Q3 2021 Kellogg Co Earnings Call

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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 Thanks, John and good morning, everyone. I Hope you and your families are doing well. After all we are still managing through a pandemic and still nowhere close to what any of US would call life as normal. This is certainly true from a business perspective as well. Therefore, we remain focused on keeping our employees safe and aiding our.

Communities is more important than ever we also continue to supply the world with food, but as we and all companies have discussed previously this has gotten extremely challenging.

Importantly, we remain on our strategy deploy for balanced growth, which is depicted on slide number six this strategy continues to keep us on our path for steady balanced financial returns for shareowners.

We also continue to make progress on better days, our ESG oriented program.

Few better days highlights from quarter three are shared on slide number seven.

This remains a critical element of our strategy are clear focus of management and are part of the DNA of Kellogg company and we have not lost sight of this during the current pandemic and business environment.

And there is no question that todays business environment is as challenging as we've ever seen at our organization has risen to all of these challenges using creativity skills and work ethic to manage through them.

Slide number eight attempts to categorize these challenges into three basic buckets.

First we're all familiar with the surges in market prices for commodities packaging and freight all the result of supply demand imbalances that may take some time to work out.

We're working hard to mitigate the margin impacts of these high costs from our active hedging program, which has given us strong visibility into our commodity cost to mitigating cost pressures with productivity initiatives and revenue growth management actions.

By now we're also all aware of the economy wide bottlenecks and shortages that are not only pushing costs higher but are also making it very difficult to supply the market here.

Here's where our supply chain control tower approach has provided us agility in addressing shortages and gaps in materials equipment and land and Ocean freight. We've also taken actions to reduce complexity in our portfolio and operations and.

And third we are seeing acute shortages in labor across all spectrums of the economy. This is resulting in absenteeism high turnover difficulty maintaining temporary labor and for some of us even labor strikes.

To address this we've had to recruit continuously and we've executed contingency plans to sustain as much supply as possible in the face of open positions and work stoppages simply put we are taking important actions to manage through today's unprecedented environment.

And through it all we are executing well in market and delivering balanced financial growth, which continued in quarter three and as discussed on slide number nine.

Consumption growth remains elevated as measured on a two year compound annual growth basis, even if it continues to decelerate as expected, we're seeing particularly strong consumption growth and share performance in many of our biggest world class brands and we continue to sustain strong momentum in our emerging markets. This moment.

<unk> has been evident for the past few years and reflects our improved geographic footprint the strength of our portfolio our efforts to broaden our offerings into affordable price points and our local route to market and supply chains from a financial standpoint. These factors led to continued balanced growth strong organic net sales growth.

<unk> strong operating profit growth strong earnings per share growth and cash flow that remains well above pre COVID-19 2019 levels. So.

So in spite of all the operating challenges we continued to deliver and today, we are even raising our full year guidance for net sales to reflect momentum in the business at the same time. We are also reaffirming our guidance for operating profit earnings per share and cash flow. Despite a worsening cost in labor and supply environment I'm sure you.

You can appreciate that even holding guidance amidst these kinds of challenges speaks to the kind of dependability, we strive for regardless of business conditions. Let me now turn it over to Amit. So he can take you through our financial results and outlook in more detail. Thanks.

Thanks, Steve and good morning, everyone.

Our financial results for the third quarter are summarized on slide number 11 as you can see we delivered strong organic basis net sales growth of 5% in quarter three on top of similar growth in the year earlier period.

<unk> came in better than anticipated due to exceptional growth in Europe and EMEA.

Currency neutral adjusted basis operating profit increased by 11% year on year. This was driven by the strong topline growth as well as lapping a year ago quarter and rich incremental brand building investment has been shifted from earlier quarters.

Currency neutral adjusted basis earnings per share increased by 18% at strong operating profit growth was augmented by a decrease in average shares outstanding and.

And cash flow, while still below last year's unusual pandemic related surge remained well above the pre pandemic 2019 level.

In total our very strong financial performance.

Let's examine the results in a little more detail.

We'll start with net sales on slide number 12 as you can see the net sales growth in quarter, three was driven by both volume and price mix, the 1% plus organic volume growth was driven by our international regions, most notably Europe, and EMEA, where our Nigerian business had an exceptional quarter.

And this volume growth comes despite supply pressures and lapping good year ago growth.

Our 4% organic basis price mix remained solidly positive in all four regions. The result of revenue growth management actions that we have been implementing since the second half of last steel when input costs inflation began to accelerate.

Finally, foreign currency translation was modestly favorable to net sales in quarter three decelerating from the first half as expected.

So through the first nine months you can see that on an organic basis. Our net sales were up 3%. Despite lapping the pandemic related surge and they were up 5% on a two year compound annual growth basis.

Looking to the fourth quarter, we expect sustained price mix growth based on the revenue growth management actions. We've taken though we are a bit more cautious on volume given the current labor negotiations and a prudent view towards decelerating at home demand and emerging markets growth.

Moving down the income statement slide number 13 shows our gross profit performance.

As we had anticipated both our gross profit and gross profit margin declined year on year and quarter three as we lapped last year's strong operating leverage and as we face. This year is unusually high cost pressures.

While our productivity and revenue growth management actions continue to Kabul market driven cost inflation, there was significant incremental cost and disruption stemming from the current operating environment that came on top of that.

Our gross profit margin was further weighed down by disruption and costs related to fire at one of our plants and are more pronounced than usual mix shift towards emerging markets, most notably our distributor business in Nigeria.

Importantly, though while our gross profit percent margin decrease to below the level of pre pandemic quarter. Three 2019, our gross profit dollars remained higher than that period and if you look at the right hand side of the slide you can see that our gross profit dollars are up through the first nine months of this year both.

On a year on year, and Ontario basis.

And this high cost environment, we have to focus on both margins and dollar growth.

On slide number 14, we see a driver of year on year profit change that is really more of a phasing dynamic.

SG&A expense is comprised of advertising and promotion R&D and overhead.

Last year's quarter, three was unusual and that included incremental A&P investment delayed from the first half because of the pandemic.

It also included a sizable increase in incentive compensation accruals.

But comparing SG&A to the third quarter of 2019, we see it was lower both on a percentage margin and dollar basis. This decrease is related to both the work we did to remove stranded costs. After our divestiture, but also to our decision this year to pull back on investment behind specific supply constrained.

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You can also see that through the first nine months, our SG&A dollars are up be flat with the same period of 2019 and Thats, probably how we will finish this deal.

If you look at operating profit in the same way on slide number 15, we find that in dollars or operating profit in this year's quarter three was not only higher than it was in last year's quarter, three but also higher than what it was in quarter three 2019.

Again this focus on profit is important as we manage through this challenging environment.

Now, we do think that quarter four will be a little different country to our prior assumptions. We are seeing no moderation of the economy wide bottlenecks and shortages deal in the fourth quarter.

In fact, we're now experiencing incremental disruption in cost further compounded by a labor strike.

So for quarter four we are forecasting gross profit dollars and operating profit dollars to be below quarter four of 2019, even if both metrics finished the full year above 2019 levels.

Moving down the P&L, let's turn to slide number 16, while operating profit drove most of our growth in earnings per share in quarter. Three we also benefited from modest net favorability and below the line items in quarter three interest expense decreased on lower debt, which will continue to be a year on year.

Driver in quarter four with quarter forward comparison also lapping the $20 million debt redemption cost we recorded large deal.

This decrease in interest expense was more than offset by a decline in other income which compared against an unusually high level Lonsdale, we expect quarter fourth other income to be similar to that of quarter three.

Active tax rate in quarter three came in lower than last year, we believe quarter fourth rate will come in higher than the 22% rate. We are now forecasting for the full year.

JV earnings in minority interest together with favorable to large deal, though this mostly reflects the consolidation of a couple of our smaller investment phase joint ventures in West Africa into operating profit.

And average shares outstanding decreased year on year, reflecting the impact of quarter one's buybacks, we still expect full year average shares outstanding to be around half a percent lower than 2020.

Outside of the currency neutral EPS that we manage and guide do we did experience continued year on year favorability, though modest from foreign currency translation.

Based on where exchange rates are today, and what we're lapping there would be little to no benefit from foreign currency translation in quarter four.

Let's now discuss our cash flow and balance sheet shown on slide number 17 year to date, our cash flow remains below last years unusually high level as expected, mostly as we lapped last year's timing related increases in various accruals during the height of the pandemic.

The more relevant comparisons therefore, although year to date periods of 2019 and 2018.

As you can see from the slide this year's cash flow continues to track well above those freak over time periods. This was driven by our operating profit as well as reduced restructuring outlays and continued effective management of working capital.

Meanwhile, our balance sheet remains solid.

Net debt remains roughly even with last year and lower than each of the prior two years, even despite this increase in cash returned to shareowners in the form of resumed share buybacks and increased dividend. So our financial condition remains quite strong.

Slide number 18 shows where our results then after the first nine months of 2021, obviously, we've had a good year, so far producing strong and balanced financial results on a two year basis and staying ahead of our own internal forecast. This.

This year to date performance is all the more impressive when you consider just how challenging the business environment has been.

Let's now turn to our updated guidance for the full year 2021 as shown on slide number 19, given the better than expected momentum we are seeing in our international regions. We are raising our guidance for organic net sales growth to a rate of 2% to 3%. This is a solid performance, particularly given the comparisons.

Against last year's pandemic related surge.

At the same time, we are reaffirming our guidance for currency neutral adjusted basis operating profit and earnings per share as well as for cash flow.

While net sales are coming in higher than previously expected, we are incorporating costs and disruptions related to the current supply and labor conditions. In fact, given this current environment, we will likely land towards the lower end of the guidance ranges for these metrics.

Our guidance assumes a reasonable conclusion to the current labor stoppage at our U S cereal plants. However.

However, as you can appreciate there is always uncertainty regarding labor negotiations in.

In the meantime, we will continue to execute our contingency plans to mitigate disruption.

Overall, despite an incredibly challenging operating environment, we remain in strong financial condition and our full year results are expected to sustain balanced financial delivery on a two year basis.

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

Thanks, Amit I'll start by emphasizing the broad based nature of our sales growth slide number 21 shows the two year compound annual growth rates in net sales across our four regions. It's in North America, where we've had the most supply disruption and most significantly in cereal. This is restrained our overall growth in quarter, two and quarter three this year.

But as we'll see in a minute our snacks continued to grow nicely year on year and frozen breakfast in plant based foods have continued to post good growth on a two year CAGR basis.

Europe's sustained impressive growth in quarter, three pringles has driven exceptional growth for us in snacks and cereal sales have remained strong there as well and our Latin America and EMEA regions. We are clearly demonstrating exceptional momentum collectively sustaining double digit growth on a two year and one year basis in the third quarter in.

In fact, if you turn to slide number 22, you can see that this emerging markets growth is anything but new <unk>.

Collectively our emerging markets had already been growing consistently at or above our long term target of mid single digit growth for these businesses. This.

This year, we've seen double digit growth elasticities to a cost related price increases have run lower than historical levels. We have continued to expand pringles across these markets with especially strong growth in Russia, and Brazil. We have also continued to grow cereal across our emerging markets with particular strength this year in Asia.

And our growth in Africa. This year has been nothing short of spectacular driven by noodles cereal and snacks.

Equally important to our long term prospects as the health of our Big World class brands and in quarter three their momentum was sustained as much in developed markets and emerging markets Slide number 23 shows the two year CAGR for consumption growth for Pringles in the U S. This brand continued to gain share in the third quarter.

Propelled by incremental innovation effective brand building campaigns and strength in multi packs.

And slide number 24 shows that pringles momentum is truly global <unk>.

Similar to the U S. The brand strong growth and share performance is being driven by incremental innovation like the sizzling platform in Europe or local flavors like seaweed in Asia.

And by very effective brand building, particularly its 360 degree campaigns around soccer and electronic gaming on top of that it continues to gain distribution, particularly in emerging markets. So this $2 billion global retail sales brand continues to perform well.

Let's check in on another World class brands Cheez. It shown on slide number 25 in.

In the U S. This brand continued to grow consumption and gained share in the third quarter sparked by strong brand building activity and growth in multi packs meantime, it continues to gain distribution and share in its newly launched markets, Canada and Brazil. This is a $1 billion plus brand that continues its long track record of consistent growth.

Pop Tarts is another world class brand that is performing well its two year growth is well outpacing the portable wholesome snacks category as shown on slide number 26, another big brand with over $750 million sales at retail in the U S alone, it's showing good momentum to give you an idea of how relevant this <unk>.

<unk> is our latest add has generated nearly 40 million views on Youtube or what would pop tarts do hash tag as shown up $5 7 billion times in Tictoc and the brand has enjoyed more than 2 billion earned impressions this year.

And big growth has continued for us on rice Krispies treats shown on slide number 27.

This brand even accelerated its consumption growth and share gains during the third quarter aided by effective brand building and the success of innovation like Homestyle treats this brand generates close to $350 million in retail sales in the U S and it continues to grow.

In cereal the performance of key brands in the U S has been impacted by supply complications in North America, but internationally, we're seeing good growth on slide number 28, our two world class brands in Europe are worth highlighting <unk> also known as crave in some markets is a taste segment brand that has become the number one zero Brandon.

In Europe and is dramatically outpaced the category this year in key markets like France and Germany.

Extra Meanwhile, is geared more towards adults and it too has strongly outpaced the category this year in markets like Italy and Spain.

Over in the frozen aisle Eggo is clearly a world class brand and it is performing well slide number 29 shows that it is sustaining solid mid single digit consumption growth in spite of capacity constraints, yet another big brand with close to $900 million in retail sales in the U S continuing to grow.

Good morning Star farms, our leading plant based proteins brand as shown on slide number 30. This is another world class brand and are sustaining strong consumption growth, even as the category Decelerates as expected and even as we run up against capacity limits in some of our product segments. This is a $400 million retail sales brand with momentum and strong <unk>.

Aspects in fact, as you've seen the fundamentals momentum and growth prospects for many of our biggest world class brands remained solid.

Now, let's review each of our regions, starting with North America, and Slide number 31, net sales were flat year on year in the third quarter with underlying consumption growth well exceeding our shipments due to supply constraints.

Many of these constraints were economy wide, including shortages of materials labor and freight, but we had some internal challenges as well as you know we entered this year tightening capacity for growing food formats in cereal frozen from the griddle and plant based protein as well as certain pack formats and snacks add to that the fire then interrupted production.

<unk> had one of our cereal plants and you can appreciate just how constrained we have been the.

The good news is that we remain in growth on a two year CAGR basis and that our revenue growth management actions are resulting in good price mix growth.

This price realization along with good execution of productivity programs is crucial for mitigating the margin pressures of high cost inflation and incremental costs and inefficiencies related to the broader bottlenecks and shortages in the economy.

Slide number 32 breaks our north American net sales growth in the category groups you can see the good momentum we've seen in snacks and frozen. Despite these supply constraints and the fact that away from home sales remained lower on a two year basis.

<unk> net sales had been flattish on a two year CAGR basis in the first half roughly in line with the U S categories performance in quarter. Three however, it face the worst of it supply challenges and is now down about 1% year to date on a two year CAGR basis importantly.

Importantly, our underlying consumption trends remain solid across most of the portfolio as shown on slide number 33.

And all three of our snacks categories, we saw an acceleration in two year CAGR in quarter, three continuing to well outpace their individual categories.

In the frozen from the Griddle category. We also saw accelerated two year growth during the third quarter and in frozen veg vegan, even as the category Decelerates as expected our growth remains strong even in cereal, which is a category has been flat on a two year basis. This year, we are holding consumption relatively flat despite all of the <unk>.

Apply challenges we've been facing.

And before we move on from our discussion of North America, We should touch on our U S away from home business in Slide number 34. This slide shows rolling two year average growth rates in our net sales over the past few quarters in these channels as.

As restrictions eased in consumer mobility increased we saw year on year growth starting in quarter, two and continuing in quarter three our sales remain below 2019 levels, but you can see that a gradual recovery continues the recovery has been a little quicker in channels like convenience stores in schools and much slower in channels like <unk>.

Vending and in travel and lodging.

There is no question that our North America region is facing the toughest of the global supply challenges and the team has risen to the occasion, we are presently working to restore full production at our fire damage zero plant, while negotiating with the union regarding its strike against all of our U S. Cereal plants, Indeed, North America faces an even tougher.

Quarter in quarter four.

Nonetheless, we are executing well in market and our brands are in great shape.

Now, let's turn to our international regions and slide number 35.

You can see that in each of these three regions. We are sustaining strong momentum both in the form of year on year growth and on a two year CAGR basis, which eliminates the impact of comparing against last year's surge, especially in Latin America.

Let's look at each of these regions a little more closely.

Slide number 36 shows the results of Kellogg Europe.

Europe streak of quarterly organic net sales growth continued in impressive fashion in the third quarter drew.

Driven by both volume and price mix. This growth was led by Russia, and the U K, but broad based across the region.

<unk> digit growth in snacks was driven not only by pringles sustained its momentum, but also by a rebound in portable wholesome snacks.

Cereal sales grew on top of last year's growth and we're particularly pleased with the magnitude of our share gains in the U K as.

As we look to the fourth quarter, we lap a particularly strong organic net sales growth performance and on operating profit, we are managing through high costs and supply challenges as well as lapping a 50 <unk> week. Nevertheless, we expect to sustain our end market momentum in cereal and snacks in Europe is on track for another strong year.

Now, let's talk about Latin America, and slide number 37% the year ago quarter included outsized gains in sales and profit. So comparisons are masking a solid performance for us in the third quarter organic net sales continued to grow year on year. Despite the comparisons with notable strength on a two year CAGR basis the growth.

It was broad based and supported by strong end market performance in cereal led by Mexico as well as by Pringles across key markets. We saw particular strength in Brazil, where pringles is showing outstanding momentum.

We are executing productivity initiatives, we're being disciplined on overhead and selective on brand investment and we are carefully executing all levers of revenue growth management.

Bottlenecks and shortages are ramping across the economy right now and we are experiencing our own particular labor and supply disruptions. However, we are managing well through these difficult supply conditions or people are demonstrating why they are a competitive advantage going the extra mile to supply the market when everything procurement Manny.

Factoring shipping is more challenging now than ever and in the end, we expect to remain on our path of balanced financial growth. We've delivered on it so far this year and we are reaffirming our full year guidance today, even in spite of the current operating environment I.

I want to commend and thank our entire organization for their dedication and grid and for finding a way to deliver on our commitments and in what is obviously, an unusual environment and with that we'd be happy to take any questions you might have.

Okay.

As a reminder, for anyone who does fish to ask a question. It starts with a buy one get high. Thank you Pat and we do ask Felicia your lines are not being utilized today.

First question today comes from Andrew Lazar Barclays. Andrew Your line is open. Please go ahead.

Thanks, Good morning, everybody.

Hey, good morning, Andrew.

Just one from me Europe trends, obviously remains incredibly strong and accelerated on a two year basis, even as many of those markets have been reopening at a faster pace than we've seen here in the U S. So I guess what are what are the learnings if any from Europe, maybe that can help you inform the debate and the group on whether some of the new.

<unk> gained in the past two years can be somewhat more sticky over time as markets in the U S more fully reopened.

Yeah. Thanks, Andrew we have seen terrific growth in all of those international markets driven by increases in penetration and increases in Bahrain.

So obviously those two things are important they work in concert together and we've seen the business stick even as mobility has increased and so what we've always said is we're looking at 2019 is a comparison that obviously is still very relevant the U S continues to open up slowly and we're hanging onto those buy rates, especially in the U.

And so we anticipate even as the U S continues to open up what we've talked about is the lasting impact as such.

We're confident in and as we've said time and again our goal all along was to exit the pandemic stronger than we went in and we're more confident than ever that that's that's happening that's absolutely happening.

Thanks, so much.

Thank you. Our next question today comes from Steve Powers of Deutsche Bank. Your line is open please continue.

Yeah, Hey, Thanks, Good morning from me as well.

Two questions related to the supplier production backdrop in the U S.

First is just can you give us some color on how your service levels and fulfillment rates are holding up.

Do you expect them to trend for the fourth quarter and into the next into fiscal 'twenty, two and whether we should worry about out of stocks accelerating or anything on that front and then I guess relatedly as you manage through these situations and you are pulling back as you say on the investment spending I guess, what's the risk as you see that you begin to lose ground more structurally versus competition.

I appreciate everyone's on the same boat directionally, but your situation.

We see a bit more severe at the moment. So just I'm wondering how you assess that risk. Thank you.

Yeah. Thanks, Steve So as you pointed out the.

The environment is challenging for all of US. There is no question about that our fill rates and our customer service levels are not where we want them to be and we're not alone in that either but we hold ourselves to a very high standard and we aim to get better and better and so let me point out a couple of things around your question.

We have one particular area that is more challenging than others and thats, our cereal business and Thats, obviously been compounded because of the strike that we're going through right now, but outside of that which as you know thats, 20% of our global business outside of that we are in the same boat as everybody else and you can see based on the type of performance outside of cereal in the United.

States, we have posted some very very strong gains. So we don't believe theres going to be anything structural to our disadvantage as we continue to make our way through the pandemic through the supply grid lock into a more normalized environment. So.

We've got mitigation plans based on where we are with our current cereal plants in the U S. As well. So by no means are we complacent, we've got big challenges in front of us, but we're quite confident that we're not going to be at a long term or any kind of permanent disadvantage. This is a transitory event and we will work our way through it.

And I think just on the investment levels.

<unk> and <unk>.

<unk> levels are broadly flat versus year ago. So while we've pulled back on some supply constrained platforms. When I look at the overall level of investments.

We are flattish and in fact, our advertising is up so we continue to invest at appropriate levels.

Okay very good.

On that point just is that does that I think that's a.

Regional statement does that does that apply to U S cereal as well.

I think it would vary across Garik I think it would vary across categories, because as Steve mentioned different categories. The supply and service levels vary by category. So I was talking on a global level on our levels of investment.

And really Steve based on supply.

Not going to advertise and promote heavily areas that are severely constrained at the moment.

No that makes sense just wanted to clarify thank you very much.

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

Hi, good morning.

I just had a question on <unk>.

I had a question on the guidance for the full year.

Full year implied guidance implies relatively wide range for Q4 top line growth can you talk about the factors that would contribute to your results coming in toward the low versus the high end of the range and what impact are you expecting from the labor strike.

Yes, so I'll start and Amit can pick up so what we've said is we're taking a reasonable approach to what we think will happen with the labor strike and that's that.

It's in our guidance our top line, obviously continues with great momentum, but you heard what we said about the other three elements coming in perhaps.

More towards the lower end of the guidance. So let me talk about.

Our thinking behind the strike and what I can share with you. We are in the process of negotiating right now and so out of respect for that process I'm not going to get into a lot of detailed which I'm sure. You can appreciate but we have always treated our employees with respect and fairness and that includes industry, leading compensation and benefits. The offer that we have in front of the union right.

Now is increased compensation on top of that already industry, leading compensation and benefits and we are not asking to take anything away. Despite what you may have heard publicly so we think a fair resolution should be in the offing. We think that this type of offer is fair reasonable and again.

Increases on top of the industry, leading compensation already so this would allow our employees to get back to work we want them back to work I think they want to be back to work, but because these negotiations are ongoing we can't go into much more detail than that but I think we're hoping that will come to a reasonable conclusion and that's what.

That's what we're working towards.

Great.

And can you give more color on your gross margin expectations for the fourth quarter and how they will compare to the third quarter and then just looking towards next year do you think you've taken enough.

Pricing and blending enough productivity to preserve you already have gross margin.

Yes.

Just on gross margin I think it will we expect quarter four continued to be challenging from a cost standpoint, so I think the environment is.

It remains challenging.

And we'd expect that to continue in fact on soda in packaging and in certain commodities, we expect inflation to be higher than what we've seen in quarter. Three overall I would say that we're expecting inflation to be in the high single digits I'd like to dwell in quarter, three similar levels slightly higher than quarter four.

And then of course.

Founded by the strike right.

And the disruptions as a result of that so thats the outlook on gross margins.

Quarter, four standpoint, and I think as I mentioned in our prepared in my prepared remarks from an absolute dollar standpoint.

We expect it to.

It will be higher for the full year versus 2019 levels. So.

That's the outlook on gross profit.

And Pam on the pricing, which you asked about we're not going to comment on forward looking pricing for obvious reasons, but I think if you look at where we are with price mix and you look at what we've been able to accomplish that would be our goal going into this in the future. So obviously the very cost.

It's a very inflationary environment driving up costs are first.

Line of defense is always productivity and as we plan out 2022, we'll plan for the same levels of productivity or greater and then look through revenue growth management that we've successfully employed in order to protect our margins into next year.

Okay. Thank you.

Thank you. Our next question comes from Ken Goldman of Jpmorgan.

Hi, Thanks, so much.

I know this is a difficult question to answer so I'm just trying to look for some rough ideas here, but.

There's the normal headwinds that every sort of food manufacturers facing right now and when I say normal I mean, the ones that are across the entire industry, whether it's labor challenges logistics or so forth higher raw materials and then there's the sort of Kellogg specific one of the strike.

And I'm, just trying to get a better sense of as you look to your fourth quarter guidance and you think about early next year, how do we think about.

The impact on whether it's your gross margin or your.

EBIT dollars. However, you want to think about it on the labor strikes a load I'm just trying to get a sense of how to parse that out as we think about the headwinds there and any help you can give would be great.

Yes, Ken I appreciate the question, but I think you can appreciate based on the sensitivity of where we are and the fact that we're in negotiations, we're not going to be able to quantify any of that we've taken what we think is a very reasonable view of getting to an agreement. We have also taken into account. The contingency plans that we have in effect, we knew we would.

Been talking for a year now because we had a year extension we knew the contract was expiring in October 5th. So we took all sorts of measures to prepare ourselves, including building inventory building inventory was a little bit challenged because of the fire in Memphis, but we also have deployed are white collar workers we've deployed.

Outside labor to keep the plants running to get the plants running theyre gaining productivity each and every day. We've also leveraged our global supply chain network for cereal to also mitigate and so we're working very very hard on two fronts to mitigate the effects of the strike on the one hand, and we're doing that successfully and getting better every day.

But also to get our workers back to work.

Want them to get their paychecks, we want them to enjoy their healthcare, we truly want them back to work and we think we've got a very very good proposal again with increases on top of already industry, leading compensation. So I think reasonable hedged should prevail based on all that and Thats kind of the view that we're taking we want we want to get.

To a negotiated settlement get back to work and we think we've given the best guidance that we can based on all of those different factors.

Yep. Thanks. Thank you for that and then a quick question follow up just think about thinking about modeling Amit.

<unk> had similar sort of adjusted SG&A in the last couple of quarters, a little under $720 million.

As we think about sort of a run rate going forward is that a reasonable number I know it is going to vary obviously from quarter to quarter I'm, just trying to get a sense because you've had some ups and downs in the last year of what we should be thinking about going ahead here.

Overall, I'd say flattish to 2019 levels.

Kind of a good run rate to assume Ken.

I think <unk> been facing we're lapping the phasing of the brand building and obviously be able to lapping the incentive.

Our compensation accruals from last year.

Thanks, so much.

Thank you. Our next question comes from Nik Modi of RBC capital markets.

Yeah.

Yes, thanks, good morning, everyone.

Well I mean I was hoping maybe you can just.

I was hoping you could give us some context on inflation just kind of.

The key buckets, and how you see that playing out and then.

Steve if I could throw in a question to you just strategically and just philosophically.

We're obviously seeing a lot of one time events that are causing lots of disruption of these one time events feel like they just keep on happening. So I wanted to get your kind of thoughts on.

Capex in.

Does it make sense to just kind of have a super cycle in the near term to automate as much as possible and just really evolved the infrastructure to be really ready for handling these types of shocks.

And then just on the inflation I think as we expected and as we had previously communicated inflation came in at high single digit rates in quarter three it accelerated through the quarter and as I mentioned earlier, we expect it to further accelerate into quarter four as well.

And we kind of look at it in two buckets, there's the market driven costs in commodities like oil and dairy.

<unk> ingredients like rice potatoes, and packaging.

And actually packaging was the one where we saw significant acceleration in quarter three.

So thats, we think inflation fairly broad based I'd say across our.

Our commodities.

And then of course, you know the operating environment continues to be challenged.

Whether it's freight markets, whether its ocean freight.

Whether it's labor shortages as well as shortages across.

Our suppliers and our supply chain.

So that's.

I would expect a similar outlook for quarter, four with slightly higher still in the high single digit rate rates, but slightly higher levels of inflation.

In quarter, four and I think from a pricing standpoint, and from a revenue growth management standpoint, we're obviously taking action.

And broadly I'd say covering our commodity related costs at all.

Our direct cost I think it will some of the disruptions.

Hard to predict.

And.

And so.

That's kind of the color on inflation, yes.

Yes, Nick it's a really interesting question that you raised strategically and I think for everybody the pandemic as rod all sorts of different consequences right and it's almost an old joke by now there is no pandemic playbook, but we've all had different challenges some very common in some unique unique to us obviously is.

A fire that we talked about the strike that we're dealing with right now. So there is clearly some uniqueness, but I think one thing that we are definitely looking towards is how we continue to grow because despite this we've had lots of I wouldn't call it pockets.

We've got real growth happening.

Most of our business that is very resilient and robust and sustainable but the future of work is clearly going to change in our capital plans over the next couple of years will reflect that and when I say the future of work the obvious what happens in office environments, where work gets done how work gets done but then also from a capacity standpoint.

How have how factories run and where work gets done there where where product gets made.

To allow ourselves even more resiliency going forward is clearly something that is on the cards for us.

Great. Thanks.

Thank you. Our next question comes from David Palmer of Evercore.

Thanks, Good morning.

You mentioned that I think it was an answer to.

Ken's question in the high single digit inflation in the fourth quarter.

If input costs remain at these current levels and considering contracts and hedges rolling off.

Well the Cogs inflation slow.

In the first half of 'twenty two or remain.

Near those high single digit levels and I have a quick follow up.

Yes, I think it will.

We'll obviously provide detailed guidance right in our quarter four earnings call in early February.

To your question on from an inflation standpoint, I think on a planning basis, I mean, assuming that the high levels of inflation will persist for the foreseeable future.

I think that's what that's the assumption that we're working with.

I think from a hedging standpoint, we have a continuous hedging process. So they continue to role although we do not anticipate any sudden cliff at the start of the year.

Obviously, the hedges are rolling up at higher prices.

From a lapse standpoint, the current hedges are are higher than the hedges that are dropping off so all in all we are planning for <unk>.

Inflation environment in 2022.

I think from a.

Shortages and disruption standpoint, that's harder to predict.

But we are assuming that they will persist.

And so from a productivity standpoint, and from a revenue growth management standpoint.

We will be taking actions.

And 'twenty two to offset them.

Continuing to drive balanced financial delivery.

And thanks for that and if we were to look back I mean, we can almost now.

At 21 with pretty good visibility I would imagine and if you were to look at the friction costs Covid related strike related to just put it all into one bucket and God willing youll be able to lap these friction costs.

With less friction in 'twenty, two but how would you how.

How would you say we're estimate those friction costs have been a drag to your gross margins in 'twenty one.

I'll pass it on.

Yes, I think it's hard to it's hard to model that because there's so much that's happened during the course of.

Of this year.

I think like I mentioned from a 22 planning standpoint, we are assuming that the current environment is going to persist.

We are focused on productivity and pricing and revenue growth management.

Actions too.

To try and offset.

Sure.

Scott.

And continue to drive.

Balanced delivery.

Okay.

Okay. Thank you.

Thank you. Our next question comes from Laurent <unk> of Guggenheim.

Yes. Good morning, everyone. Two questions. The first one is more photo up actually you said in your per Mark I mean U S shipments were lagging behind consumption. So what is the current level of inventory at retailers.

And how it compares to where it should be.

So that's the first question the second one is really about Europe.

As for me strong gross in Europe. This quarter were higher than what we expected and you mentioned in your per market performance was driven by the U K and Russia. So could you please give us a bit more color there.

Sure.

We heard about disruption.

So in the neighborhood.

Drivers in the U K.

Are you seeing any kind of disruption there in the UK, but absorbing that.

Shipments between the UK and Europe. Thank you.

Yeah. Thanks, Lauren I'll start and then Amit can fill in as well from a U S shipment standpoint, I would say shipments are lagging consumption, probably mid single digits is probably a reasonable assumption there I'd say inventory levels across the whole landscape. Our low obviously, it's been well documented all of the supply chain.

<unk> and disruptions and so forth in terms of Europe, I mean, the Europe team continues to deliver at a very high level and if you look at the U K and Russia performance, we highlighted that and if you look at across Pringles in cereal and our wholesome snacks is bounce back as we said as well and so it's really just tie.

Levels of execution lapping a very strong performance last year and continued demand creation activities that have been very very successful in terms of the disruptions. There clearly are disruptions theyre not quite as acute as they are in the United States, but they are real there is friction also.

So that has to do with Brexit when you think about.

Supply chain that is on continental Europe, as well as the U K, we're working our way through that Youre seeing good results despite that.

But the same issues around freight and truck drivers exist in the UK and in Continental Europe, but particularly the UK as they do in the U S as well.

Yes.

Thank you I appreciate that thanks.

Yeah.

Thank you. Our next question comes from Robert Moskow of Credit Suisse.

Hi.

One of your big competitors is talking about price increases beginning in January and snacks.

And there's a lot of packaged food companies that are introducing new pricing can you talk a little bit about like what your plans are for pricing in 2022.

If you talk to the trade about so far.

And then a quick follow up.

Yeah. Thanks, Rob I appreciate the question, but we do not talk about forward pricing.

For for for.

For a number of reasons, but again, if you look backwards and you see what we've done we've been successful at driving pricing. The good news is elasticities have performed very well. So they have been lower than historically that was kind of our expectation and I think a lot of expectations based on just the totality of the inflationary environment and as we look.

2022, as we said we will deploy productivity will deploy revenue growth management, and we will look to be competitive in market.

And.

To create value and to provide for a plan that delivers balanced financial growth going forward.

And I think if you look at a quick look backwards right.

This mix has been at around 4% and within that actually mix has been negative because of in this quarter because of country mix and.

And so not only is that not only to 4% so offsetting the mix.

But obviously the pricing is at a high level in that so it's coming through.

Okay. My follow up on plant based you said that the category is declining as you expected off of tough comps is there a risk that these declines continue into next year.

Like when do you think it kind of comes back to positive again.

Yeah, Rob I think it does come back to positive next year, where lap the lap is really whats.

Whats occurring right now and if you go back to.

See what happened two years ago, there was an enormous excitement around the new entrants lots of new distribution being built lots of doors frozen doors refrigerated doors being added and so we always anticipated as we said that the hurdle of that would be difficult, but when you look to consumer behavior. When you look to the <unk>.

Tumor research we have there is still a lot of <unk>.

Enthusiasm and excitement around plant based and so we think going into next year, you'll start to see healthier.

Healthier growth rates on a year over year basis because of those comps.

Great. Thank you.

Thank you. Our next question comes from Chris <unk> of Stifel.

Hi, good morning.

Quick question for you on thank you and on mix as you were talking to Rob there.

This lower mix at the revenue line mean lower mix at the profit line, whether it be gross profit operating profit. So is that a is that a factor weighing on your on your gross margin as well.

Not necessarily I think.

I mean, there are two factors in play right at a high level, one is obviously or geographic mix.

Now multiple it does impact both and as we on gross margin because it's a distributor business and.

<unk>.

Quarter three likely.

Like I mentioned, we had a huge quarter in.

And multi grow in Nigeria.

And really by pricing to cover inflation.

Volume growth was strong despite the significant pricing that we that came through so it's on that one it flows through.

I think in all the categories I would say, it's a lot more balanced.

Between snacks and cereal.

Okay.

Okay, and then I had a second question just around pricing and kind.

Kind of two elements of that one would be that you noted that your pricing to offset inflation, but some of these disruptions and supply chain challenges.

<unk> had been an issue for your gross margin.

I think you've noted as well that you expect those to continue next year. So does that mean that your pricing would.

Would be below whatever the total amount of inflation into next year, if the supply chain challenges don't get better and then if I could add to that you talked about a low level of elasticity, especially in the emerging markets to pricing is that pushing you to price even more there than what you would expect around the level of inflation in those markets. Thank you.

I think to the extent that we can forecast the disruptions right I think it's hard to forecast and thats been kind of the challenge this year right because it's.

It's just come in so many unexpected places I think to the extent that it sustained and we are able to forecast. It obviously that will go into the mix of how we offset through productivity and revenue growth management. So I think that's the way we're thinking about it I think.

The areas that we think thats going to persist.

We would obviously take actions to offset that.

And I think on your point on on.

Emerging markets yes.

Volume has has come through stronger than we had expected and so I think elasticities have been lower no question.

Okay. Thank you.

Thank you. Our next question comes from Ken Zaslow of Bank of Montreal. Your line is open.

Hey, good morning, everyone.

Good morning, good morning, Ken.

Can you talk about the <unk>.

Yes.

That you have with Pringles, and where you think that the new markets will be.

And when you're thinking about it in a couple of years, how big do you think this brand will be.

Yeah. Thanks, Ken So we're very excited about the pringles momentum obviously, it's a great brand, it's highly differentiated it handles innovation extremely well it carries flavor like no other snack and so we see continued growth in the markets, where we are it's got pretty good.

<unk> distribution countrywide. So most of the growth is going to come from.

From continuing to penetrate.

And <unk> increased by rates and household penetration.

Some of the developing markets, you've seen us enter Brazil, and other emerging markets quite successfully so we put a couple of lines in our Brazilian planned for Pringles as well the Malaysia plant has been running strong for us and that provides good growth opportunities across Asia. So we think we're not going to predict how big it can get but it keeps getting <unk>.

<unk> for sure and generating very solid growth for us. The other thing I had mentioned, where we have a lot of opportunity from snacks and expanding distribution as cheez, it which doesn't have the same footprint as pringles not even close and we've now launched in Canada, and Brazil, and it's done extremely well so as we look to the globe we looked at <unk>.

<unk> like Cheez, it and even pop tarts and others that would have global aspirations and so we continue to look at our snacks portfolio as something very exciting with a lot of growth potential.

My second question is.

For the last couple of quarters, you've tried to temper the emerging market growth. This is probably the first quarter you haven't done that.

And you continue.

It sounds a little bit more optimistic about the outlook of emerging Martin I thought you havent been optimistic right youre not trying to taper off expectations on that what are you seeing in emerging markets to give you increased confidence that maybe this is much more sustainable than you may have thought for the last three to four quarters.

And unless I misread what you are.

Youre thinking.

And I'll leave it there.

Ken sorry, we do assume a slowdown in emerging markets in quarter four.

And we've been we've been pleasantly varies I wouldn't say surprise, but they are great great numbers that have been posted in the emerging markets. You look at the Africa business and so we don't plan on that sustaining but have been very pleased with with what's been achieved.

If you looked at our prepared remarks, we talked about growth accelerating we saw it all the way through last year and it has further accelerated so we had.

Double digit growth through the year. So overall I mean, it's been sustained.

Through the year through large deal right and.

And I think from a growth standpoint.

We continue to see it as a.

As a as a growth opportunity.

Great. Thank you operator.

Thanks, Kevin Operator, I believe we are at $10 30, which means we need to wrap it up.

We'd like to thank everybody for their interest and their questions and if you do have any follow up questions. Please do not hesitate to call us.

Thanks, everybody.

Thank you.

Thank you today's conference call has now concluded and you may now disconnect your lines.

Mr. Clark.

Yes.