Q3 2022 Kellogg Co Earnings Call
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All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session with publishing analysts at this time I will turn the call over to John Renwick, Vice President of Investor Relations and corporate planning for Kellogg Company.
Thank you operator, good morning, and thank you for joining us today for a review of our third quarter results and an update regarding our outlook for 2022 I'm joined this morning by Steve <unk>, Our chairman and CEO and Amit <unk>, 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 of this presentation as well as to our public SEC filings.
This is of particular note amidst the current operating environment, which includes unusually high input cost inflation global supply disruptions and uncertain global macroeconomic conditions, all of who is direction length and severity are so difficult to predict.
A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of 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'll turn it over to Steve.
Thanks, John and good morning, everyone. We are delighted to be able to report yet another quarter of momentum progress better than expected results and an improved full year outlook. Our organization once again exhibited grit and creativity in navigating and executing through a global operating environment that showed little to no signs of.
Easing.
We continue to improve our service levels in spite of persistent bottlenecks and shortages of everything from materials and equipment.
And containers. We also continued to mitigate the profit impact of exceptionally high cost inflation with good execution of productivity initiatives and revenue growth management actions and even in this unusual operating environment. We again saw the strength of our portfolio play out we sustained our strong growth momentum in snacks.
The world and our emerging markets saw strong growth in all key category groups and in our North America cereal business, we continued to recover inventory and share more quickly than expected from enormous disruptions late last year.
At the same time work continues on the planned separation, which we announced in June a recent milestone was the announcement of our North America Cereal company leadership team and we continue to work on organizational design and carve out financials.
And through all of this we delivered a financial performance for quarter, three that exceeded our expectations and enables us to raise our guidance for the full year and.
In short another good quarter, adding to a track record of dependable delivery and with plenty of reasons to be confident that this kind of delivery can continue.
You can tell our deploy for growth strategy is working from the quality of our results.
Number six shows one key metric our net sales growth as you know our momentum is not new our third quarter showed acceleration of a trend that has been running above our long term target for the past few years.
And while this third quarter acceleration was led by price realization necessary to keep up with soaring costs. The elasticity impact on volume has been less than expected and our world class brands continued to perform well in modern market.
We are seeing this momentum across markets and category groups. We grew net sales organically in all four regions and in all four category groups within those regions from snacks to cereal to frozen foods to noodles and other so.
This momentum is broad based and long running and another reason to believe in our strategy portfolio and people.
A key element of our deploy for growth strategy. Our ESG strategy is also working.
<unk> highlights from quarter three are shown on slide number seven.
Let me now turn it over to Amit, who will explain our financial results and outlook in more detail.
Steve and good morning, everyone.
I'd number nine provides a summary of our third quarter and year to date financial results.
Net sales in quarter, three grew more than 13% year on year on an organic basis.
Coming in higher than expected and bringing year to date organic growth to 10%.
Adjusted basis operating profit grew 4% on a currency neutral basis in quarter, three overcoming the impact of high cost bottleneck and shortages and increased investment.
This too was better than expected and it puts our year to date growth at a similar 4%.
Adjusted basis earnings per share declined 3% on a currency neutral basis in quarter three due to the anticipated reduction in pension income related to re measuring the pension assets and interest rates.
Nevertheless through the end of the third quarter, our EPS was up 3% on this currency neutral adjusted basis.
Cash flows for the first three quarters remained well ahead of last year.
Excluded from our currency neutral results of course, as foreign currency translation, which reduced our net sales operating profit and earnings per share by four to five percentage points each as the dollar strengthened meaningfully further during the quarter.
Now, let's look at each metric and a little more detail.
Slide number 10 lays out the components of our strong net sales growth this year.
Despite supply challenges and a suspension of bring goods shipments to Russia volume only declined relatively modestly suggesting that price elasticity has not moved up as much power as soon as we had expected.
Price mix accelerated again in quarter, three and it accelerated in all four regions as they continue to utilize revenue growth management to help offset higher input costs.
All four regions delivered double digit increases in price mix and quarter three.
Both of these components volume and price mix were relatively consistent with a year to date trends.
Turning now to gross profit slide number 11 illustrates how each region is facing enormously high cost pressure.
Year to date.
<unk> per kilo inflation has run in the high teens in each region, driven by both input cost inflation and costs and inefficiencies arising from global bottlenecks and shortages not to mention Edwards transactional foreign exchange.
And keep in mind that this is net of the good work we're doing on productivity.
Our net sales per kilo, which is how we measure price mix is up in the mid teens covering a sizable portion of our input cost inflation. However, it is not able to cover the unpredictable impacts of supply disruptions in the first quarter impacts related to last year's second half.
Aaron strike.
Our net sales per kilo accelerated sequentially in quarter three in part reflecting revenue growth management actions taken during the quarter. However.
However, our Cogs per kilo accelerated to indicating that these pressures are not behind us.
Slide number 12 shows that our gross profit dollars increased year on year, both in quarter, three and on a year to date basis.
During quarter three our margin decline narrowed as we had indicated it would and our net sales grew enough that gross profit dollars increased at a mid single digit rate year on year.
So even though our margins have been pressured by the current environment.
Profit dollars remain on an upward trajectory.
As we look to quarter four we expect both margins and dollars to increase year on year as we lapped last year's Byron strike impact.
However, based on the current economic conditions, we no longer anticipate bottlenecks and shortages to diminish in quarter four.
As a result, while we still expect gross profit margin to increase year on year in the quarter it won't be as much as previously projected.
And this will mean, finishing the full year with a gross margin that is down a bit more than 100 basis points previously mentioned, but still growing and moving.
Moving down the income statement on slide number 13, we see.
Our SG&A accelerated its year on year increase just as we said it would.
As expected advertising and promotion investment increased year on year as our U S cereal business resumes commercial activity now that it has caught up on inventory.
And overhead increase year on year, reflecting higher incentive compensation and a resumption of travel and meetings.
As we enter quarter four we expect to see an even larger year on year increase in SG&A as North America cereal restores more of its commercial activity.
Slide number 14 shows that in spite of these extreme operating conditions not to mention this yields meaningfully adverse currency translation.
We remain on an upward trajectory on operating profit.
Operating profit in the third quarter was up 4% year on year on a currency neutral basis.
And flat after the adverse currency translation.
Year to date, it was up both on currency neutral basis, and after adverse foreign exchange we.
We expect to see that continue in quarter four.
Slide number 15 shows our below the line items, which will again collectively negative to EPS growth in the quarter.
Interest expense was up modestly year on year and quarter three as lower debt balances were offset by our interest rates.
As we mentioned last quarter rising interest rates will affect the roughly 20% of our debt is floating and this will become much more acute in quarter four.
As expected other income decreased significantly year on year due to the midyear remeasurement of two of our U S pension plans, which adjust for currently lower asset values and higher interest rates.
This was similarly affect other income in quarter four.
And as mentioned previously depending on our financial markets finished the sale. This will be an even more significant headwind in 2023, as we will have a full year impact across all of our post retirement plans of course. This is a noncash nonoperating item.
Our effective tax rate in quarter, three was relatively flat year on year after benefiting from country mix and discrete benefits we.
Now look for a full year effective tax rate to be somewhere above 21, 5%.
Our JV earnings and minority interests were collectively down against an unusually high year earlier period, following our <unk> 'twenty, one consolidation of Africa joint ventures.
<unk> remained fairly consistent with more recent quarters.
And average shares outstanding were relatively flat year on year as the impact of our share buybacks early in the year was offset by increased option exercises by employees. As a result, we now tank average shares outstanding will be flattish portfolio.
Our cash flow and balance sheet also remained in very good shape as shown on slide number 16, our absolute cash flow has remained on an upward trajectory right through quarter three and this cash flow has enabled us to reduce our net debt over the past few years, leading to lower leverage ratios. This.
<unk> given us enhanced financial flexibility, even as we have continued to increase our cash returned to shareowners in the form of an increased dividend and buybacks this year.
Let's now turn to slide number 17, and discuss why we think we will finish the year.
As Steve mentioned, we are raising our guidance today based on a strong quarter three delivery and good top line momentum going into quarter four.
We are raising our full year outlook for organic net sales growth to approximately 10% a sizable increase from our previous guidance of 7% to 8%.
This reflects our better than expected performance in quarter, three and it implies continued double digit growth in the fourth quarter led by price mix and sustained momentum in our business, partially offset by rising price elasticity and Russia impact.
This improved sales outlook is prompting us to raise our full year outlook for adjusted basis currency neutral operating profit growth to approximately 6% up from our previous guidance of 4% to 5%.
This is despite sustained high teens cost inflation.
<unk> assumption around bottlenecks and shortages, which we now expect to persist through the fourth quarter.
We are also raising our full year outlook for adjusted basis earnings per share growth to approximately 3% growth on a currency neutral basis up from our previous guidance of 2%.
This reflects the higher operating profit outlook, partially offset by a worsened outlook for below the line items.
This includes a re measured pension income and higher interest expense due to the horizon rates only partially offset by an effective tax rate that comes down slightly because of Q3's favorability.
We deliberately stick to currency neutral guidance because of the difficulty in predicting foreign exchange rates.
But because of the dollar's meaningful strengthening lately and a number of investor questions. We received regarding its impact I will mention that if today's exchange rates were to hold we were.
Absorb a negative impact of 3% to 4% on a full year net sales operating profit and EPS growth and a higher negative impact in quarter four.
Our full year outlook for cash flow remains approximately $1 2 billion.
Remember that this guidance incorporates incremental upfront cash outlays in 2022 related to the previously announced separation transactions.
So to summarize our financial position on slide number 18, we feel very good about how we are performing and our financial condition.
Our business is showing strong underlying momentum.
Our efforts around productivity and revenue growth management are helping to mitigate unusually high cost pressures.
We are raising our outlook for the Palio largely on the strength on what we've already delivered.
And our cash flow and balance sheet are giving us good financial flexibility and with that I'll turn it back to Steve to discuss our individual businesses.
Thanks, Amit I'll start with a review of each of our regions beginning with Kellogg North America on Slide number 20. This region had another good quarter, delivering notably strong net sales growth with organic growth in both volume and price mix. Our sales growth was led by what is by far our largest business in North America in that snacks. This business.
Had another quarter of strong organic volume growth and price realization and its net sales growth acceleration was accompanied by a similar acceleration in consumption. We will talk more about these brands in a moment cereal in North America also recorded another quarter of accelerated net sales growth, reaching double digits year on year roughly in line with its consumption growth.
We will talk more about this business as rapid a recovery also in a minute.
And our frozen businesses, where we've experienced pronounced supply constraints. This year, we returned to organic net sales growth in the quarter. This was aided by newly installed waffle capacity.
Kellogg North America in the third quarter delivered sequentially better operating profit growth as well despite no letup in input cost inflation or bottlenecks and shortages and despite increased reinvestment. So overall North America continues to perform well and is poised for a strong finish to a strong year.
Kellogg Europe's results are shown on slide number 21.
Ever since the war broke out in Ukraine, we've known that Kellogg Europe would have two very different halves of the year.
<unk> as we suspended pringles shipments into Russia right away during the first quarter. It took some time to work through inventories now in the second half we feel the brunt of this lost revenue and profit mean.
Meanwhile, The war in Ukraine has contributed to a surge in energy costs, and bottlenecks and shortages as well as devaluations in currencies against the U S dollar and a pinched consumer it is contributing to increasing elasticities at least on cereal.
And yet Kellogg Europe in the third quarter is still manage to sustain top line growth and mitigate the profit pressure, even as it lapped the year earlier quarters enormous sales and profit growth.
In snacks, which represent almost half of Kellogg Europe sales the lost sales in Russia were more than offset by double digit organic growth elsewhere.
Pringles maintained its double digit consumption growth momentum and portable wholesome snacks are generating strong consumption growth on the strength of pop tarts, rice, krispies squares and Beretta nut bars.
Cereal net sales also grew organically, reflecting revenue growth management and broad based consumption growth, even as price elasticity continued to move toward historical levels.
The fourth quarter faces, similar Russia, and cost headwind as quarter, three as well as increased reinvestment, but the underlying momentum in the business will be sustained.
Let's turn to Kellogg Latin America as shown on slide number 22.
Strong organic net sales growth was broad based across the region with double digit growth in both snacks and cereal and driven by revenue growth management actions and.
In snacks, which represent more than a third of our annual net sales in Latin America. We continued to drive very strong consumption growth in key markets, including double digit growth and share gains for pringles in the key markets of Mexico and Brazil.
And cereal net sales and consumption growth was led by Brazil, Colombia and Mexico.
Productivity and revenue growth management actions helped to mitigate the impact of high cost inflation and adverse transactional foreign exchange and supply disruptions, leading to solid growth in Latin America's operating profit.
In the remaining quarters. This year Latin America showed sustained sales and profit growth, even as we expect price elasticity to rise gradually and as we work to offset continued cost inflation and supply challenges.
Finish our regional review with Kellogg EMEA and slide number 23.
In the third quarter, our EMEA region sustained its exceptional momentum accelerating into organic net sales growth for a third consecutive quarter.
From a category perspective noodles and other is our biggest segment in EMEA, representing almost half of the region sales and led by our West African distributor business multi pro.
In the third quarter it sustained organic net sales growth of more than 20% just as it has all year.
Snacks accelerated its organic net sales growth in the quarter led by Pringles, which sustained its broad based momentum and consumption growth with notable outperformance in emerging markets series.
Cereal also sustained good broad based net sales growth with particular strength in the middle East and India disc.
Despite facing the high cost pressures in the region a function of input costs ocean freight costs and adverse transactional foreign exchange EMEA still managed to grow its currency neutral adjusted basis operating profit in the double digits in the third quarter, we expect similar dynamics and momentum to play out in the fourth quarter.
Making this a very strong year for EMEA region.
Now, let's dig into each of our category groups and brands and a little more detail shaping our discussion in terms of the businesses that comprise the planned post separation companies.
Breakout of these businesses as shown on slide number 24, as you can see the businesses that represent 80% of our portfolio's net sales today and they will comprise global Snacking company. After the separations have continued to show outstanding growth. This year. In fact, this portfolio's net sales have grown organically at a double.
Digit rates so far this year.
For North America Cereal company, you can see that our net sales are up organically in the low single digits. This year.
The only business, where there has been softness as planned company, which has continued to experience supply disruption as we'll discuss in a moment.
Let's look at each of these businesses and their key brands.
Slide number 25 shows how our world class snacks brands sustained their end market momentum in the third quarter around the world.
Pringles with $2 5 billion in annual net sales globally. Once again generated double digit consumption growth in virtually every one of our major markets around the world Cheez It with over $1 billion of annual net sales sustained its double digit growth in quarter three both in Canada and the U S. We're in.
New pump platform has been incremental to the franchise.
<unk> closing in on $1 billion of annual net sales continued to post good growth in the third quarter in its primary market. The U S. While continuing to show why we believe it is so much promise internationally.
<unk> krispies treats with half a $1 billion of annual net sales were supply constrained in the U S. During the third quarter and still grew consumption in the mid single digits with its new homestyle sub line proving to be incremental to the franchise and the brand is showing good growth in international markets as well.
These are important brands the four brands collectively represent more than 40% of the total net sales of what will be global Snacking company.
Slide number 26 provides a glimpse of our international cereal businesses as you can see good consumption growth continued in the third quarter with growth led by World class brands and by emerging markets.
In more developed cereal markets like those in Europe , Australia, Japan, and Korea, we are starting to see price elasticity move higher. Nevertheless, we grew consumption across key European markets in the third quarter with special K back to growth aided by a new campaign and the launch of special K Granola with 30%.
Rent less sugar.
We also grew consumption in Australia, and our consumption is beginning to improve in Japan, and Korea on the relaunch and expansion of granola offerings and.
In emerging markets, which represent about half of our international cereal sales annually consumption growth remains robust both for us and the category on the slide note the solid consumption growth rates in key Latin American markets and in India.
Slide number 27 shows the sustained double digit organic net sales growth of our noodles and other category group.
This is a $1 billion plus business annually comprised of our distributor business in West Africa, and our Kellogg's branded noodles business elsewhere in Africa, and the Middle East and.
And as we've already discussed this business again sustain exceptional growth in the third quarter, adding to a track record of consistent double digit or high single digit growth as we've said before this reflects the competitive advantage multi pro offers as well as the value of offering a kellogg's product line.
The lower end of the price pyramid.
Now, let's look at frozen breakfast in slide number 28.
<unk> is another world class brand in our portfolio with about $750 million in annual net sales globally.
In the U S. The brand has sustained steady consumption growth this year, despite being very constrained on capacity for both waffles and pancakes, but while we remained constrained on pancakes, we did add internal waffle capacity during the second quarter.
This enabled our waffles to accelerate consumption gradually during the third quarter, even returning to volume growth and this has lifted the brand's overall consumption growth sequentially as shown on this slide.
And another driver of this growth has been the launch of Liege style waffles and on the go offering that is proving to be incremental to the franchise now let's look at North America serial <unk>.
Slide number 29 shows how our consumption and share a recovering in the U S. Following our unfortunate fire and labor strike in late 2021.
Recall that we rebuilt inventory, both our own and that of our retailers' faster than anticipated during the first half.
In quarter, three we have seen our share continue to recover across key brands and this has continued into October . This reflects not only increased on shelf availability, but also our gradual resumption of commercial activity behind these brands.
The good news is that the category has shown robust growth right now accelerating to the double digits in quarter three on the strength of increased prices and below average elasticity. The even better news is that our consumption growth has accelerated even faster than the category as you can see in the chart on the left.
Our share is already back to its pre strike level as you can see on the chart on the right. Clearly we are building momentum as we returned to commercial activity and while this chart focuses on our recovery in the U S. It has been just as impressive in Canada, where we returned to share gains in the third quarter.
And in both markets, we have a strong lineup of commercial activity continuing in the fourth quarter. Just a few of these are shown on slide number 30, ranging from innovation like Strawberry frosted flakes, the seasonal offerings like Halloween Rice, krispies, and the perennial favorite El fund a shelf to bringing back indulgent license foods like Cinnabon and little.
Debbie.
We have our mission Tiger program back in full swing and we're experimenting with an innovative just add water product called instant bowls and short we feel good about where we are in this business. We've restored inventory levels were back on shelf and we are rapidly recovering share. In addition, we've turned back on our commercial programs.
And equally importantly, we are making good early progress toward restoring profit margins in this business I will now turn to plant based foods and slide number 31.
For context. This business represents only about 2% of our total net sales, but it gets a lot of attention because of its promising long term prospects and because of the recent slowdown of its category.
This is a category that experienced the equivalent of a few years' worth of acceleration in a single year 2020.
It had already been an elevated growth with new entrants new technologies and new space in stores, then COVID-19 hit and product proliferation was soaked up by the surge in at home demand, bringing penetration by rates up with it.
The category lapped that surge in 2021 and in 2022. It has experienced a pause in growth and points of distribution have decreased in stores as many retailers consolidated into the frozen aisle, but household penetration remains above pre COVID-19 levels with ample opportunities to return to consistent growth behind.
Underlying consumer focus on health and environmental concerns. These are demand fundamentals they remain firmly in place for a long runway of growth as.
As you know our Morningstar farms brand has been severely impacted by supply disruptions at a key co manufacturer. This year and this disruption has not yet been fully resolved in quarter three and has also forced us to prioritize skus.
While we have not yet been able to fully resumed commercial activity, we have been able to support products that are not capacity constrained.
Good example is sausage and links and we are generating double digit consumption and good share growth in that segment. This supply disruption as a temporary issue and we continue to work through it the brand remains a leader in plant based foods with strong plans and a new media campaign once it restores full supply so.
Despite near term disruptions. This is a business that remains in good condition with excellent prospects.
So with that allow me to briefly summarize with slide number 33.
I could not be prouder of our organization for how it has navigated through an incredibly volatile environment identifying issues resolving them and executing.
Our people and culture are truly are our competitive advantage for Kellogg.
Our strategy is working and our portfolio is showing its strength, we continued to deliver solid results and we are again raising our outlook.
Yet we are anything but complacent, we are working hard on a set of plans that will navigate through the current macro headwinds and enable us to drive balanced financial delivery again in 2023, and thereafter and with that we'll open up the line for questions.
Operator.
Operator.
We will now begin the question and answer session with <unk> Suisse.
Analysts may enter the queue by pressing the star key and the number one on your telephone keypad as a courtesy to your colleagues. Please limit yourself to one question.
Our first question comes from the line.
Cody Ross with UBS. Your line is now open.
Good morning, Thank you for taking my question.
Good morning, Tony.
Environment.
Hey, good morning, guys.
Nielsen consumption by roughly four points this quarter.
Of your 14% organic growth in North America was related to material inventory replenishment and do you expect to continue to ship above consumption moving forward.
Yes. Thanks for the question Cody Theres, not really any meaningful difference between shipments and consumption. It's moved around a lot obviously, because we had to rebuild inventory on cereal in quarter one quarter two.
But we're pretty much right in balance right now we may actually see some shipments come out in the fourth quarter.
Because we're kind of back to where we want to be but there is.
Not really a meaningful.
Thing to talk about when it comes to differences between shipments and consumption in North America or anywhere around the world for that matter.
Got you that's helpful. And then I just wanted to talk about the North American profit margin a little bit the.
The decline accelerated in the quarter, how does that compare to your expectations and what were the <unk>.
Key drivers in the quarter and should we look at the third quarter profit margin trough for North America. Thank you.
Yes, I'll start and I can turn it to Amit.
North America, if you look at the way they performed in the third quarter and year to date, it's pretty exceptional I didn't really think we'd be talking about 14% organic net sales growth in North America, which is which is really outstanding but inflation is running so very hot there.
Getting pricing to cover input costs I think is an exceptional achievement and then you've got the bottlenecks and shortages, which are very difficult to price, where obviously and to forecast and so whether or not it's a trough on bottlenecks and shortages remains to be seen it stopped getting worse, but theres not a means.
Full improvement in it but the price mix in North America was strong ability to cover costs was strong.
Underlying brand performance was exceptionally strong and so the outlook for North America is strong it's been a terrific year, Amit do you want to yes, just a couple of other things Cody. So one was we've seen input costs.
Rates for the quarter.
I think we had talked previously of sequential improvement we did see the sequential improvement in gross margins.
But it was not as much as we expected and really the primary driver for that was acceleration of input costs. So we saw that happen we've taken incremental action from our revenue growth management I think within the quarter that was probably a bit of a lag. So you are seeing the impact of that on margins I think as Steve mentioned bottlenecks and shortages persisted I think the.
Other factors as well as we resumed as we had said that SG&A would be backend weighted will be restored.
A&P behind cereal as we build back inventory, so you've seen that come through in the quarter as well.
We would expect that.
In quarter four as well so the SG&A has been kind of back weighted this year.
Thank you for the color I'll pass it on.
Thank you for your question.
The next question is from the line of David Palmer.
With Evercore ISI. Your line is now open.
Thanks, Good morning.
I know, there's always a lot of <unk>.
Controversy and talk about stranded costs in the separation if theres any sort of increased visibility on that love to hear that but also a question on Europe .
The sales trends are positive, but im wondering how youre seeing.
This elasticity there I see that volumes are down 8%, so any thoughts about.
Yeah.
Not just the price elasticity, but the ability to get through pricing going forward in Europe would be helpful. Thanks, So much.
Yes, David I'll start and <unk> can add.
Add any color starting with the stranded costs, we're not prepared to talk about that today, we will be as we get into next year, but we continue to make very solid progress I would remind you that we've got a lot of experience around this when we divested the.
Portions of the Keebler business, we were very successful in extracting stranded costs, we will have the opportunity to have TSA as well and the business is growing very very strongly so we and the plans are.
Moving forward very nicely so when we get to the point, where we can do that.
Of course provide that visibility in terms of Kellogg Europe . They continue to perform very very well. This quarter was a tale of what they were lapping last year. So if you look at the operating profit being down on a two year CAGR, it's actually up over 20% because of that lap you also have the most impact coming from.
The stoppage in Russia, obviously, what's happening there and so they're cycling that in terms of pricing. The team has been very very successful in executing revenue growth management and in the most difficult environment. The world they've done an exceptional job we've got.
David who runs the business, they're doing a terrific job Miranda Prince who runs continental Europe has done an exceptional job with our customers really putting together joint business plans with them.
Into next year that help us cover cover the high inflation that exists there. So lots of good work happening in Europe continued strong momentum despite exceptional headwinds in terms of elasticity to one area, where we're starting to see a little bit of returned to normal and elasticity would be in cereal.
In Europe in the U K actually it looks like it was starting in Continental Europe , because there is a lot of noise. So I wouldn't point to that as anything significant right. Now there is a lot of variables in it but it's the one area, where elasticity is probably emerging faster than anywhere else in the world.
Okay helpful. Thank you.
Thank you for your question.
The next question is from the line of Andrew Lazar with Barclays. Your line is now open.
Great. Thanks, so much.
Steven in North America, cereal, obviously, the fire and the strike, where we're certainly disruptive, but I guess I'm curious if there was an opportunity to make it.
Any structural changes to how you compete as you return product to the shelf like in other words was there an opportunity to come back with an even more optimized SKU assortment than before or as you return to commercial activity. What are you seeing in terms of rois on those activities again versus like before the strike or maybe there are other structural elements that youre working on there.
I may not be thinking oven, maybe I'm, making too much of this and the focus was simply I'm just getting product back on the shelves, but what I'm trying to do is think ahead of it from here about when this unit is ultimately on its own. Thanks, so much.
Yes, Thanks, Andrew I would say, we actually are emerging stronger from what was an incredibly trying time, obviously you have a major fire and then you have a strike that lasts a full quarter.
An exceptionally difficult environment, but we were confident that we can restore the business and we have been sequentially and now as we look forward, we're looking at even better year over year performance and that's coming from some of the things that you mentioned, we did prioritize skus, we cut out a number of tails, which allows us to consolidate some of our investments around our strong our strongest Brad.
And so some of the things I mentioned.
Tony the Tiger being back.
Lots of good promotional activity being back.
The Rois are are rising for us and you can see that in some of the shares of our leading brands the pricing we've been in the revenue growth management has been exceptional.
Behind those programs and those Rois, our shelf sets if you walk the stores look very very good.
Paired to where they look to <unk>.
Six months ago. So it is about prioritized skus prioritize brand investment getting the commercial activity back there are fourth quarter. We've got really good innovation coming through that's been well accepted so I would say the cereal business has emerged as a stronger business and Thats why you heard the optimism when we talk about the business going forward.
It's been it's been very strong in Canada, even stronger so terrific job by the team.
Got it alright, thanks, so much.
Thank you for your question.
Next question is from the line of Pamela Kaufman with Morgan Stanley . Your line is now open.
Hi, good morning.
Good morning.
You pointed to continued challenges on the supply chain and are seeing continued acceleration in place. So I'm just wondering what your updated inflation expectation is for next year and can you talk about what you're seeing in the supply chain and where you've seen slower improvement.
Relative.
Okay.
Yeah, I'll start on supply chain and turn it over to Amit on inflation in the first part of your question on supply chain as we mentioned in the prepared remarks. It is it has not gotten any worse right. So.
We're in a position where each each quarter continue to accelerate in terms of disruptions what we call.
Things that get to the the attention of our control tower and right now that stopped getting worse I would say there is not.
As we look out on the horizon and Theres not a lot of signals that it's going to get better anytime soon or significantly better. So we're operating in an environment that continues to be somewhat tumultuous, but the execution that we're able to bring forward has gotten better and better as we continue to get used to an environment with so many disruptions.
And how many you weren't talking about I think from an inflation standpoint, we did see meaningful acceleration during the quarter.
So we saw input cost inflation.
Around the <unk> into the Twenty's.
And so I think from a full year standpoint, and we expect similar levels of inflation.
Quarter, four as well and I think given the acceleration we've seen in quarter three into quarter four.
I think our full year inflation from the high teens is now kind of pushing close to the 20% level from.
From an inflation standpoint.
Okay.
Great. Thanks, and then are you expecting to do you need to take incremental pricing to offset the inflation that you're seeing in the business and how should we think about.
And how are you thinking about kind of the.
Balance of incremental pricing versus your commentary around increasing elasticity and starting category.
I think as always and as you've seen in our results right.
Combination of productivity, it's a combination of revenue growth management and I think as you saw in our quarter three results our price mix accelerated during the quarter. So I think another deemed so doing a terrific job navigating through what is a high cost inflation environment by taking incremental actions as needed.
I would say that on gross margins.
We saw sequential improvement despite all the inflation, we saw sequential improvement in quarter three.
And I think our expectation is that we will see margin improve and gross profit dollars improved in quarter four as we lap.
The fire and strike I think from a full year gross margin standpoint, our previous guidance was around 100 basis points decline.
We'd expect that to be a bit more than the 100 basis points that we had guided to but I think that gives you an indication that despite the higher inflation.
The amount of incremental actions that the teams have taken.
And just the strength of our brands.
Thank you.
Thank you for your question. The next question is from the line of Chris Growe with Stifel. Your line is now open.
Hi, good morning.
Good morning, Chris just had a couple of questions for you. The first one would just be to following a little bit on the questions around Europe .
Just as we're getting a sense of the incremental elasticity in those markets and those in other markets as well stacks was a little softer in growth as well then I thought are you seeing that in snacks or was that more of the comp with the prior year.
I think Chris was more of the comp the prior year, we're really not seeing elasticities in Europe .
Our snacks business led by Pringles is very very strong in fact, if you look at.
We stopped all shipments into Russia, as you know and we quickly diverted all of that we were able to sell that volume elsewhere immediately and we are still somewhat capacity constrained as the business has been so strong.
It was up over 22 and it was up almost.
22% a year ago quarter Chris.
Alright.
Tom do you have you indicated how much the volume.
The volume drag in Europe , there was from Russia, not shipping into Russia.
Virtually all of Europes volume decline.
Okay.
And just one follow on which is in the.
EMEA Division and noodles and other business continues to grow very strongly.
Along with the other businesses there is that a business that's growing volume as well as pricing and it's been a very inflationary environment are you seeing volume growth in that business as well.
It's a pricing story there Chris it's almost all price in fact, it is oil price and our ability to take that level of price has been obviously impressive, but it's a pricing story.
Okay. Thank you for that color.
You bet. Thank you for your question.
The next question is from the line of.
Robert Moskow with credit Suisse. Your line is now open.
Hi, I think Pamela try to to get at the question but.
But into 2023.
I would expect you'd have continued high levels of inflation, given what you are saying about the acceleration in the third quarter would it be fair to assume.
Double digit inflation in 2023.
And then maybe can you give us a little more color as to why it accelerated in Q I mean, we're looking at spot values for commodities and they don't seem to be going up higher sequentially why is your costs going higher.
Yeah, So Rob I would say you definitely you should plan on double digit inflation going into next year and I don't think thats going to be unique to Kellogg in fact, I know its not going to be unique to Kellogg. If you look at spot prices. It doesn't always tell the full story year over year price changes even in spot are still up double digits.
Coring up over 20 cooking oil is up over 20, we in double digits diesel.
Nearing 50% so price.
The whole infill.
Inflation was going to be transitory was always.
Sure.
Obviously ridiculous and so we continue to see strong inflation ingredients and co man in packaging across the board. So I think as a total country and globe.
We need to prepare for the same type of inflation and this is double digit inflation on top of the inflation. We've seen this year. So it's a pretty significant macroeconomic event.
Okay.
Maybe a follow up.
It seems like there is more kind of knock on costs like labor energy co packing.
Is it more difficult to pass along those costs.
Due to retailers.
Or is there a good understanding that hey, that's just the rising cost of business.
Yes, I think I think.
We've largely been successful in covering.
Inflation on our input costs in our packaging costs right and so I think in all.
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I think what from a disruption standpoint, that's probably some of the unplanned because of supply chain bottlenecks.
And some of those inefficiencies are probably the ones that it's hard to forecast and how to plan around that we've probably not been able to pass on.
Okay. Thank you.
Thank you.
Thank you for your question. The next question is from the line of Ken Goldman with Jpmorgan. Your line is now open.
Alright, thank you.
I just wanted to clarify and make sure I heard.
Correctly, what you were saying about the.
The European volumes I think you said that almost all of the downturn in European volumes. This quarter was because of the Russia situation, but I also maybe heard you say that that volume was sold elsewhere. So I may have just heard that wrong I was just trying to get a sense of.
How to think about that as a put and take maybe.
So I think in the quarter right. When you were lapping when you compare.
The Russia business itself right, we stopped shipments in so yes, all of the decline was driven by Russia.
But that rush by the by the Russia stopped shipments.
I think the teams have done a remarkable job right in terms of finding alternative uses of that volume not just in Europe , but around the world into EMEA as well.
So I think what we've been able to work through that through the network.
Thank you and then quick follow up.
Just on the and thank you for the guidance regarding pension income and into.
The fourth quarter.
Understand a lot can change between now and next year and you're not guiding to 23%, but you did mention that we should expect an incremental headwind in 'twenty three so I'm just trying to get a sense for.
How big that headwind might be given that we have.
Obviously limited information about what the stock market and interest rates will be but are there any rough numbers, we can kind of.
Model in just in comparison to the $38 million. Other income line, we saw this past quarter.
Yes, so I think firstly say, we'd expect a similar amount for quarter four right. So I think that's that's that's the Postbank obviously it depends really on what happens on markets because the remeasurement would really be at the year end.
And that's where the markets are at the end of the year.
What we've seen this year is like I said, it's about on on two of our plants they are roughly around 50%.
Our of our of our value of our pension assets.
And you've seen it for about half of the year. So we would expect a full year impact next year.
We'd need to re measure all the plants.
Got it.
It really depends on where markets are at the end of the yield. So it is hard to forecast and we'll obviously talk a lot more about that when we are guiding for 'twenty three in our February call.
And this is.
Not unique to us I think it's driven by what's happening in interest rates as well as markets and it's of course nonoperating and noncash.
Understood. Thank you.
Thank you for your question.
The next question is from the line of Michael Lavery with Piper Sandler Your line is now open.
Good morning.
Good morning.
Yes.
Just wanted to come back to the revenue guidance.
It just looks like.
The 10 or so percent on a full year would suggest something around 7% organic growth in the fourth quarter.
Imagine certainly theres, some conservatism, but what would drive a deceleration like that is there stepped up.
<unk> spending is it just your assumptions around elasticity can you just help us unpack, how youre thinking about that.
Yes, the guidance for the quarter, Florida is roughly in line with the year to date rate at double digit.
Double digit levels. So it's.
Yes, so its similar to that you would see the Russia impact that we saw in quarter, three and quarter four as well so as we cycled.
To stop shipments of pringles into into Russia.
And so directionally its in line with the year to date.
As always we've made some assumptions around rising pricing elasticity, so we'd see how that.
Place plays out.
I think it also from a lapse standpoint quarter four last year was when we took the most revenue growth management actions last year.
So we'd be lapping that so I think there are a couple of factors there, but broadly I would say that the quarter full guide is in line with the year to date rates.
Okay. That's helpful and just on the.
<unk> markets.
The U S. You touched on the increases in the cereal elasticities, just as far as how the consumer behavior is evolving.
Do you have a sense of how much they are trading down to something like private label or exiting the category or what's the response been when you see the elasticity is growing.
Yes, it hasnt been interestingly trading down.
So and by the way, it's still low levels of price elasticity. So we're just saying this is the first maybe early indicators that it's returning and some of those regions, but still it's still low still not back to historical levels and when you look at private label. There is a lot of variables all around the world.
By and large we see no empirical evidence of private label growing in any of our markets really in any of our categories in a meaningful way we see in fact quite the opposite in some markets and where they are growing they tend to be growing off year ago comparisons, which were which were challenged.
And so that's really what we're seeing the concern I think overall is just the absolute nature of household budgets and as inflation throughout the economy continues to rage.
How that affects the absolute dollars available for households, but what you see in our categories as we tend to be affected less than discretionary consumer goods and travel and dining out and things of that nature. So, but it's one to watch we do not take it for granted we watch our price gaps very much we continue.
To invest in our brands.
Not complacent by any means but we just haven't seen the empirical evidence that that private label is making meaningful inroads in any of our categories or geographies.
Okay. Thanks, so much.
Okay.
Thank you for your question.
The next question is from the line of Bryan Spillane with Bank of America. Your line is now open.
Thanks, operator, good morning, guys.
Just two quick follow ups.
Hi, So just two quick follow ups.
With SG&A spending coming back in the second half is the 23 full year SG&A base, a reasonably good base to think of for next year or.
Or did you end this year still not spending at a normalized level.
I think we're pleased with the level of spending I think although phasing.
We are spending competitively in the marketplace.
Drive the brands I think.
There was some phasing obviously between the first half and second half, but overall from a <unk> standpoint, we.
We are pleased with the.
With where we are.
Okay and then just second one last one is just related to the discussion about the pension re measurement and the effect on the P&L.
Is there any are there any cash consequences.
Just given given where markets have moved is there are you fully funded will you need to put cash in just just trying to understand if theres going to be any cash consequences related to that.
No cash consequences really I mean, I think the level of funding because both your assets annual liabilities go down. So your level of funding is it moves a little bit but not meaningfully so.
This is really more driven by accounting and like I said, it's noncash nonoperating.
And I think the level of funding and the pension plans doesn't change.
Meaningfully.
Okay, great. Thanks, guys.
Operator, we might have time for one last question.
Thank you. The final question is from the line of Nik Modi with RBC capital. Your line is now open.
Yes, thanks, good morning, everyone.
The question is just I know, obviously stranded costs or something you are still looking into.
But I was just curious if you had a view yet or strategy on what youre going to do on the supply chain side in terms of which business is actually going to own the trucks.
Just some of that stuff will you have a TSA agreement just was curious if you had any any developments on that front and then from a consumer insight standpoint will the.
Cereal business have to develop its own system or will you be able to leverage.
Existing insight from the Snacking company. Thank you.
Yeah.
If I understand the question Nik again next year, we will be providing much more transparent information on it in terms of things like who owns the trucks, we outsourced the vast majority of our logistics right now so we'll be working through warehousing and all those types of things, but when you look at the scale of both of our businesses Theyre pretty scaled busy.
So we're not going to be running half truckloads anywhere it will be running full truckloads and it's the work that's being done right now and yes, there will be TSA agreements.
And between the businesses.
Mainly the snacks business, providing <unk> to the to the <unk> co in terms of things like it.
The classic way to do this is you typically closed systems and then separate.
And we've got a lot of experts, helping us with that number of us have been through these things before and.
Are we going to get a lot of experience at it so lot of work going on right now, but what you should hear from US is a very very high degree of confidence that the work is progressing exactly as we expected and that we have a high degree of confidence in the value creation opportunity that exists and that's exactly why we're doing it.
Excellent. Thank you Steve.
Operator, we are at the hour here.
Okay, everybody. Thank you for your interest.
Thank you for your interest and if you do have follow ups. Please please feel free to call.
That concludes the conference call. Thank you for your participation you may now disconnect your lines.
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