Q1 2022 Kellogg Co Earnings Call
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Good morning, welcome to the Kellogg Company first quarter 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
At this time I will turn the call over to John Renwick, Vice President of Investor Relations and corporate planning for Kellogg Company. Mr. Renwick, you may begin your call. 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 2022 I'm joined this more.
By Steve <unk>, our chairman and CEO , and Amit Banotti, our Chief Financial Officer.
Slide number three shows our forward looking statements disclaimer as you are aware certain statements made today such as projections for Kellogg company's future performance are forward looking statements actual results could be materially different from those projected for further information concerning factors that could cause these results to differ please refer to the third slide.
This presentation as well as to our public SEC filings.
This is of particular note during the current COVID-19, pandemic 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 Kellogg Company Dot 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 will turn it over to Steve.
Thanks, John and good morning, everyone. We're pleased to be able to report another good quarter delivering solid results. Even ahead of plan by sustaining growth momentum across our international businesses, and our North America snacks brands, realizing pricing productivity amidst decades high inflation and executing with agility.
After all we are navigating through what I think you would all agree continues to be an extremely challenging operating environment. The situation in Ukraine, only accelerated cost inflation and exacerbated the global economies bottlenecks and shortages. It also prompted us to suspend all shipments and investments into Russia and to identify new sources for certain.
Ingredients. Meanwhile, the team has done an excellent job of quickly restoring and ramping up production in our U S. Cereal plants following the fire and strike of last year's second half our inventory is gradually building toward normal levels as plan, enabling us to start replenishing retailer inventories earlier than expected in the first quarter.
To be able to affirm our full year earnings guidance is a testament to our strategy our brands and our people.
Our deploy for growth strategy shown on slide number five is working this strategy is still as appropriate and effective as ever even as occasion shift in the operating environment evolves, we continue to emphasize occasions and build on our world class brands, we continue to see the benefits of our reshaped.
Portfolio and through extreme supply challenges, we continue to focus on service and in store effectiveness behind all of these growth boosters are capabilities that we have strengthened from data and analytics to E. Commerce to revenue growth management to a robust innovation pipeline you are seeing the benefits of these capabilities and our.
<unk> and results simply put this strategy is working.
We remain equally focused on better days, our ESG strategy actions are louder than words slide number six offer some examples of our ESG activities. During the first quarter. They reflect continued action on various elements of ESG as we remain committed as ever to our values and doing what is right.
For the planet and for our communities.
Sticking to our strategy and focusing on execution is resulting in sustained top line momentum as you can see on slide number seven.
We had restore topline growth in 2019 experienced the pandemic related acceleration in 2020, and yet sustained its strong growth in 2021. Despite what we were lapping an in quarter. One of this year, even with difficult comparisons we continue to exceed our long term target of 1% to 3% net.
<unk> growth with organic growth of more than 4%.
I'll call out two key elements that are behind this momentum. The first is our reshaped portfolio. Our largest portfolio segment developed market snacks continued to generate strong growth led by world class brands like Pringles, Cheez, it and others and our emerging markets collectively sustained double digit growth.
So even in a quarter when one of our businesses North America cereal was notably soft declining 10% year on year because of a lack of inventory this was more than offset by momentum in the rest of our portfolio.
The second element is price realization and an environment in which cost inflation is too high to cover with productivity alone. We have leveraged our enhanced revenue growth management capabilities to realize price effectively.
<unk> been realizing price ever since cost inflation began to accelerate back in the second half of 2020, and we have accelerated as the market driven cost inflation worsened.
The result of all of this strategy execution focused and sustained momentum as another quarter of delivering results and affirm our full year outlook and increased cash to shareowners as discussed on slide number eight we grew our net sales faster than we had anticipated and we delivered more operating profit than we had pre.
<unk> our earnings per share and cash flow also came in ahead of our plan.
This puts us in a good position it allows us to affirm earnings guidance for the full year as an improved net sales outlook covers the impact of accelerated cost inflation and supply disruptions, including Russia and Ukraine. It also enables us to increase the cash returned to shareowners, which we have done both in the form of.
Share buybacks and an increased dividend so with that introduction, let me now turn it over to Amit who will explain our results and outlook in more detail. Thanks, Steve and good morning, everyone.
As Steve said, we're off to a good start to 2022.
We'll start with a brief summary of our quarter one financial results on slide number 10 on.
Net sales growth came on top of a similarly, good growth in the year earlier quarter and is tracking ahead of our previous full year guidance as expected operating profit declined against last year's double digit gain but it should be noted that the year on year decline was entirely related to the wraparound impact of the fire and strike.
We experienced in 2021.
Earnings per share also exceeded our expectations, reflecting the better operating profit and with unfavorable <unk> and other income offset by some discrete favorable items in our tax rate.
Cash flow came in ahead of plan and significantly higher than last deals.
Slide number 11 lays out the components of our net sales growth in the quarter. One volume was down year on year due to lapping a strong <unk> CAGR of nearly 4%, but also due to lagging inventory in certain businesses going into this year, most notably in our North America business in fact, North America cereal volume.
Decline represented almost half of our total company's year on year volume decline in the quarter.
So sell price elasticity resuming in many markets just as we have been forecasting although still running well below historical levels.
Price mix grew nearly 10% year on year and acceleration from recent quarters as we continue to work to offset market driven cost inflation.
This price realization is predominantly price as we continue to implement revenue growth management actions in all four regions with a much smaller contribution coming from a mix shift towards snacks.
The result was organic basis net sales growth of almost 4% year on year. Another strong quarterly performance that continues to exceed our long term target.
This was better than forecast, principally because of less price elasticity than expected, but also because the sooner than anticipated replenishment of trade inventories in North America cereal at least some of which could be considered timing related foreign currency translation nearly two percentage points of net sales growth.
In the quarter with a U S dollar strengthening year on year against virtually all of our major currencies.
Slide number 12 shows our gross profit in dollars as anticipated our gross profit declined year on year, principally because of supply disruption. The good news is that productivity and revenue growth management continued to mostly cover the market driven cost inflation. Despite the latter accelerating again in the quarter. This is.
What we can manage and we've done a good job of it.
The single largest driver of our gross profit decline was a transitory impact of the fire and strike we experienced in the second half of last year.
This impact reflects not only lost sales year on year, but significant costs as well on top of this or the economy wide bottlenecks and shortages that I expect it to persist at least through the first half.
These two factors accounted for almost all of our year on year decline in gross profit dollars in quarter, one and about half of the margin contraction.
These are transitory factors and should diminish as the year progresses.
The rest of the margin contraction was related to mix as we've discussed our only meaningful mixed headwind is the shift towards emerging markets and particularly towards our EMEA region and its Nigerian distributor business multiple in quarter. One this mix shift towards EMEA was especially pronounced as we've often stated.
This mix shift does not bother us because of our growth in emerging markets and in multiple and not cannibalizing any of our higher margin developed markets businesses.
Which brings us to operating profit on slide number 13.
Despite transitory supply disruptions are operating profit remains on an upward trajectory, owing primarily to higher net sales.
With our supply constrained in many of our businesses, most notably in North America cereal.
Advertising and promotion investment was much lower than usual in quarter one.
Last quarter. This A&P investment is expected to be restored gradually across the year in line with our recovering supply. The result of our lower gross profit while the year on year decline in operating profit, which was also up against the double digit growth comparison.
Importantly, though our quarter one operating profit was still higher than that of quarter, one 2020, and even quarter, one 2019 sustaining an upward trajectory.
Turning now to our below the line items on slide number 14, lower debt year on year translated into lower interest expense.
The run up in rates during quarter, one we will likely create year on year increases in the coming quarters.
Other income was negatively affected by lower pension income as expected, but also by the impact of a declining bond market on a company owned life insurance investments lower net pension income will continue through the year.
Our effective tax rate benefited from a couple of relatively small discrete items a quarter one.
Our JV earnings in minority interest collectively improved year on year, reflecting the consolidation of Southern Africa JV at midyear last year.
And average shares outstanding decreased year on year, mainly reflecting the repurchases we made in 2021.
We're active on buybacks during the quarter and this will have an impact on average shares outstanding in quarter two.
Let's look at our cash flow and balance sheet on slide number 15.
Cash flow came in strongly in quarter, one on the strength of higher net earnings continued management of core working capital and some timing of accruals and capital investment as you can see on the chart. We start the year well ahead of where we typically are in quarter. One aside from the unusual pandemic youll have 2020.
In addition, our net debt remains lower year on year between strong cash flow and our.
Deleveraged balance sheet, we feel good about our financial flexibility. This financial flexibility has given us the ability to increase the cash returned to shareowners.
Recently announced another increase in our dividend.
And in quarter, one, we repurchased some $300 million of our stock.
Let's now turn to the rest of the year are.
Primary planning assumptions are shown on slide number 16.
We expect to deliver sustained momentum on the top line led by a strong snacking portfolio around the world and geography by emerging markets price mix will continue to drive our net sales growth as we try to keep up with rising costs and as we continue to assume some combination of decelerating at home.
<unk> growth.
Brazil price elasticity.
Our market driven cost inflation has gotten io.
By the wall in Ukraine, and it looks like it will persist longer than originally anticipated.
This has been incorporated into our outlook.
From a supply disruption standpoint, we're largely off the fire and strike impact, though we will still expect bottlenecks and shortages to persist at least through the first half the disruption related to the war in Ukraine more weighted to the second half.
Meanwhile, as we mentioned, we do plan to gradually restore overhead and brand building investment across our regions as the year progresses.
<unk> capabilities are resumed commercial activity behind supply constraint Brian .
Slide number 17 shows how these planning assumptions translate into updated full year guidance, we are raising our forecast for organic basis net sales growth to about 4% growth versus our previous estimate of about 3%. This reflects the momentum in our business and the fact that price mix is likely to come in.
Higher than we previously planned as we seek to cover incremental cost inflation.
This higher net sales should offset the incremental pressures of accelerated cost inflation and supply disruption as a result, we continue to forecast currency neutral adjusted basis growth of 1% to 2% and operating profit.
We also continue to forecast currency neutral adjusted basis growth of 1% to 2% in earnings per share with a further reduction in other income partially offset by the full year flow through of quarter, one discrete tax benefits from.
From a phasing standpoint, the only new news since last quarter is that we got off to a better than expected start in quarter, one but that our second half will now experienced more cost inflation and disruption and costs related to supply.
Finally, we continue to forecast cash flow of one one to $1 2 billion.
This is roughly in line with a reported basis net income growth with no changes to our disciplined approach to restructuring outlays for working capital and capital expenditure.
So in summary, we got off to a good start in quarter, one delivering solid financial results in the face of massive headwinds and even putting US ahead of plan.
Brands continue to perform well and we have been effective at offsetting market driven cost inflation with productivity and revenue growth management.
Cash flow generation remains strong and our balance sheet remains strong. So we feel good about our financial position and the outlook.
Let me now turn it back to Steve for a review of our regions. Thanks Amit.
Firstly, you'll note about our quarter one is the continuation of broad based top line growth slide number 20 shows our organic net sales growth by region in the first quarter, along with a two year CAGR. They had to lap we generated organic basis net sales growth of 8% in Europe , 6% in Latin America and 17%.
In EMEA. These are exceptional growth rates and in North America, where last year's fire and strike left us with low cereal inventory and therefore loss sales are reported and organic net sales were still only down less than 1%. In fact, if you exclude cereal the rest of our North America business grew by 3% to 4% year on year.
Even against tough comparisons in a moment, we will walk you through the key category groups within each region, you'll see the continued exceptional growth of our relatively new growth leg for us and Thats noodles in Africa, you will see that cereal and frozen foods. The category groups that are the most at home in nature.
Therefore, we're seeing the most deceleration as consumer mobility has increased but outside of North America with its supply disruption from the fire and strike, we do continue to grow in cereal internationally.
But you'll also see that in all four regions. Our biggest category group snacks continued to grow strongly even against tough two year comparisons.
Slide number 21 offers the world class snacks brands, we've been talking to you about and they had another quarter of excellent consumption growth.
<unk> continues to gain penetration and distribution in key markets around the world and it continued its strong consumption and net sales growth in the first quarter Cheez. It already a powerhouse in the U S is growing rapidly in Canada and is off to a strong start in its launch in Brazil.
<unk> continues to grow in the U S, but look at its growth rates in markets like the UK and Mexico as well.
Rice Krispies treats is enjoying explosive growth in several markets outside of the U S. As we put more focus and support behind that unique brand not only are these brands continuing to grow in North America, but this chart can give you a glimpse of their international potential.
Aside from Pringles. These brands are in very early days of expansion, which is part of our strategy and their growth rates speak to their long term potential.
Let's now review each region in turn starting with North America on Slide number 22.
North America's net sales declined slightly on an organic basis, owing to the fire and strike related impact on cereal.
Supply constraints, most notably low inventory heading into the quarter for cereal did pressure volume, but as we'll see in a moment, we did sustain good momentum elsewhere in the portfolio, especially in snacks price mix grew more than 7% year on year as we continue to implement revenue growth management actions.
Operating profit declined year on year, not only because of lapping a mid single digit two year CAGR, but also because of the bottlenecks and shortages that persist in the economy and the wrap around impacts from the fire and strike we experienced in the second half of 2021.
Our snacks business in North America posted organic net sales growth of 5% in the quarter as you can see on slide number 23. This sales growth lagged consumption, which remains quite strong pringles generated consumption growth of more than 8% year on year lapping last year's double digit gain this brand is in very good.
We saw strong growth in our core four flavors in standard cans propelled by effective brand building, including our Super Bowl execution, and we saw continued rapid growth in multi packs and in a sign of resuming consumer mobility, we are seeing a rebound in immediate consumption offerings as well.
Cheez. It also sustained its strong momentum growing consumption in the double digits with the new pump platform proving to be incremental to both the snap platform and the core Cracker line, but we didn't just gained share in crackers because of Cheez. It. We also outpaced the category with the club and townhouse brands pop Tarts grew consumption.
<unk> in the double digits, and so did rice krispies treats with both brands sustaining excellent momentum through the strength of effective marketing programs and incremental innovation and while we're at it neutral grain also grew consumption in the double digits and Rx continues to reaccelerate its growth as consumers go back on the move so our <unk>.
North America snacks business remains very strong.
Let's turn now to North America cereal in slide number 24.
Call that 2022 is all about recovering from last year's fire and strike as you know we entered the quarter with very low finished goods inventory, which obviously hampered our net sales and consumption year on year.
The good news is that our first order of business in quarter, one was restoring production in the four affected plants, which our team achieved and ahead of schedule with demand holding up well and retailers anxious to restore their inventories we were able to ship out more products in the first quarter than we had anticipated. This certainly will help us improve.
<unk> going forward.
Slide number 25 offers a good way to gauge our progress on restoring supply it measures our share against our total distribution points you can see the sharp decline in last year's fourth quarter as retailers ran through their inventory and we were unable to replenish it.
As we ramped up production during the first quarter, you can see product returning to the shells in the form of recovering tdp's and therefore share.
This reflects our improving supply and is a testament to the strength of our brands and relationships with our retail partners.
This sequential improvement is what we expect to continue to realize as we get through the first half in fact this positive trend has continued quite clearly in April this will put us right on track to gradually restore commercial plans brand by brand towards full recovery in the second half.
Our frozen businesses in North America are depicted on slide number 26.
Oh consumption growth remained strong with mid single digit growth on top of a mid single digit two year. CAGR. This is good performance given that we've been capacity constrained, especially on pancakes. The even better news is that we have incremental capacity coming online in the second quarter.
In our plant based business Morningstar farms consumption was down against the mid teens two year CAGR comparison, and the category has paused on distribution gains in household penetration gains after surging. The past couple of years, we've seen some share losses competitors have entered and expanded offerings in our segments and in many cases.
Competing intensely on price.
So in total North America got off to a good start in the first quarter with progress on supply recovery in cereal and in market momentum elsewhere in the portfolio.
Closing out North America Slide number 27 highlights some of the exciting innovations and commercial programs, we have going into the marketplace to remind you that even though we're in an unusual supply environment environment. We continue to delight consumers on the innovation front cheese puffs is off to an even faster start and snap.
The platform, we launched a couple of years ago Club, Chris is also new to the market, providing a light and fresh snack. That's built on the strength of our club crackers line for pop Tarts, we've launched new flavors like Snicker Doodle expanded on our simple ingredient line called pop tarts simply and brought back a fan.
For us the grape and in frozen beyond the lookout for Ngos, New Liaised style waffle for on the go consumption and some exciting new varieties of Morningstar farms, including a delicious pancake rap sausage honest thick.
From a marketing standpoint mission Tiger is roaring back, helping kids gain better access to youth sports. These are just a few examples of why we are so confident that we can sustain our snacks momentum recover cereal and reaccelerate frozen.
Now, let's discuss Europe shown on slide number 28, Europe had another outstanding quarter growing net sales, 8% and operating profit by 28% even as it lapped strong year ago growth for both metrics, while volume was down against the tough comparisons Europe's RG <unk> efforts continue to generate price mix.
Growth and productivity also help to cover costs, enabling increased A&P investment.
On slide number 29, you can see that we experienced organic net sales growth in both snacks and cereal in the first quarter. Despite what were very tough comparisons on a two year basis and snacks. The growth is underpinned by a fantastic momentum and consumption for pringles, which gained share in markets like Germany, Italy and Spain.
And lagged the category double digit growth in the U K only because of tougher comparisons. We should also point out that in portable wholesome snacks, where categories are rebounding on a return to consumer mobility, our efforts to revitalize brands like rice Krispies squares and pop tarts are starting to pay off with share gains in.
Markets like the UK and Italy.
And cereal consumption is moderating across the region as consumer mobility and price elasticity resumes, while we have gained share in the UK and Germany, we have ceded share in other markets in part because of lapping tougher comparisons. Nevertheless, some key supported brands continued to do well as shown on this slide.
A quick worried about the situation in Ukraine, Russia, and Ukraine represent less than one 5% of our total company net sales and less than 10% of our sales in Europe , we have suspended shipments and investments into Russia, which will have a direct impact on our sales and profit in Europe . This year. This is incorporated into.
Our updated guidance overall, though Kellogg Europe is off to a very good start to 2022, and we feel good about the business now.
Now, let's discuss our Latin America, turning to slide number 30, Latin America, too faced notably impressive comparisons, particularly on a two year CAGR basis, and especially on operating profit, but this business got off to a good start with year on year net sales growth driven by price mix growth and operating profit declined less than.
We had expected.
Slide number 31 shows that our Latin American net sales growth was led by snacks.
Here are two pringles is showing impressive momentum outpacing the category double digit growth in Mexico and Brazil.
In portable wholesome snacks, our consumption has rebounded faster than the category and our principal markets of Mexico, and Puerto Rico.
And cereal category consumption growth remains robust across the region and we outpaced the category in key markets, However, tough comparisons and regulatory hurdles in Mexico negatively impacted our cereal net sales in the quarter. Nonetheless, our Latin America business continues to perform well.
Let's finish our business review with EMEA on slide number 32.
Quarter, one featured another exceptional performance by our fastest growing region. Despite lapping a strong two year CAGR for volume EMEA continued to leverage our GM for exceptional price realization across the region, which helped offset the margin impact of high costs. The result was double digit growth in both net sales.
<unk> and operating profit versus the prior year.
Slide number 33 shows how EMEA net sales growth was generated across all three of our product category groups in the region noodles.
<unk> was once again, the largest contributor to the growth, reflecting exceptional growth by multi pro in West Africa, and a continued expansion of the Kellogg's noodles brand in markets like Egypt, and South Africa.
Our strong snacks growth was led by Pringles, which sustained goods consumption growth even as it entered the quarter with low inventories coming out of last year's Covid related production restrictions.
In portable wholesome snacks are double digit growth was strong enough to gain share in Australia and in the rest of the region.
In cereal the overall regions category has decelerated to modest growth, but we have gained share led by Australia Korea, and South Africa. So.
So to close out our prepared remarks, let.
Let me briefly summarize with slide number 35.
We're off to a very good start to the year, we remain right on strategy as ever focused on dependable balanced financial delivery, we are navigating well through unprecedented cost and supply challenges and through it all we have sustained top line momentum both in net sales and consumption growth. This reflects this.
Strength of our reshaped portfolio, particularly our international markets and our North America snacks and frozen businesses. It also reflects what we have done on revenue growth management in order to help cover rising costs put it all together and we come out of quarter. One ahead of plan, which is an important benefit as we look ahead to continued on.
Certain market conditions, we are affirming our guidance for the year and we are increasing the cash we returned to shareowners as always I can't thank enough the talented resourceful and persevering Kellogg employees, who have made this performance and our bright prospects possible and with that we'll open up the line.
Questions.
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Okay.
Our first question is from Chris Growe from Stifel.
Your line is open.
Hi, good morning.
Good morning, Chris I, just had a question hi, good morning, I had a question for you if I could.
Steve you had mentioned about being able to rebuild inventory a little faster than I guess I wanted to ask first of all that is that a U S comment I presume it is versus a global comment I think that's an area, where you've had a little more of a shortage and then just to get a sense of where you are in the recovery you showed a chart with the <unk> and kind of rebuilding distribution in cereal, but.
Is it Q2, when that kind of starts to make a further push up I just don't want to get a sense of where you are in that process.
Yes, Thanks, Chris It is a U S comment.
Inventories are down really across the globe generally speaking because of supply shortages bottlenecks and the like but the big issue for US is in the U S and predominantly in cereal because of the fire and strike and so we're ahead of where we planned debate. So thats, great I give a real tip of the cap to our for cereal plants that came back to where it came.
Back motivated and are building inventory ahead of plan and we appreciate that and those efforts and the leadership in the plants and the planned workers.
The second quarter, you'll see accelerated commercial activity and really in the back half of the year is when we plan to be.
Resuming full commercial activity against our cereal portfolio. So that's why we're encouraging looking at the sequential improvement. If you look at year over year performance in share in U S. Cereal, clearly still down, but thats based on low inventories and lack of commercial activity, but when you look at the sequential performance of the business our goal is.
Each and every week to continue to build our tdp's and each and every week to continue to accelerate our share momentum and get back to where we belong because the brands are still incredibly strong relationships with retailers continues to be very very strong and we're working together to get this business back to where it belongs.
Okay. Thank you and I had just a quick question for Amit.
Inflation.
Can you give the rate of inflation. If you did I missed it I'm sorry for the first quarter and then how that fares versus the remainder of the year and then to what degree you maybe hedge on those input costs.
Yes, so on inflation I think we talked in our last call as well that we entered the year with an outlook of double digit inflation I think in all through the quarter, we saw that inflation accelerating and I think when I look at the rest of the year, what's incorporated in our guidance is continued double digit.
Inflation, it's notched up by two to three points.
So thats kind of whats been incorporated in all.
And our guidance I think it will and hedge levels, we're almost at around 80% level of hedging.
So that's where we sit but it's important to note that this is just for traded commodities, which is about.
Quarter.
Of all our all our costs.
Okay. Thank.
Thank you so much.
I'm sorry.
Yes, the only thing that only other thing I'd add is that.
Our outlook now for inflation it goes into the second half and so it.
It is not moderating at the level that we thought it would.
Okay.
Okay. Thank you.
Our next question is from Jason English from Goldman Sachs.
Jason Your line is open.
Hey, folks thanks for slotting yet.
Yes.
Goodness early you've got lots of questions left.
So first.
Amit, Steve I forget who said it but I heard comments of price elasticity, returning submarkets can you elaborate which markets, where you've seen heightened or a return to more normalized type price sensitivity for consumers.
Yes, Jason So I'll start and Amit can add we're seeing.
Clearly elasticities still well below normal levels. So I think that's the important thing to note.
But we are seeing when you look at two year CAGR, we're starting to see the return of elasticities, which is not surprising giving the level of pricing that's in the market youre seeing it more in some of the at home meal occasions, So cereal and frozen we are seeing a little bit more snacking less so.
And we're incorporating that into our guidance. So we're planning on elasticities.
Growing as pricing continues to be very elevated but still below what you would normally see prior to.
All of these disruptions the only other thing I would add Jason is that the elasticity was better than what we had expected and that's kind of one of the factors that drove the outperformance versus our plan in quarter one.
So.
So far it's been better than what we had expected.
Okay got it seems pretty consistent what we are hearing industry wide.
One more slightly more nuanced question.
We've got these gross margin bridges, where we tried at higher gross margin every quarter and for a very long time.
Theres been leakage there.
Due to inefficiencies like your single serve pack initiative, it's due to mix like the African business, maybe outpacing everything else.
This is one of a few quarters where.
On our math.
Really is no leakage youre kind of back to whole I can plug in the math and the math work that you could take out another 100 200 basis points and I guess my question is are you aware of why like why make the flow through would be a little more cleaner and are we at a point, where we may not be facing the same degree of maybe mix or mix degradation or leakage going forward.
Yes, I think Jason if you look at our quarter right quarter, one our gross margins were down to 180 basis points I think the biggest driver of that was the impact was the wraparound impact of the fire and strike.
So that I would say would be almost half of the of the gross margin decline in the quarter.
We continue to see bottlenecks and shortages so that continues to impact the gross margin.
<unk> is that will continue through the first half.
Of this deal and then start moderating in the second half so.
I think it will.
Though.
The single biggest impact in the quarter from a mix standpoint again the mix, we did see a mix impact just given the level of growth in EMEA, which grew 17% in the quarter. So that mix shift I would say that mix shift will continue as EMEA continues to grow faster, but it was more pronounced.
Quarter, one and I think when you kind of look at the outlook for the year. What's in our guidance is an improving trend I would expect gross margins to continue to decline.
In the coming quarters before bouncing back in quarter, four when we lapped last year's fire and strike.
Definitely an improving trend because.
The impact of the fire and strike is now behind Us and I think when you kind of look at the outlook for gross margin for the full year.
I'd say sitting here today, we would probably say that it'll be down around 1%.
Really helpful. Thank you I'll pass it on.
The next call question is from Cody Ross from UBS.
Your line is open.
Hey, good morning folks. Thank you for taking that question in the press release, including higher price mix.
Sir.
This release, you noted higher prices in Mexico as a reason for the higher organic sales outlook for the year does that mean youre, taking another round of price.
Parts of your portfolio.
Magna.
Okay.
Yes, Cody and thanks for the question. So we don't comment on prospective pricing, but I think when you look at what we've done it's a good indication of what will.
<unk> planned for in the future. So we have in terms of our revenue our net sales growth.
Actually all price mix right and Thats due to obviously the incredible input cost inflation that we're seeing and the fact that productivity just simply can't cover this type of inflationary environment, we see that continuing and so as we look forward, we're going to continue to look at productivity as a first line of defense, but we're going to be in a situation, where it's not going to be in.
And we will look at our whole revenue growth management toolkit in order to protect and preserve our margins going forward.
Excuse me that's around the world. So that's not just the United States phenomenon.
Got it and then you noted you were able to start replenishing retailer inventory levels in the U S. Cereal earlier than expected. However, your volume came in worse than we anticipated.
In line with your expectations and how much do you think your inventory replenishment.
North America.
Okay.
I wouldn't say it benefited North America I mean, the entire decline was in our tech only.
And like we said in the prepared remarks, if you were to remove U S. Cereal in the U S business was or the North American business was actually up 3% to 4% and so it was slightly better than we anticipated, but we anticipated it being significantly down but we're pleased that the inventory levels are starting to replenish and we look at the back half of the year is really being when the art Tech business starts to get.
Back on track, but if you look at the snacks business for example shipments actually lag consumption in that category.
Yeah.
Great.
Yes.
Our next question is from Robert Moskow from Credit Suisse.
Robert Your line is open.
Alright, thank you.
I ask you to drill down a little bit more into Europe with profits up I think it was 28%.
It seems a little inconsistent with.
Mr commentary about Russia, and Ukraine being a headwind.
And volumes being down so so why was it so good and it is possible that the lower spending in Russia is actually helping more than hurting.
No Rob I'd say, a couple of things first the Russia, Ukraine impact will be a second half impact right. So we didn't we didn't feel that effect in the first quarter, but we will feel that going forward and thats why we incorporated that into our outlook and the real story to be honest with you in.
In the European businesses. This is four years on the trot that this business has been performing very very well it was a bit of an outsized performance, but they grew in snacks. They stabilized cereal. They grew in wholesome snacks and when I say they grew in snacks I mean pringles.
<unk> growth has been exceptional behind gaming messaging soccer events incremental innovations like rice fusion and Sizzlin.
And the team performed extremely well when it comes to revenue growth management as well and spending was in line with what we anticipated. So it was just an excellent quarter driven by very very good top line performance that flowed through to the bottom line and like I said. This is four years now where our European business has been performing well and I tell the team.
When I visit there that there's not too many businesses like ours to talk about Europe as a growth driver to their company, but it is for us and we're very proud of the team's performance there.
Maybe I can have a follow up for Amit.
SG&A from a corporate standpoint was down $50 million year over year in the quarter. How do you think it's going to kind of lay out for the rest of the year is it still down in <unk> and then ramp up in the back half when U S. Cereal spending goes higher and then also I think you gave.
Guidance for 2% to 3% FX headwind for the year last quarter what is it now.
Alright does start with SG&A I think in autos plan quarter. One was planned we knew that we were low on inventory in U S cereal and so I think we're there.
Adjusted our spending appropriately.
So thats kind of whats played through I think as I mentioned.
As the yogurt through we will restore.
Our our levels of advertising and commercial activity once supply picks up so that's very much.
Plan and I think from a full year standpoint, I'd say flattish SG&A.
<unk>.
Is kind of our outlook excluding currency so that's.
The SG&A.
Our plan for the year.
I think on in terms of currency based on where currencies are today, we'd probably be in that same 2% to 3% range I think we saw about a 2% impact in quarter one.
2% to 3% is kind of the outlook.
Got it thank you.
Our next question is from Michael Lavery from Piper Sandler.
Michael Your line is open.
Good morning, Thank you.
Good morning.
I just wanted to come back to Europe , following up a little bit on Rob's question.
Anybody who just was on the haynesville might be panicking over the European consumer.
And that was a little bit more focused on the UK business I think maybe spread out a little bit more but you touched on how well it's doing there we clearly see that in the numbers can you just maybe give us a sense.
Of how much that's.
Our category difference, you're gaining some share so clearly it's a brand difference.
But maybe also just is there a watch out that it might be slowing down just broadly.
They've been talking about the.
Total grocery store sales being down mid to high single digit percent in the UK.
Europe , 12% there.
How do we think about what the head can you keep this going or is there. Some some slow down we should be expecting how do you think about the rest of the year.
Well the biggest impact to the rest of the year is as we said the Russia, Ukraine situation and the fact that we're not shipping into Russia, we have our pringles business there that we discontinued.
Not shipping anything into Russia, but in terms of the consumer and the outlook. What I would tell you is the Artek category, we have seen is decelerating, but the salt.
It remains extremely strong our portable wholesome snacks business is really coming back as the consumers coming back. So when we look at our categories. It's what you saw in the first quarter was exactly that the artek slowing down kind of flattish and solve the being very strong in wholesome snacks being very strong and inside those categories.
<unk> with our brands performing very well highly differentiated great innovations coming to market, we anticipate that continuing and as I said to Rob.
For years now that this business has reliably delivered on the top line and the bottom line.
Clearly, it's a more challenging environment now we're seeing inflation in continental Europe .
Seen that in a long time.
What was typically a deflationary environment has shifted so clearly that will have pressure on the consumer but we're seeing right. Now is obviously that is pervasive everywhere and so it's not just at the grocery store just like in all parts of the country is wide ranging and the fact that we are in the types of business that we're in.
<unk> is a good place to be in an environment like this and when you have strong brands inside of that it's an even better place to be so we're very confident in the European performance continuing to be strong.
Okay. That's helpful.
Follow up on Morningstar.
You gave you touched on a little bit there with some pausing household penetration and distribution gains and some price competition, but.
How much is that decline would you say more driven by that.
Consumer versus competition.
Sure.
Sort of a plateau in consumer interest is it really just more from a competitive intensity.
And maybe one clarification too.
With that Morningstar Bar chart.
It's under it's under North America frozen is it just the simplicity of language where that also includes the refrigerated incognito or does that strictly speaking just the frozen piece of that brand.
No.
I'll start there that includes the incognito, which is a small portion of the total Morningstar farms in the broader question around what's happening in the category and I would say in effect you can think about the pandemic, having pulled forward trial penetration and buy rates and you saw that in the first year because there was so much at home consumption across the grocery store.
And this was a new hot category I think it jumped forward. Two years you also saw irrational exuberance in the category and the entrant of many many new players, which took a lot of shelf space took a lot of trial not always the highest quality offerings to be honest with you and we've seen this in many categories in the past that.
Take off they have a shakeout period, and I think what youre seeing now is a bit of that hangover from the pull forward of all of those various components Morningstar farms. That's why we're looking at the two year CAGR. It's still the original since 1975 very very strong consumer base. When we look at our brand equity scores.
We know that it's.
Still performing very very well and so we're bullish on the category and the brand, but I think what we're seeing is again just the pull forward from the pandemic and having to lap that.
Rather exceptional year.
Okay, great. Thanks, so much.
The next question is from Pamela Kaufman of Morgan Stanley .
Pamela Your line is open.
Thanks, Good morning.
I have a follow up question to Rob's question on SG&A I would guess.
Wanted to see if you could give details on how much brand building was down in Q1 and was this just in this area or other aspects of the portfolio and then how should we think about your brand building investments increasing in the second half as serial comes back.
Okay, and then alright.
Yes, I think it was predominantly North America cereal.
It was planned and I think we knew that going into the year, we knew that going into the quarter and I think the good news is though.
Production is ahead of plan.
We're ramping up inventory and so.
We will be restored and commercial activity.
Other than planned and and I think the spending will will follow that.
And I think as I've mentioned earlier from a full year standpoint.
Our outlook is.
Call it flattish.
Without currency on a currency neutral basis, so thats so on SG&A, So that's kind of.
The shape of how the <unk>.
<unk> will be through the course of the year.
Great.
It seems like you are making good progress on rebuilding cereal inventory and its coming in ahead of plan. When do you expect to see a recovery in North America cereal market share.
How do you think about balancing pricing growth on CRE.
Restoring market share and regaining TEP.
Yes, apparently what I'd say is as I said in the prepared remarks, we're looking at sequential recovery right and we're not going to forecast market share, where we are when we're going to be at a certain point, but we're we're bound and determined to continue week after week.
Month after month to continue to build our tdp's build our shelf presence and build our commercial activity, which includes displays and merchandising so that we exit the year with great momentum.
Close to where perhaps we were before all this occurred.
And so that's essentially the way we're thinking about it the second half has the return to the commercial activity that looks.
Much more similar to pre strike and so that's how we're thinking about it we're pleased about the progress to date, but we remain very.
Very aggressive in terms of making sure that we continue the progress that we've seen so far.
Thank you.
Okay.
Our next question is from Ken Goldman of Jpmorgan.
Ken Your line is open.
Hey, thanks.
Yes, I think there was some concern among investors I guess, including many of the Africa business might have trouble later this year, maybe procuring all the needs just given that.
Africa in general Basel lot from Eastern Europe . So.
I think you laid a lot of those concerns today, which is great to hear but.
I think there's still a desire to hear maybe a bit more about where your business in Africa, you noodle business in particular like procures most of its week how locked in are those and if there is any risk you see are just not being able to get product.
Beyond just the inflationary factor.
Yes, Ken So obviously, we're very pleased with the African performance in general multi pro in particular, youre seeing their ability to take price.
As exceptional to cover rising input costs currency and so forth.
And we've mentioned many times you know they've got they've got four.
Our decades of experience on the African continent, and their agility and ability to overcome obstacles continues to be very very impressive and the moat that we built around that country in terms of our route to market with multi pro continues to be impressive they are adding suppliers. They are at.
Adding our points of distribution on on a regular basis to continue to build that business now on the procurement front theres clearly.
Lot of wheat that comes from Russia, and Ukraine, and they pivoted to all around the world to get.
Supplies.
To replace that and they've done that very effectively and thats really really across the world and so they've got line of sight to good product production they've got line of sight to meet our noodles forecast for the remainder of the year and even into next year and so I think it's down to execution, it's down to planning and it's down to just the experience.
They bring to bear and virtually everything that they do and I don't know you want to add anything.
That's helpful. Steve Thank you.
Okay.
Yeah.
Our next question is from David Palmer of Evercore.
David Your line is open.
Okay. Just one more follow up question on the amazing quarter, you guys are having in Europe .
<unk> just judging from one of your slides it looks like you had mid teens organic growth, there, which is very impressive yet.
It was 10 points of price there, which is also impressive it's typically a market where it takes a while to get pricing in place. So.
There are some things that are just impressive versus the peers out there, but I'm wondering if there's other insights.
About maybe this being more of a mobility play on your snacks business there than what we would typically see from your snacks business here in the U S.
A lot of snacks were had more at home or at least from the marketing was more around mobility.
And why that should be sustaining from here.
And any sort of like timing benefits that might have happened for the first quarter.
Yes, David So there's really no timing benefits in the first quarter as I said, it's just a very very good quarter that Europe delivered part of the mobility returned to mobility definitely benefits our portable wholesome snacks. So thats kind of a new third leg that is performing now very well.
Pringles.
One of the Magic of Pringles is it's a very differentiated brand. Its innovation performance in Europe has been very strong and its brand messaging and communication has been very strong and that's allowed us to do a couple of things over the course of the last call. It 18 to 24 months and Thats break some magic price points that are <unk>.
<unk> in the marketplace for some time and so there is no ceiling on theres no artificial ceiling on pringles in terms of call. It.
<unk> 99 in Europe , it's burst through that and once you do that improve too.
Our retailers and consumers that the brand is worth that youll start to see some some continuing benefits and so I'd say breaking magic price points because of the investments in innovation and brand marketing the return of wholesome snacks. The stabilization of cereal. It's just it's been a solidly delivered planned by Europe and Thats why we.
Have confidence ex the Ukraine.
Russia terrible situation that the underlying momentum continues.
Yeah.
Outstanding and I guess, one follow up to I think it was Pamela <unk> question about the rebuilding of market share in points of distribution for cereal I mean do you see.
Any.
Barriers or maybe theres, a friction point or two you'd call out that would that you have to address in getting back to those pre.
Strike pre fire levels.
Levels.
<unk> thousand 829% market share for example, what would you call out there that youre trying to.
<unk> overcome as youre getting back to those levels.
Yes, so first I'd start with saying we are not at all complacent about this and we're not at all underestimating the challenge of rebuilding our business, but we do know a couple of things. The brands are very very strong. So if you look at the brands that have return too.
I wouldn't even say yet adequate levels of inventory, but better levels of inventory like froot loops, and frosted flakes, performing well getting their shares back.
And then brands like some other brands Rice Krispies is one where obviously was very impacted by the fire not yet there because the inventories arent close to where we need them to be and so we do know that the brands are remain very strong. These are iconic brands that consumers love. They are important to our retail partners and again, we do.
Take that for granted but as we rebuild inventory and we put commercial activity behind these beloved brands and we get our Tdp's back then we're very confident that we will continue to improve the business and get get it back to where it belongs but again, we don't take that for granted we've got work to do but we know what that work is we.
Know how to do it and we're doing it.
Thank you.
Operator, I think we have time for one more.
Okay. Our final question is from Alexia Howard from Bernstein.
Your line is open.
Thank you very much for the question and good morning, everyone.
Could I just thought about the.
Input cost inflation, you said double digit for the year.
And that it increased to 3% since last quarter are we talking about.
Hi.
It was low double digits.
Give us some idea of where you sit.
Such as everybody else.
Given the length of the hedges I know you can't give an exact number but would it would we be.
Be directionally correct in thinking that the step up in grain and oil inflation that happened as a result of Russia, and Ukraine is really not likely.
Until very late 2022, and looking out into 2023, Thank you and I have a follow up.
Alexia I think if you were to kind of look at specifics. It will is in the teens. When we started it was probably in the mid teens, it's moved up.
Two or three points from there so that's kind of the level of inflation that we're looking at.
And I think in terms of the hedges again, it obviously covers a lot of commodities and like I said at an overall level of at around 80%.
Rolling program.
So I think.
We keep adding on a rolling basis so.
So.
Has some of the Russia, Ukraine is it already and some of it there then.
But you'll continue to bleed through right as we continue to add hedges through the program.
We have visibility into what our 'twenty three.
Our outlook is and so I think that's all going in.
The planning as we look at.
Our revenue growth management plans.
All ahead of us.
Great. Thank you and just as a follow up.
I'm curious about the UK as a follow up Michael Lavery question, how big is the U K to you guys at this point and should we be worried about the change in regulations about labeling product positioning restore products that contain a fair amount of sugar.
Okay.
Legal action with the UK government going on at the moment I'm just curious about how you see that impacting your business.
Later in the year.
I'll pass it on.
Yes, Alexia so it's about 5% of our business and the <unk> FSS high fat sodium sugar content.
Is.
What you're referring to and we have we are building plans to overcome.
Merchandising restrictions and so forth for all of them all of the brands that are affected. So we're very confident we'll be able to do that we don't see any impact for the remainder of this year and we remain constructively engaged despite.
Despite the legal activity, we remain constructively engaged and hopeful that we'll be able to work something out with the UK government, but it's all incorporated in the guidance.
Great. Thank you very much.
Okay. Operator, we are at 10 30.
Thank you everybody for your interest and if you do have follow up calls please do not hesitate to call us.
Yes.
<unk>.
That concludes our conference call. Thank you for your participation you may now disconnect your line.
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