator:

Thank you. Our next question comes from Eric Larson of Seaport Research Partners. Eric, your line is now open. Please go ahead.

Steven Cahillane:

Yes, Eric, thanks for the question. I'd say there's nothing unusual that we're lapping aside from an easier comp when we get to the Russian comparisons is one. And the first half is really the catch-up -- pricing catching up to costs, and we're very confident that we're going to do that. The underlying brand strength remains very strong. Europe has just completed their fifth year of growth and so it's been a long story of underlying momentum driven by great execution on Pringles. We've got a great plan for Pringles again based on a number of different activities, strong consumer engagement, strong customer engagement with Pringles. Our cereal brands remain strong. And one of the real surprises has been our portable wholesome snacks has really returned to growth and is doing quite well. And so it's a first half, second half, but it's really more in terms of catching up, which we're in process of doing. And we can see it. We can see it in our forecast that it's happening, and it gives us a great deal of confidence that there'll be a sixth year of growth in Europe. You want to add anything?

Eric Larson:

One quick follow-up. Given that your pension income is really kind of a noncash event, but I think it gets priced and looked at as a cash event, have you ever considered reporting your EPS on a cash EPS basis as opposed to the way you report it now?

Eric Larson:

Thank you.

Stephen Powers:

Hey, great. Good morning. Thanks guys. Maybe to start, just some follow-up on a couple of topics that came up earlier. Just -- the first one on the cash cost, the CAPEX associated to $300 million, is that -- is there any kind of timing element on that, does that -- has that come pretty equally throughout the year, does it build as we get closer to the actual event? And on pricing, I'm sure there's incremental pricing in 2023 in the emerging markets. It sounds like there's pricing to come in Europe. My question is, is there any kind of material magnitude of pricing anticipated in the U.S. and if so, could you give us a little sense of the magnitude there?

Amit Banati:

And I think in terms of the onetime costs and the phasing through the year, I mean, we're right in the middle of the program. And so I think you could expect it to be spent through the year. So there's nothing particular to call out in that.

Steven Cahillane:

Yes. We don't go into that category level, but you can look at the momentum that we have and the comments I made earlier. We plan on continuing that momentum, getting back TDPs that were lost that's been very successful up to this point and to continue to grow our gross margin. We came to a low point, obviously, because of the fire and strike. So we're coming off that. But the underlying momentum, the trajectory of the business, we feel very good about, and we aim to continue that trajectory.

John Renwick:

Operator, we are at 10:30, so we are out of time. But everybody, thank you for your interest in Kellogg. And please give us a call if you have any follow-up questions.

Operator:

Good morning! Welcome to the Kellogg Company's Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session with publishing analysts. At this time I will turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellogg Company.

Steven Cahillane:

Thanks John and good morning everyone. We are delighted to be able to report yet another quarter of momentum, progress, better than expected results and an improved full year outlook. Our organization once again exhibited grit and creativity in navigating and executing through a global operating environment that showed little to no signs of easing. We continue to improve our service levels in spite of persistent bottlenecks and shortages of everything from materials and equipment to trucks and containers. We also continued to mitigate the profit impact of exceptionally high cost inflation with good execution of productivity initiatives and revenue growth management actions, and even in this unusual operating environment, we again saw the strength of our portfolio play out. We sustained our strong growth momentum in snacks around the world and our emerging markets saw strong growth in all key category groups. And in our North America Cereal business, we continue to recover inventory and share more quickly than expected from enormous disruptions late last year. At the same time, work continues on the planned separations which we announced in June. A recent milestone was the announcement of our North America serial company leadership team and we continue to work on organizational design and carve out financials. And through all this, we delivered a financial performance for quarter three that exceeded our expectations and enables us to raise our guidance for the full year. In short, another good quarter, adding to a track record of dependable delivery and with plenty of reasons to be confident that this kind of delivery can continue. You can tell our Deploy for Growth strategy is working from the quality of our results. Slide number six shows one key metric, our net sales growth. As you know, our momentum is not new. Our third quarter showed acceleration of a trend that has been running above our long term target for the past few years, and while this third quarter acceleration was led by price realization necessary to keep up with soaring costs, the elasticity impact on volume has been less than expected and our world class brands continue to perform especially well in the market. We are seeing this momentum across markets and category groups. We grew net sales organically in all four regions and in all four category groups within those regions. From snacks to cereal to frozen foods to noodles and other. So this momentum is broad based and long running and another reason to believe in our strategy, portfolio and people. As a key element of our Deploy for Growth strategy, our ESG strategy is also working. A few highlights from quarter three are shown on slide number seven. Let me now turn over to Amit, who will explain our financial results and outlook in more detail.

Steven Cahillane:

Thanks Amit. I'll start with a review of each of our regions beginning with Kellogg North America on slide number 20. This region had another good quarter, delivering notably strong net sales growth with organic growth in both volume and price mix. Our sales growth was led by what is by far our largest business in North America and that’s snacks. This business had another quarter of strong organic volume growth and price realization, and its net sales growth acceleration was accompanied by a similar acceleration in consumption. We'll talk more about these brands in a moment. Cereal in North America also recorded another quarter of accelerated net sales growth, reaching double digits year-on-year, roughly in line with its consumption growth. We'll talk more about this business's rapid recovery also in a minute. In our Frozen businesses where we've experienced pronounced supply constraints this year, we return to organic net sales growth in the quarter. This was aided by newly installed waffle capacity. Kellogg North America in the third quarter delivered sequentially better operating profit growth as well, despite no let-up in input cost inflation or bottlenecks and shortages and despite increased reinvestment. So overall, North America continues to perform well and is poised for a strong finish to a strong year. Kellogg’s Europe's results are shown on slide number 21. Ever since the war broke out in Ukraine, we've known that Kellogg’s Europe would have two very different halves of the year. Because as we suspended Pringles shipments into Russia right away during the first quarter, it took some time to work through inventories. Now in the second half, we feel the brunt of this lost revenue and profit. Meanwhile, the war in Ukraine has contributed to a surge in energy costs and bottlenecks and shortages, as well as devaluations in currencies against the U.S. dollar and a pinched consumer that is contributing to increasing elasticities, at least on Cereal. And yet Kellogg Europe in the third quarter still managed to sustain top line growth and mitigate the profit pressure, even as it lapped the year earlier quarters, enormous sales and profit growth. In snacks which represent almost half of Kellogg Europe sales, the lost sales in Russia were more than offset by double digit organic growth elsewhere. Pringles maintained its double digit consumption growth momentum, and portable wholesome snacks are generating strong consumption growth on the strength of Pop-Tarts, Rice Krispies Squares and Barrette Nut Bars. Cereal net sales also grew organically, reflecting revenue growth management and broad based consumption growth, even as price elasticity continued to move toward historical levels. The fourth quarter faces similar Russia and cost headwind as quarter three, as well as increased reinvestment, but the underlying momentum in the business will be sustained. Let's turn to Kellogg Latin America as shown on slide number 22. Strong organic net sales growth was broad based across the region, with double digit growth in both snacks and cereal and driven by revenue growth management actions. In snacks, which represent more than a third of our annual net sales in Latin America, we continue to drive very strong consumption growth in key markets, including double digit growth and share gains for Pringles in the key markets of Mexico and Brazil. In Cereal, the net sales and consumption growth was led by Brazil, Columbia and Mexico. Productivity and revenue growth management actions helped to mitigate the impact of high cost inflation, adverse transactional foreign exchange and supply disruptions, leading the solid growth in Latin America's operating profit. In the remaining quarter this year, Latin America should sustain sales and profit growth, even as we expect price elasticities to rise gradually and as we work to offset continued cost inflation and supply challenges. We'll finish our regional review with Kellogg AMEA in slide number 23. In the third quarter our AMEA region sustained its exceptional momentum, accelerating its organic net sales growth for a third consecutive quarter. From a category perspective, noodles and other is our biggest segment in AMEA, representing almost half of the region sales and led by our West African distributor business, Multipro. In the third quarter, it sustained organic net sales growth of more than 20%, just as it has all year. Snacks accelerated its organic net sales growth in the quarter, led by Pringles, which sustained its broad based momentum in consumption growth, with notable outperformance in emerging markets. Cereal also sustained good, broad based, net sales growth with particular strength in the Middle East and India. Despite facing the high cost pressures in the region, a function of input costs, ocean freight costs and adverse transactional foreign exchange, AMEA still managed to grow its currency neutral, adjusted basis, operating profit in the double digits in the third quarter. We expect similar dynamics and momentum to play out in the fourth quarter, making this a very strong year for an AMEA region. Now let's dig into each of our category groups and brands in a little more detail, shaping our discussion in terms of the businesses that comprise the planned post separation companies. A breakout of these businesses is shown on slide number 24. As you can see, the businesses that represent 80% of our portfolios net sales today, and they will comprise global snacking company after the separations, have continued to show outstanding growth this year. In fact, this portfolios net sales have grown organically at a double digit rate so far this year. For North America Cereal Company, you can see that our net sales are up organically in the low single digits this year. The only business where there has been softness is Plant Company, which has continued to experience supply disruption as we'll discuss in a moment. Let's look at each of these businesses and their key brands. Slide number 25 shows how our world-class snacks brands sustained their in-market momentum in the third quarter around the world. Pringles with $2.5 billion in annual net sales globally once again generated double digit consumption growth in virtually every one of our major markets around the world. Cheez-It with over $1 billion of annual net sales sustained its double digit growth in quarter three, both in Canada and the U.S. where our new Pop'd platform has been incremental to the franchise. Pop-Tarts closing in on $1 billion of annual net sales continued to post good growth in the third quarter in its primary market, the U.S., while continuing to show why we believe it has so much promise internationally. Rice Krispies Treats with $0.5 billion of annual net sales was supply constrained in the U.S. during the third quarter and still grew consumption in the mid-single digits with its new Homestyle sub-line proving to be incremental to the franchise, and the brand is showing good growth in international markets as well. These are important brands. The four brands collectively represent more than 40% of the total net sales of what will be Global Snacking Company. Slide number 26 provides a glimpse of our international cereal businesses. As you can see, good consumption growth continued in the third quarter, with the growth led by world class brands and by emerging markets. In more developed cereal markets like those in Europe, Australia, Japan and Korea, we are starting to see price elasticity move higher. Nevertheless, we grew consumption across key European markets in the third quarter with SpecialK, back to growth, aided by a new campaign and the launch of SpecialK Granola with 30% less sugar. We also grew consumption in Australia, and our consumption is beginning to improve in Japan and Korea on the relaunch and expansion of Granola offerings. In emerging markets, which represent about half of our international cereal sales annually, consumption growth remains robust, both for us and the category. On the slide, note the solid consumption growth rates in key Latin America markets and in India. Slide number 27 shows the sustained double digit organic net sales growth of our noodles and other category group. This is a $1 billion plus business annually, comprised of our distributor business in West Africa and our Kellogg's branded noodles business elsewhere in Africa and the Middle East. And as we've already discussed, this business again sustained exceptional growth in the third quarter, adding to a track record of consistent double digit or high single digit growth. As we've said before, this reflects the competitive advantage Multipro offers, as well as the value of offering a Kellogg's product line at the lower end of the price pyramid. Now let's look at frozen breakfast and slide number 28. Eggo is another world class brand in our portfolio with about $750 million in annual net sales globally. In the U.S., the brand has sustained steady consumption growth this year despite being very constrained on capacity for both waffles and pancakes. But while we remain constrained on pancakes, we did add internal waffle capacity during the second quarter. This enabled our waffles to accelerate consumption gradually during the third quarter, even returning to volume growth, and this has lifted the brands overall consumption growth sequentially as shown on this slide. And another driver of this growth has been the launch of the Liege-Style Waffles, an on-the-go offering that is proving to be incremental to the franchise. Now let's look at North America Cereal. Slide number 29 shows how our consumption and share are recovering in the U.S., following our unfortunate fire and labor strike in late 2021. Recall that we rebuilt inventory, both our own and that of our retailers faster than anticipated during the first half. In quarter three we have seen our share continue to recover across key brands and this has continued into October. This reflects not only increased on-shelf availability, but also our gradual resumption of commercial activity behind these brands. The good news is that the category is showing robust growth right now, accelerating to the double digits in quarter three on the strength of increased prices and below average elasticity. The even better news is that our consumption growth has accelerated even faster than the category as you can see in the chart on the left, and our share is already back to its pre-strike level, as you can see on the chart on the right. Clearly we are building momentum as we return to commercial activity, and while this chart focuses on our recovery in the U.S., it has been just as impressive in Canada where we return to share gains in the third quarter. And in both markets, we have a strong lineup of commercial activity continuing in the fourth quarter. Just a few of these are shown on slide number 30, ranging from innovation like strawberry frosted flakes, the seasonal offerings like Halloween Rice Krispies and the perennial favorite Elf on the Shelf to bringing back indulgent license foods like Cinnabon and Little Debbie. We have our Mission Tiger program back in full swing and we're experimenting with an innovative just add water product called Instabowls. In short, we feel good about where we are in this business. We've restored inventory levels, we're back on shelf and we are rapidly recovering share. In addition, we've turned back on our commercial programs and equally importantly, we are making good early progress toward restoring profit margins in this business. We'll now turn to plant based foods in slide number 31. For context, this business represents only about 2% of our total net sales, but it gets a lot of attention because of its promising long-term prospects and because of the recent slowdown of its category. This is a category that experienced the equivalent of a few years' worth of acceleration in a single year 2020. It had already been in elevated growth with new entrants, new technologies and new space in stores, then COVID hit and product proliferation was soaked up by the surge in at-home demand, bringing penetration and buy rates up with it. The category lapped that surge in 2021 and in 2022 it has experienced a pause in growth and point of distribution have decreased in stores as many retailers consolidated into the frozen aisle. But household penetration remains above pre-COVID levels with ample opportunities to return to consistent growth behind underlying consumer focus on health and environmental concerns. These are demand fundamentals that remain firmly in place for a long runway of growth. As you know, our MorningStar Farms brand has been severely impacted by supply disruptions at a key co-manufacturer this year, and this disruption has not yet been fully resolved in quarter three. It has also forced us to prioritize SKUs. While we have not yet been able to fully resume commercial activity, we have been able to support products that are not capacity constrained. A good example is Sausage Links and we are generating double digit consumption and good share growth in that segment. This supply disruption is a temporary issue and we continue to work through it. The brand remains a leader in plant based foods with strong plans and a new media campaign once it restores full supply. So despite near term disruptions, this is a business that remains in good condition with excellent prospects. So with that, allow me to briefly summarize with slide number 33. I could not be prouder of our organization for how it has navigated through an incredibly volatile environment, identifying issues, resolving them and executing. Our people and culture truly are a competitive advantage for Kellogg. Our strategy is working and our portfolio is showing its strength. We continue to deliver solid results and we are again raising our outlook. Yet we are anything but complacent. We are working hard on a set of plans that will navigate through the current macro headwinds and enable us to drive balanced financial delivery again in 2023 and thereafter. And with that, we'll open up the line for questions. Operator.

Cody Ross:

Good morning. Thank you for taking my questions. You are outpacing…

Amit Banati:

Good morning Cody.

Steve Cahillane:

Yes, thanks for the question, Cody. There’s not really any meaningful difference between shipments and consumption. It's moved around a lot obviously, because we had to rebuild inventory on cereal in quarter one, quarter two, but we're pretty much right in balance right now. We may actually see some shipments come out in the fourth quarter, because we're kind of back to where we want to be, but there's not really a meaningful thing to talk about when it comes to differences between shipments and consumption in North America or anywhere around the world for that matter.

Steve Cahillane:

Yeah, I'll start and I can turn it to Amit. But you know, North America, if you look at the way they performed in the third quarter and year-to-date, it's pretty exceptional. You know I didn't really think we'd be talking about 14% organic net sales growth in North America, which is really outstanding. But inflation is running so very hot that you know getting pricing to cover input costs I think is an exceptional achievement and then you've got the bottlenecks and shortages, which are very difficult to price for obviously and to forecast, and so whether or not it's a trough on bottlenecks and shortages remains to be seen. It stopped getting worse, but there's not a meaningful improvement in it. But you know the price mix in North America was strong, the ability to cover costs was strong, the underlying brand performance was exceptionally strong and so the outlook for North America is strong. It's been a terrific year. Amit, do you want to…

Cody Ross:

Thank you for the color. I'll pass it on.

David Palmer:

Thanks. Good morning. I know there's always a lot of controversy and talk about stranded costs in the separation. If there's any sort of increased visibility on that, love to hear that. But also a question on Europe. The sales trends are positive, but I'm wondering how you're seeing price elasticity there. I see that volumes are down 8%, so any thoughts about not just the price elasticity, but the ability to get through pricing going forward in Europe would be helpful. Thanks so much.

David Palmer:

It's helpful, thank you.

Andrew Lazar :

Great! Thanks so much. Steven, in North America cereal, obviously the fire and the strike were certainly disruptive, but I guess I'm curious if there was an opportunity to make any structural changes to how you compete as you return product to the shelf. So like in other words, was there an opportunity to come back with an even more optimized SKU assortment than before or you know as you return to commercial activity. What are you seeing in terms of ROIs on those activities, again versus like before the strike, or maybe there are other structural elements that you're working on there that I may not be thinking of. And maybe I'm making too much of this and the focus was simply on just getting product back on the shelves. But what I'm trying to do is think ahead of it from here about you know when this unit is ultimately on its own. Thanks so much.

Andrew Lazar :

Thanks so much.

Pamela Kaufman :

Hi! Good morning.

Amit Banati:

Good morning.

Steve Cahillane:

Yes, I'll start on supply chain and turn it over to Amit on inflation, the first part of your question. On supply chain, as we mentioned in the prepared remarks, it has not gotten any worse, right. So you know we were in a position where each quarter continued to accelerate in terms of disruptions, what we call things that get to the attention of our control tower and right now that stopped getting worse. I would say there's not – as we look out on the horizon, there's not a lot of signals that it's going to get better any time soon or significantly better. So we're operating in an environment that continues to be somewhat tumultuous. But the execution that we're able to bring forward has gotten better and better as we continue to get used to an environment with so many disruptions. And Amit, do you want to talk about inflation?

Pamela Kaufman :

Great! Thanks. And then are you expecting to or do you need to take incremental pricing to offset the inflation that you're seeing in the business, and how should we think about – and how are you thinking about kind of the balance of incremental pricings versus your commentary around increasing elasticities in certain categories?

Pamela Kaufman :

Thank you.

Chris Growe :

Hi! Good morning.

Chris Growe :

Just had a couple of questions for you. The first one, just for you to follow-on a little bit on the questions around Europe just as we're getting a sense of the incremental elasticity in those markets and those other markets as well. Snacks was a little softer in its growth as well. Then I thought, are you seeing that in snacks or was that more of the comp of the prior year?

Amit Banati:

It was up over 22 – it was up almost 22% in the year ago quarter Chris.

A - Steve Cahillane:

Virtually all of Europe's volume declined.

Chris Growe :

Okay, and I just have one follow-on, which is in the AMEA division and the noodles and other business continues to grow very strongly along with the other businesses there. Is that a business that's growing volume as well as pricing. I know it's been a very inflationary environment. Are you seeing volume growth in that business as well?

Chris Growe :

Okay, thank you for that color.

Operator:

Thank you for your question. The next question is from the line of Robert Moskow with Credit Suisse. Your line is now open.

A - Steve Cahillane:

Yeah, so Rob I would say you definitely should plan on double digit inflation going into next year and I don't think that's going to be unique to Kellogg. In fact, I know it's not going to be unique to Kellogg. If you look at spot prices, you know it doesn't always tell the full story. Year-over-year price changes even in spot are still up double digits. You know corn up over 20%, cooking oil is up over 20%, wheat in double digits, you know diesel nearing 50%. You know price, you know this whole inflation was going to be transitory, was always obviously ridiculous, and so we continue to see strong inflation ingredients in Coleman, in packaging, across the board. So I think as a total country and globe, we need to prepare for the same type of inflation, and this is double digit inflation on top of the inflation we've seen this year. So it's a pretty significant macroeconomic event.

Amit Banati:

Yeah, I think you know we've largely been successful right in covering inflation on our input costs and our packaging costs, right, and so I think you know – I think what, from a disruption standpoint, that's probably and you know some of the unplanned, because of supply chain bottlenecks and some of those inefficiencies are probably the ones that you know it's hard to forecast and hard to plan around that we probably have not been able to pass on.

Operator:

Thank you for your question. The next question is from the line of Ken Goldman with J.P. Morgan. Your line is now open.

A - Amit Banati:

So I think in the quarter right, when you were lapping, when you compare the Russia business itself right, we stopped shipments in. So yes, you know all the decline was driven by the Russia, by the Russia stop shipments. I think you know the teams have done a remarkable job right, in terms of finding alternative users of that volume, not just in Europe, but around the world into AMEA as well and so I think you know, we've been able to work through that, through the network.

Amit Banati:

Yeah. So I think you know we'd firstly say, we'd expect a similar amount for quarter four right, so I think that's the first thing. Obviously it depends really on what happens on markets, because the remeasurement would really be at the year end, and where the markets are at the end of the year. What we’ve seen this year is like I said, it's about on two of our plans. They are roughly around 50% of our value, of our pension assets, and you've seen it for about half a year. So you know we'd expect a full year impact next year. We need to re-measure all the plans, but, it really depends on where markets are at the end of the year. So it's hard to forecast and we’ll obviously talk a lot more about that when we are guiding for ‘23 in our February call. And this is not unique to us. I think it's driven by what's happening in interest rates, as well as markets, and it's of course non-operating and non-cash.

Operator:

Thank you for your question. The next question is from the line of Michael Lavery with Piper Sandler. Your line is now open.

A - Steve Cahillane:

Good morning.

Michael Lavery:

Just wanted to come back to revenue guidance and it just looks like the 10% or so on the full year would suggest something around a 7% organic growth in the fourth quarter. I imagine certainly there’s some conservatism, but what would drive a deceleration like that? Is there stepped up promotional spending; is it just your assumptions around elasticities. Can you help us unpack some of how you're thinking about that?

Michael Lavery:

Okay, that's helpful. And just on the developed markets outside the U.S., you touched on the increases in the cereal elasticities. Just as far as how the consumer behavior is evolving, do you have a sense how much they are trading down to something like private label or exiting the category or what's their response been when you see these elasticities growing?

Michael Lavery:

Okay, thanks so much.

Bryan Spillane:

Thanks operator. Good morning guys. Just two quick follow-ups.

Bryan Spillane:

Yep, hi! So just two quick follow-ups. Amit, as I guess with SG&A spending coming back in the second half, is the ’23 full year SG&A base a reasonably good base to think of for next year or did you end this year still not spending at a normalized level?

Bryan Spillane:

Okay, and then just the second one, last one is just related to the discussion about the pension remeasurement and the effect on P&L. Is there any – are there any cash consequences, you know just given where markets have moved? Is there – are you fully funded? Will you need to put cash in? Just trying to understand if there's going to be any cash consequences related to that.

Bryan Spillane:

Okay, great. Thanks guys.

Operator:

Thank you. The final question is from the line of Nik Modi with RBC Capital. Your line is now open.

Steve Cahillane:

If I understand the question, again, next year we'll be providing much more transparent information on it. In terms of things like who owns the trucks, we outsource the vast majority of our logistics right now, so we'll be working through warehousing and all those types of things. But when you look at the scale of both of our businesses, you know they are pretty scaled businesses, so it's – we're not going to be running half truckloads anywhere. We'll be running full truck loads and it's the work that's being done right now. And yes, there will be TSA agreements between the businesses, mainly the snacks business providing TSA to the Cereal Co. In terms of things like IT, you know the classic way to do this is you typically clone systems and then separate and we've got a lot of experts helping us with that. A number of us have been through these things before and are you know, you get a lot of experience at it. So a lot of work going on right now, but what you should hear from us is a very, very high degree of confidence that the work is progressing exactly as we expected and that we have a high degree of confidence in the value creation opportunity that exists, and that's exactly why we're doing it.

John Renwick:

Operator, we are at the hour here.

John Renwick:

So everybody, thank you for interest. Thank you for your interest, and if you do have follow-ups, please feel free to call.

John Renwick:

Thank you, operator. Good morning, and thank you for joining us today for a review of our second quarter results and an update on our outlook for 2022. I'm joined this morning by Steve Cahillane, our Chairman and CEO; and Amit Banati, our Chief Financial Officer. Slide 3 shows our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for Kellogg Company's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation as well as to our public SEC filings. This is a particular note during the current COVID-19 pandemic, volatile input costs and supply disruptions when the length and severity of these issues and resultant economic and business impacts are so difficult to predict. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of kelloggcompany.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. And now I'll turn it over to Steve.

Amit Banati:

Thanks, Steve, and good morning, everyone. We'll start with a brief summary of our quarter two financial results on Slide 10. Our net sales growth in quarter two again came in better than projected. This was a result of good momentum, particularly in snacks and Noodles & Other as well as price elasticity not returning as quickly to historical levels as we had assumed. It was also driven by North America Cereals recovery happening faster than planned. Our adjusted basis operating profit grew 10% on a currency-neutral basis in quarter two. This was better than expected and it brings our first half into year-on-year growth. This growth comes despite high cost inflation, industry-wide supply disruptions and incremental costs and lost sales stemming from a fire and strike in our North America Cereal business in the second half of 2021. Our adjusted basis earnings per share grew a better-than-expected 8% on a currency-neutral basis, bringing our year-to-date growth up to 5%. Cash flow through the first two quarters was ahead of our projections and significantly higher than last year. So clearly, it was a strong quarter, and we entered the second half ahead of where we thought we'd be at this juncture. Now let's look into each of these metrics in closer detail. Slide 11 lays out the components of our net sales growth this year. On an organic basis, we recorded 12% net sales growth in quarter two. Volume remained pressured in quarter two by bottlenecks and shortages, but the decline was more moderate than expected. Price elasticity did not increase as much as we had anticipated. And our North America Cereal business recovered inventory and shipments faster than expected. Price/mix remained elevated in quarter two, even accelerating as all 4 regions utilized all levers of revenue growth management in order to complement productivity initiatives. This is all in an effort to protect gross profit dollars amidst enormously high input cost inflation. Through the first half, our net sales grew organically by 8%, with price/mix growth more than offsetting the negative volume impacts of supply disruptions, most notably in North America Cereal and price elasticity. Foreign currency translation negatively impacted net sales growth by more than 3 percentage points in quarter two as currencies around the globe weakened further against the U.S. dollar. Slide 12 shows the organic basis net sales growth rates of each region during the first 2 quarters of this year. We have generated solid growth in all 4 regions year-to-date, even despite unusual supply disruptions principally in North America. For our international regions, quarter two strong growth was a continuation of a multi-quarter and multi-year trend. And for our North America region, the quarter two growth reflected continued strength in snacks, complemented by better-than-expected recovery in cereal, including trade inventory replenishment. Overall, for the second half, we expect to see price/mix continue to drive our sales growth, reflecting revenue growth management actions already executed as well as further RGM activity to be taken in the second half. On volume, we are taking the planning stance of assuming a gradual return to normal levels of price elasticity, and additionally, we face a larger impact from lost Russia volume. Turning now to gross profit. Slide 13 offers a glimpse at just how impactful input cost inflation and supply disruptions have been as well as how each region has utilized revenue growth management to help protect the dollar profit impact. COGS per kilo is a metric that captures the rate of cost across all factors from input cost inflation to adverse transactional foreign exchange to supply disruptions, which create lost absorption and the need to utilize more expensive spot markets. These metrics also captures productivity savings and changes in mix. As you can see on the chart, this comprehensive cost per kilo was up in the high teens year-on-year in the first half, even after productivity savings. The good news is that our net sales per kilo, which is how we measure price/mix, is up in the low teens, covering a sizable portion of our input cost inflation. However, it's not able to cover the unpredictable impacts of supply disruptions and impacts related to last year's second half fire and strike. Our objective during this unusually high cost environment is to protect gross profit dollars as much as we can. Slide 14 shows that our gross profit through the first half is down year-on-year, but it wouldn't have been were it not for the fire and strike's residual impact in quarter 1. Moreover, it remains higher than our pre-COVID first half 2019 level with or without the businesses we divested later that year. So even though our margins have been pressured by the current environment, our gross profit dollars remain on an upward trajectory. As we get into the second half, we no longer have fire and strike impact. In fact, we lap it in quarter 4. Input cost inflation is likely to remain ahead of our productivity and RGM offsets, and we now assume no moderation in bottlenecks and shortages until quarter 4. As a result, we believe we will see gross profit dollars narrow the year-on-year deficit in quarter 3 and then swing to year-on-year growth in quarter 4 when we lap the worst of the fire and strike. SG&A expense, meanwhile, will work in the opposite direction in the second half. Slide 15 shows how our SG&A began to decline in the second half of 2021 when supply disruptions, starting with bottlenecks and shortages and then worsening with fire and strike forced us to pull back on A&P investment. This was mainly the case in North America Cereal, which continue to refrain from this investment during quarter 1 and only started to resume investment in a relatively small way during quarter two. But you can see how SG&A returned to year-on-year growth in quarter two and should continue to do so in the second half. This will be driven by increased A&P as we restore commercial activity as well as by higher incentive compensation related to our improved outlook and a return to travel and meetings. Putting it all together, we see on Slide 16 our quarter two and first half operating profit performance in the context of prior years. Leaving aside 2020, which stood out for its pandemic-related lift from shoppers stocking up, our operating profit remains on an upward trajectory. And we grew operating profit year-on-year in quarter two and the first half with and without currency translation. We expect to sustain this upward dollar profit trajectory in the second half as well in spite of cost and supply pressures and increased investment. Turning now to our below-the-line items on Slide 17. These items were collectively negative to EPS growth in the quarter and only slightly positive for the first half. Interest expense was again down year-on-year in quarter two, owing to lower average debt. However, rising interest rates on the roughly 20% of our debt that is floating will swing interest expense into a year-on-year headwind in the second half. Other income, which is predominantly the nonoperating portion of pension expense, decreased meaningfully year-on-year in quarter two and the first half, attributable to lower asset values at the beginning of the year. In the second half, an update of higher interest rates and lower pension asset values, reflecting this year's sharply lower fixed income and equity markets will pull down other income in the second half by more than previously forecast. And barring a significant comeback in the financial markets over the remainder of the year, this will be a sizable headwind in 2023 as well. Our effective tax rate in quarter two was up year-on-year. But through the first half, it was right in line with the approximately 22% rate we expect for the full year. Our JV earnings and minority interest were collectively less negative to net income, thanks to consolidating some of our Africa joint ventures at midyear in 2021. We have now lapped that consolidation so it is no longer a tailwind for this line item. And average shares outstanding decreased slightly year-on-year, a reflection of our share buybacks during quarter 1. Based on accelerated options exercises and higher stock price, we now expect shares outstanding to decrease less than 0.5% for the full year. Let's now look at our cash flow, starting with our cash flow conversion ratio shown on Slide 18. In recent years, we've made it a priority to improve our conversion of earnings into cash flow. And while 2020 was distorted by the various effects of the pandemic, you can see that our ratio of cash flow to adjusted basis net income has been on an upward trajectory. Slide 19 shows what this focus and discipline has done for us. On the left side, you can see that our absolute cash flow has remained on an upward trajectory, and this continued in quarter two. And on the right-hand side, you can see that this cash flow, along with proceeds from our 2019 divestiture, has enabled us to reduce our net debt, leading to lower leverage ratios. This has given us enhanced financial flexibility, even as we have continued to increase our dividend and buy back shares. Let's now turn to Slide 20 and a discussion about our guidance for the full year. As Steve mentioned, our first half was strong enough and our momentum durable enough that we feel comfortable raising our guidance on all 4 metrics. We are raising our full year outlook for net sales to organic growth of 7% to 8%, a sizable increase from our previous guidance of approximately 4% growth. We are raising our full year outlook for adjusted basis operating profit to 4% to 5% growth on a currency-neutral basis, up significantly from our previous guidance of 1% to 2% growth. We are raising our full year outlook for adjusted basis earnings per share to approximately 2% growth on a currency-neutral basis, up from our previous guidance of 1% to 2% growth. This is held back only by the pension remeasurement we discussed earlier. This is a nonoperating noncash item. We are raising our full year outlook for cash flow to approximately $1.2 billion, up from our previous guidance of $1.1 billion to $1.2 billion. This reflects not only a higher cash earnings, but it also incorporates incremental upfront cash outlays in 2022 related to the upcoming separation transactions. So to summarize on Slide 21, we feel very good about our financial condition as we enter the second half. As Steve mentioned, the work continues towards the separations. As of now, we estimate that we'll incur between $70 million to $80 million in upfront costs in 2022 related to readying for the transactions. To ensure visibility into the ongoing results of the businesses, the company will disclose these upfront costs and exclude them from its adjusted basis operating profit and earnings per share in its external reporting. However, the cash portion of these costs, which we estimate could be about half of these upfront expenses, are incorporated into our cash flow guidance as always. Meanwhile, we're going to great lengths to ensure no disruption to our business while this work is going on. And we are pleased with the financial health of our businesses. We feel good enough about our business that we can today raise our full year guidance on all key metrics while using our strong cash flow to both return more cash to shareowners and preserve a strong balance sheet. Let me now turn it back to Steve for a review of our regions.

Operator:

[Operator Instructions]. Our first question is from Andrew Lazar with Barclays.

Steven Cahillane:

Yes. Thanks, Andrew. So let me start by just framing the cereal business a little bit in our business for you. We have 5 of the top 11 brands. They are strong brands. All the information, research and data that we have suggests or reinforces how strong these brands are, how relevant they are. The category, as you know right now, is very healthy. It's showing incredible pricing power. Even the last 4 weeks is better than the last 13 weeks. The category is quite healthy. It's versatile. It's showing, especially in challenging times, that it is a very affordable meal for people. A bowl of cereal with a glass of milk is $1, and that's really helping the category. Our recovery, which you already mentioned, is happening faster than planned. We're up 400 basis points year-to-date so the business has good momentum. But your question is, so how do we think about it in the future? And why is it going to be a strong business going forward? And we were losing share prior to the pandemic, and that's well documented. Some of the reasons for that, we went through a pack size harmonization which was necessary, but we did that. The pandemic obviously had supply-related constraints for everybody. That was a real issue for us. Then we had a fire and strike, and you see the real results of that, and it was very, very difficult but we came through that. This is not a business that has been underinvested, right? But this is a business that will benefit from a focused management team. 1 focus will be -- the only focus will be how to drive these great brands in a category that is showing good recovery. The 1 focus of a new sales force will be these brands with the customers. There are opportunities for productivity, for sure, for supply chain automation that we're already undergoing right now. And perhaps the best example I can give you, and there's many examples because we've studied these types of spins, where you talk about focus and taking a great collection of brands and focusing them with the management team. And look at what we've done with Pringles. Pringles, when we took it over was not a brand that was growing. It was not a brand that was able to break through price points. And today, Pringles, you see in virtually all the big markets around the world, is growing double digits, right? So we are very confident in the cereal business going forward for all of these reasons, good category, great brands, focused management team and good examples of where it's worked in the past.

Sunil Modi:

So I guess, Steve, the question is most of us listening on the call have seen a lot of these spins over the last 10, 15, 20 years covering the space. And I think it's pretty safe to say that when these situations are occurring, it's tough, or at least what we've witnessed, it's tough for companies that are going through this process to kind of adjust to a changing environment, whether it be competitive, macro, et cetera. And we're kind of in this environment now where I would say the volatility, as we can all agree, is probably higher than it's ever been. So I'm just curious. What have you guys observed or learned from prior spins at other companies? What frameworks are you putting in place to make sure that you're able to adjust and adapt to the environment as you go through this process?

Sunil Modi:

And how close is the organization on figuring out divisional level executives, the C-suites for the independent company?

Operator:

The next question is from Ken Goldman with JPMorgan.

Amit Banati:

Yes. So Ken, this is Amit here. So I think during the quarter, we saw strengthening in the dollar against most currencies, particularly the pound and the euro. So in the quarter, in quarter two, we saw an impact of about 3% to 4% across net sales, OP and EPS. Though you've got to remember, this was the toughest comp from -- our toughest quarter from a comp standpoint. I think for the full year, based on exchange rates today, I'd estimate it at around a 3% impact.

Amit Banati:

Yes.

Amit Banati:

Yes. So I think the remeasurement, that was triggered. It was technically triggered because of a number of retirees opting for a lump-sum pension payment. It increased to a point that triggered a remeasurement. So that's the reason why you're seeing why that remeasurement happened. And so I think -- so that's the reason why that happened. I think from a full year standpoint, I think you should see similar year-on-year decline, dollar declines as in the first half despite the comps are easier because we started seeing this trend in the second half of last year. So despite the easier comps, right, you're going to see a similar dollar and dollar declines in the second half as we saw in the first half. And I think as I mentioned in my prepared remarks, this will continue to be a headwind into 2023 where if markets stay where they are right now, obviously, we're going to see significantly lower asset values as we head into '23. So at current market levels, this would be a headwind that would continue into '23.

Pamela Kaufman:

How much of a benefit did you see in the second quarter from inventory replenishment? And where are retailer inventory levels today? Do you expect to ship ahead of consumption in the third and fourth quarters?

Pamela Kaufman:

Got it, okay. And maybe if I could sneak 1 more in. Can you provide an updated input cost inflation outlook for the year? Is the recent moderation in commodity prices expected to translate into more moderate inflation next year? Or are there offsets like higher labor cost, supply chain issues that you would expect to keep inflation higher?