Q4 2022 Kellogg Co Earnings Call
Speaker 2: you may begin your conference call.
Speaker 3: Thank you, operator. Good morning and thank you for joining us today for a review of our fourth quarter and full year 2022 results, as well as our outlook for 2023. I'm joined this morning by Steve K. Hlan, our chairman and chief executive officer, and I'm at Benati, our vice chairman and chief financial officer.
Speaker 4: 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,
Speaker 5: Please refer to the third slide of this presentation, as well as to our public SEC filings. This is a particular note amidst the current operating environment, which includes unusually high input cost inflation, global supply disruptions, and other uncertain global macroeconomic conditions, all of whose direction, length, and severity are so difficult.
Speaker 6: for net sales and on a currency neutral adjusted basis for operating profit and earnings per share. And now it turns it over to Steve. Thanks John and good morning everyone. The fourth quarter completed what was in excellent year, competitively, financially, and in terms of the grit and skill our organization demonstrated.
Speaker 7: and executing through what were truly extraordinary circumstances. The strength of our SNAC portfolio was clearly evident with double-digit net sales growth across all regions underpinned by strong and market performance.
Speaker 8: We just named exceptional growth in emerging markets led by our noodles and other portfolio in Africa, but also posting strong growth in snacks, material across Amia and Latin America. We mitigated the profit impact of unusually high input costs that accelerated during the year.
Speaker 9: leaning into productivity and carefully executed revenue growth management actions. We navigated through economy-wide supply bottlenecks and shortages and worked to restore capacity in much of our business, most notably in North America cereal and North America frozen foods.
Speaker 10: The result of all of this was strong financial delivery that exceeded expectations throughout the year, prompting us to raise guidance more than once this year for net sales, operating profit, and ETS. And still, over-deliver that guidance, thanks to a strong fourth quarter.
Speaker 11: We also announced, planned, and made significant progress towards separation of our company that will not only improve performance of North America's Serial Co. but provide clearer visibility into the strength of the snacks oriented parent company.
Speaker 12: With all of this going on and amidst global supply disruptions and high costs, we kept our focus on sustaining momentum in all of our businesses.
Speaker 13: We stay true to our deploy for growth strategy, leveraging our growth-shaped portfolio, orienting our brand-in-billing and innovation toward winning occasions, and sustaining momentum in our biggest world-class brands. All while working to restore service levels and leveraging all levers of revenue growth management in an attempt to keep up with source-
Speaker 14: And this growth was impressively broad-based in all four of our regions and in all four of our major category groups, snacks, cereal, frozen, and noodles and other.
Speaker 15: We also remain committed to our better day strategy toward environmental, social, and governance practices. Slide number seven shows some examples of tangible actions taken and recognitions received during the fourth quarter alone, illustrating this continued commitment.
Speaker 16: And you can expect us to maintain this focus on execution and reliable financial delivery in 2023. Slide number 8 shows that you can expect many of the same drivers of this financial delivery as we saw in 2022. Our Snacks Business, which is roughly half of today's Kellogg Company, should see sustained momentum.
Speaker 17: on realizing productivity and cost savings, supplemented by utilizing all levers of our database revenue growth management disciplines around the world. And we continue to progress on our supply recovery in specific businesses.
Speaker 18: As a result, we are forecasting growth in net sales and operating profit that are above our long-term targets, even as we continue to invest in the enhancement of capabilities, service levels, and the strength of our brands.
Speaker 19: Meanwhile, we continue to march toward the separation into more focused companies, starting with the spin-off of North American Zero Company still scheduled for late this year. Work has progressed on the carving out of financials, the designing of new organizations, and the separation of key systems and processes.
Speaker 20: Separately, you'll recall that we were exploring strategic options for the plant-based food business, which represents about 2% of our company's net sales. Given current market conditions, as well as our confidence in this business as a long-term growth vehicle, we have decided to retain it as part of global snacking company.
Speaker 21: We remain as confident as ever in the value to be created by making global snacking company and North American Serial Company more focused with better visibility into and valuation of their performance and outlook. In short, we are poised for another good year of results.
Speaker 22: Before discussing our businesses in detail, let me now turn it over to Amit for a review of our financials.
Speaker 23: Thanks, Steve, and good morning, everyone.
Speaker 24: Slide number 10 provides a summary of our 22 financial results.
Speaker 25: a better than expected performance in Q4 drove us to hit or exceed our guidance for the full video.
Speaker 26: Our net sales led the way, accelerating to 16% organic growth in the fourth quarter and resulting in 12% organic growth for the year which was higher than expected.
Speaker 27: This top line growth more than offset a sizeable year on year increase in investment resulting in our adjusted basis operating profit growing 20% on a currency neutral basis in Q4.
Speaker 28: This brought our folio growth to 7%, also exceeding expectations.
Speaker 29: Our adjusted basis earnings per share increased 17% on a currency neutral basis in quarter four despite being weighed down by the as anticipated increase in interest expense and reduction in pension income related to the decline in financial markets.
Speaker 30: This quarter for performance resulted in full year EPS growth of 5% on a currency neutral adjusted basis ahead of our expectations.
Speaker 31: Caterflow came in at about $1.2 billion and increased from the prior and in line with early expectations.
Speaker 32: Excluded from our current, see neutral results of course is foreign currency translation, which reduce our net sales, operating profit and earnings per share by about 4% each points in quarter four and about the same for the full year EBS.
Now let us look at each metric in a little more detail.
Slide number 11 lays out the components of our strong net sales growth.
Our double digit organic growth in net sales in 2022 was driven by price mix, which accelerated in the second half. As we continue to execute revenue growth management actions around the world, took our accelerated input cost inflation.
Volume grew slightly in the quarter due to the continued recovery in North America?s cereal and declined only modestly for the full year, reflecting both price elasticity that has not moved up as much or as soon as we had expected, as well as our replenishment of trade inventories during the year as our supply improved.
Foreign currency translation was a headwind all year with particularly adverse impacts in quarter three and quarter four.
Let's discuss Gross Profit on Slide No. 12.
We grew our overall gross profit dollars this year. In fact, our gross profit dollars came in higher than expected, both in quarter four and the full year. From a percentage margin perspective though, there is a mechanical impact of matching input cost inflation with price realization. Because we could not cover the unpredictable inefficiencies from economy-wide bottlenecks and shortages. We did see a year-on-year increase in gross profit margin in quarter four as we lapped the first of two quarters impacted by the fire and strike. We finished the full year.
in line with expectations we had communicated. In 2023, we expect to continue to grow gross profit dollars while our margin stabilizes and improves slightly during the year.
Our advertising and promotion investment was ramped back up in the second half and finished the year roughly flat with 2021. Overhead, meanwhile, increased year-on-year in all four quarters as we gradually returned to travel and meetings and as we accrued higher incentive compensation related to our above-budget financial performance. In 2023, the quarterly phasing of SG&A expense will be affected by lapping last year's North America serial pullback on brand building in the first half and rapid ramp-up in the second half. This entire worth of marketing era includes inclusive advertising and fair volume USPS
for currency translation.
As you can see on the slide, this operating profit was not only higher than 2021, it was also higher than two and three years ago.
Slide number 15 shows our below the line items which were again collectively negative to EPS growth in the quarter and therefore the full year.
driven by non-operating factors, there will be an even larger headwind in 2023.
Interest expense was up sharply year-on-year in Q4 as rising interest rates affected the roughly one-fifth of our debt that is floating.
The quarterly run rate for 2023 interest expense will likely be a bit higher than the score of four levels.
Other income decreased in Q4 and the full year.
Most of this was related to the mid-year remeasurement of certain U.S. benefit plans, though in quarter four it was partially offset by better than expected.
for X gains and interest income that we do not expect to repeat.
As we have discussed previously, the decline in benefit plan income is related to 2022's fall in financial markets, which reduce the value of plan assets and raised interest rates.
We remeasured about half of our plan exposure in the second half of 2022. And 2023 will feel the impact of remeasuring all of our plans. Hence, we could see a year on your decline in other income in 2023 that is almost twice the decrease.
We recorded in 2022. Our effect rate tax rate came in a little higher than expected in Q4 and therefore the portfolio, mostly reflecting geography mix.
For 2023, we expect the tax rate to be approximately 22%.
Our JB earnings and minority interest were collectively flatish year on year in quarter four. Finishing the year higher than last year led by good performance by our joint ventures. Collectively, these are expected to be relatively flat in 2023.
An average share is outstanding for Flattish in 2022 as increased options exercises by employees over the course of the year offset the benefit of share buybacks executed.
Pauli in the yoke.
Our cash flow and balance sheet also remain in very good shape as shown on slide number 16.
Our cash flow increased year-on-year despite year-on-year swings in sales and receivables in December as we lapped last year's fire and strike.
This increase in cash flow over the past few years has helped us to reduce our debt right through 2022 leading to lower leverage ratios.
This has given us enhanced financial flexibility even as we have continued to increase cash return to share owners in the form of an increased dividend and buybacks this year.
Let's now pivot to 2023, starting with slide number 17 and some key assumptions behind our guidance.
First and most importantly, we expect to sustain a strong business momentum.
Between price realization, the momentum of our categories, and the strength of our brand plans, we are confident we can achieve another year of above algorithm net sales growth.
And while input costs for inflation remains high, it should decelerate year on year in the second half.
And the same can be said for bottlenecks and shortages.
Therefore, we expect to generate above-algorithm growth for operating profit as well in 2023.
Next, our guidance reflects the impact of headwinds on our non-operating below the line of
and non-cash pension income will drop sharply or into lower asset values entering the year and to a higher interest charge reflecting the rise in interest rates. The pending spin-off of North America's serial code is still targeted to be executed towards the end of the year. For simplicity reasons only, our guidance assumes it remains in our results for the full year. Slide number 18 shows our guidance by key metric. Organic growth and net sales is forecast.
Importantly, this net sales growth is expected to be broad-based across our portfolio and led by momentum in snacks and in emerging markets. On an adjusted basis and excluding currency, we expect operating profit to grow in the 7-9% range. This above-target growth will be driven by the strong net sales which drives the growth in gross profit dollars that fuel increased brand building.
At the earnings per share level, the strong operating profit growth will be more than offset by the pension and interest headwinds we discussed earlier.
The impact of the accounting re-measurement of pension and post-retirement alone is negative 7% points to EPS growth.
Again, it should be emphasized that this is a non-cash, non-operating item.
and it was driven by what was a rare steep decline in the financial markets in 2022.
Without that item, our EPS would be up 3-5% even despite the higher interest expense and tax rate.
Cash flow is expected to come in somewhere between 1.1 billion dollars. Our underlying base business cash flow will continue to grow year on year reaching 1.3 to 1.4 billion dollars. But they will be roughly 300 million plus.
of cash outlets related to the pending spin-off. This is a combination of cash costs and capital expenditure all one time in nature and all related to executing the transaction and setting up the standalone business.
So to summarize on slide number 19, we continue to feel very good about how we are performing and about our financial condition.
Across our regions and category groups, we sustained solid momentum in 2022 and we expect that momentum to continue in 2023.
amidst high cost inflation across inputs and energy, we were able to protect profit dollars through productivity and revenue growth management in 2022 and we will do so again in 2023.
In an environment of disruptions up and down the supply chain, we have executed well and steadily improved service levels in 2022 and will continue to do so in 2023.
In 2022, we delivered a buff target growth in currency neutral, net sales and operating profit. And we plan on doing that again in 2023.
We have increased our cash flow and further deleveraged our balance sheet, giving us excellent financial flexibility going into 2023.
and we remain as confident as ever in the value that can be created by spinning off North America's serial code.
Not only will that business thrive or its increase focus, but the strength of the remaining global snacking go will be significantly more visible.
So, we are looking forward to another good year in 2023.
And with that, I'll turn it back to Steve to discuss our individual businesses.
Thanks Amit. Let's start with Kellogg North America on slide number 21. As you can see, our largest region performed very well in 2022, straight through the fourth quarter. We started the year with the lingering inventory impact and costs arising from the second half 2021 fire and strike as well as other supply disruptions.
Within North America, our largest segment is snacks, representing over half of our sales in the region. And this segment led the way in 2022, as shown on slide number 22. There was some timing of shipments, particularly year over year within the quarters, but North America snacks finished the year in double digit growth. In fact, North America snacks has accelerated its organic net sales growth in each of the past four years. Leading the way were world class brands like Pringles and Cheez-It, both of which generated double digit consumption growth in 2022, and Pop-Tarts and Rice Krispies treats.
both of which sustained their multi-year momentum as well. Our North America serial businesses as depicted on slide number 23, this business overcame enormous obstacles on its way to delivering very strong net sales growth. We entered the year depleted on Finnish goods and moutories.
as we rebuilt those inventories SKU by SKU, we were able to replenish retailer shelves more quickly than we anticipated. And during the second half, we were able to ramp up our commercial programs, and we have entered the new year with real momentum.
Flight number 24 shows the end market progress we have made since restoring inventory and commercial activity. As you can see, our performance has continued to improve sequentially, accelerating both our consumption growth and our share of recovery. This business is back on track and is poised to sustain growth in 2023 when we...
challenges in 2022. For EGO, it was simply a matter of strong demand over the last couple of years putting us up against capacity. We put in capacity in mid-year and since that time EGO's consumption growth has accelerated. And for Morningstar Farms, we experienced significant production issues at a co-manufacturer.
During the fourth quarter supply came back online and almost immediately we saw signs of improvement in market.
So moving to slide number 26, Kellogg North America has all the pieces in place for another good year in 2023. Our snacks brands are demonstrating undeniable momentum and they represent more than half of our North America region's net sales.
Our serial business continues to outpace what has been very strong category sales growth as we continue to ramp up commercial activity. And our frozen businesses are getting past some severe supply constraints.
Meanwhile, our productivity and revenue growth management actions are catching up to what has been steadily rising input cost inflation, just as we are starting to see signs of bottlenecks and shortages receding. The results should be margin improvement for North America this year. And of course, North America will be moving full speed ahead.
with the carving out and spinning off of North America's cereal company. We're making good progress with detailed implementation plans, all while remaining focused on delivering good financial results and executing in the marketplace. Now let's turn to Europe and slide number 27. Cost inflation accelerated faster in this region than others.
particularly when energy prices and other costs soared after the outbreak of war in Ukraine.
Our revenue growth management actions have yet to catch up to the accelerated cost pressures pulling down profit in the last couple of quarters and will likely remain a pressure on profits into the first half of 2023 the fourth quarter also featured a meaningful year-on-year increase in brand investment Nevertheless, Kellogg Europe had another good year posting its fifth straight year of growth in the first quarter of 2020.
growth all year. This momentum is not new. This was our fifth straight year of organic net sales growth for Europe's next.
In market, Pringles generated strong consumption growth across key markets in the quarter and the full year. And in the UK, we also delivered rapid growth for pop-tarts and rice crispy squares.
Turning to our European serial business and slide number 29, you can see that this business continues to deliver steady growth. On the strength of commercial activities and revenue growth management needed to cover rising costs, this business showed sequential acceleration in its organic net sales growth in each quarter. In market, category growth rates in markets across the region picked up in the...
slide number 30, we expect to sustain momentum in snacks led by Pringles, but also increasingly accompanied by portable wholesome snacks like Pop-Tarts and Rice Krispies squares.
In cereal, we have strong brand plans, including renovations and innovation, and a campaign celebrating our 25th year of our Better Days social program in the UK. We will continue to manage through cost and supply pressures, which are particularly heavy in the first half. And we have an agreement to divest our prices in this.
So the deal's timing, approvals, and final details are still pending. This business represents a little more than 5% of Kellogg Europe's total sales. So the impact of this divestiture should not be meaningful to adjusted basis results. Now let's turn to Latin America on slide number 31.
As the chart shows, Calog Latin America grew net sales and operating profit strongly, both in the fourth quarter and full year. In fact, this region posted strong and accelerating organic net sales growth all year, a tribute to its brands, its commercial execution, and its expansion of routes of market capabilities.
as well as its revenue growth management actions and its agility in managing through supply challenges.
Our snacks business in Latin America is shown on slide number 32. This business has grown consistently over the years. In 2022, it led the organic net sales growth for the region, with year-on-year growth of more than 20% in both the fourth quarter and the full year.
The growth was broad-based, finishing the year with a fourth quarter that featured strong double-digit net sales gains across all of our sub-regions. Mexico, Brazil, Pacific, and the Caribbean and Central America region. The strong growth in the quarter and year was driven by price mix.
needed to cover soaring cost inflation and adverse transactional currency impact, and while volume did decline, the elasticity was below historical levels.
In market data shows sustained double digit category growth in the quarter and the full year for a major salty snacks markets, with Pringles gaining share in both of its biggest Latin America markets, which are Mexico and Brazil.
Our cereal business in Latin America also grew net sales organically in the fourth quarter and full year as indicated on slide number 33.
Early in the year, this business felt the impact of supply disruption coming out of North America's fire and strike, particularly in our Caribbean business.
But as you can see, once that was behind us, our cereal net sales re-accelerated strongly. In market, our consumption growth was robust across the region in the quarter and the full year, led by key brands like Frosted Flakes in Mexico and Brazil, Corn Flakes in Brazil and Puerto Rico, and Fruit Loops in Colombia.
So, moving on to slide number 34, Latin America 2 is poised for another good year in 2023. We expect to sustain momentum in snacks led by Pringles and we expect to continue to grow in cereal. We expect to improve profit margins this year.
and work as well underway toward carving out our Caribbean serial business into the North American serial company spin-off.
We'll finish up our regional review with EMEA, shown on slide number 35. This region continues to deliver exceptional top line and bottom line growth. Net sales grew organically in the high teens or better all year long. In the fourth quarter, as for the full year, this growth was broad based.
with growth across all of our sub-regions, Africa, Asia, Australia, New Zealand, and the Middle East and North Africa.
The growth was also strong across all of our category groups, serial, snacks, and noodles and other.
Despite enormous cost pressures, the region also delivered double-digit profit growth on a currency neutral adjusted basis, both in the fourth quarter and the full year.
Snackton and Mia posted outstanding organic net sales growth all year, a shown on slide number 36. This growth was led by emerging markets ranging from Asia to Africa to the Middle East, and it was led by Pringles, which sustained strong consumption and shared growth across key markets.
both in the quarter and for the full year. In Australia, we also realize good consumption growth in pop-tarts and rice crispy streets, both for the quarter and the full year. This bodes well for further international expansion of those brands. Serial also posted strong organic net sales growth all year as shown on slide number 37.
As with snacks, the growth was led by price mix, with elasticity impact on volume being lower than usual. And we saw growth across all sub-regions, both in the fourth quarter and the full year. Growth was most pronounced in Africa and the Middle East, but it also remained solid in Asia and Australia.
Overall, for the measured markets of this region, we grew consumption and share in the fourth quarter and the full year. Our most developed market, Australia, posted strong consumption growth in the quarter and year led by many of our biggest brands, including double digit gains for cornpops, cornflakes, and sold-time other brands. We also sustained good consumption growth in emerging markets, with particular...
we consolidated the distributor portion of our West African business in 2018. Turning to slide number 39, we expect another year of strong top and bottom line growth for EMEA in 2023.
Macro conditions can be challenging in Africa, and we have an experienced management team and joint venture partner to execute through them, which it enables us to sustain momentum in noodles and other. We should continue to see growth in cereal led by our markets in Asia, and we believe there is plenty of runway for Pringles to continue its strong growth.
Meanwhile, a me will be looking to improve its profit margins as well.
So with that, allow me to briefly summarize with slide number 41.
From our results and our outlook, it should be very clear that our deploy for growth strategy has us focused on the right priorities and building the right capabilities and that our portfolio has been shaped decidedly toward growth.
And following our planned separation later this year, visibility into the strength and performance of this portfolio will be even clearer. In fact, the vast majority of our portfolio is enjoying very strong momentum right now, as shown on slide number 41. And this is expected to drive above target growth in net sales and operating profit in 2023.
I want to thank our talented and dedicated Kellogg employees for making sure that nothing, not unusual economic conditions, not declining financial markets and pension accounting, not the preparation of an historical spin-off will distract us from continuing to deliver for our stakeholders. And with that, we'll open up the line for your questions.
Our first question for today comes from Jason English of Goldman Sachs. Jason, your line is out open. Please go ahead.
Hey, good morning folks, thanks for slot me in. Q. Is it a lot of questions still on the table? Maybe we can start real quick with you housekeeping. We all have our restaurants out here, but based on current spot rates, where do you see FX coming in in terms of impact to top and bottom line?
Yeah, I think, you know, just, Jason, just looking at the current rates, which say probably 1 to 2% impact on EPS and OP, maybe on sales around 3%. So that's kind of the outlook if you look at where the rates are today.
Okay, that's helpful. And then, Steve, you mentioned that Europe is finishing strong and carrying good momentum in the year, but it sure doesn't look like that from a bottom line perspective. I mean, the margins are kind of falling off and fall off fast as we exit the year. And I think you mentioned that we're...
right now. Give us an update on where status sits on negotiating price in that market. Thank you.
Yeah, sure Jason. In Europe it's essentially we're catching up, right? You know, the inflation came fast and furious and our ability to catch up to it was impacted in the third and fourth quarter. We also had obviously the Russia impact in the, you know, primarily in the third quarter. Higher A&P continued to bolster our top line, which we're committed to doing.
challenging but we've been making our way through it and so we have good confidence in the underlying momentum of the business it's really just took a little time to catch up.
Okay. And status on the price negotiations?
Yeah, we're in reasonable shape right now, Jason. We don't like to talk too much about individual negotiations with our customers. They're doing everything that they always do, which is protect the consumer. We want to protect the consumer as well, be as affordable as possible.
but we need to maintain our margins and you know we're having those adult conversations and they're proceeding constructively.
Okay, thank you.
Thank you. Our next question for today comes from Alexia Howard of Sandford Burnstein. Will the line that's now open please go ahead.
Great, can you hand me good morning everyone.
Good morning.
Great. Actually, I have to talk about the...
The volume situation in the US, particularly as we rolled into 2023, I'm looking at the Nielsen data that came out yesterday, and it looks as though frankly for a lot of companies it was a bit of a step back. So two questions, one is there anything that you are seeing from the consumer is it shifting or is it just tough compared from Omicron?
elasticity in that business as we lack the fire and strike from last year. Thank you and I'll talk it on.
Yeah, Alexis, so for us in North American, the fourth quarter volume was up and obviously overall revenue was up nicely. We did have a fairly easy comparison, particularly in North American cereal because of the fire and strike. On a two-year basis though, well first of all the trajectory of our North American cereal business is...
confident about the plans in 2023 that we have in place. We're confident about the distribution that we've been able to gain. We're confident about our shelf sets. Our consumer promotions are, as I said, really back on track. You can see Jalen Hurts and Tony the Tiger on television right now, as a matter of fact.
which is lucky for us that jails in the Super Bowl. So feeling very good about our North American serial recovery on a one year end to your basis. And then I think you know just to build on that from a guidance standpoint, we have incorporated rising elasticity so that's built into our guidance for 23.
Thank you very much. I'll pass it on.
Thank you. Our next question comes from Michael Lavery from Piper Sandler. Michael, your line is now open. Please go ahead.
Thank you. Good morning.
Thank you. Good morning.
Just wanted to follow up on the volume piece at a little bit higher level contrasting the Declines you've had globally throughout the year with the relatively stronger performance in North America excluding the 1q hit from from serial obviously, but
Can you just unpack a little bit of what you're seeing differently and is it?
stimulus and sort of savings drawdown that supported volumes in the US that now maybe is rolling over, just maybe inform how you think about the differences in the US consumer versus what you are seeing around the world. Yes, so you know it's different everywhere around the world. The US has been strong.
It's been relatively inelastic, particularly in our categories, so we've definitely benefited from that. There's no question that the US balance sheet, consumer balance sheet still remains stronger than it was pre-pandemic, although continues to erode over time. The employment situation as you know in the US is still very strong, so overall the consumer in the US
is in a good place and when you look at the categories that we play in it remains very strong, right? So they are cutting out discretionary items which you know we all know high ticket items are under a lot of pressure. Our categories are doing very well and if you look at the emerging markets the same could be said. The consumer is very strong, surprisingly resilient.
and virtually all of our emerging markets, which has been very positive for our results from a category standpoint, then we're doing well inside those categories. Europe is where you see, if you go back a couple of quarters ago, we did indicate that we were seeing the beginning of elasticity, returning, particularly in the serial business, and we're seeing a little bit more of that. So the European consumer, I would say,
level but higher than it is in the rest of the world.
Okay, that's helpful color. Could I just squeeze in a housekeeping follow-up on the pensions? That's a big below the line item for you this year, obviously. But is there any meaningful split between serial and the legacy, the rest of the company, and just trying to understand when that happens? Does one side of the business or the other have a disproportionate?
Freeze. Rock your line, it's now open. Please go ahead.
Great, thanks so much. It's just kind of first question, housekeeping is...
When should we expect to get a little bit more information on the spin and then the second question Simplistically is just around cash and tap back side. I don't know if I heard it, but in terms of the 300 million from the upfront charges and tap back for the spin.
Maybe you just write a little clarity as to what's driving that.
So I think we're on track to execute the spin towards the end of the year. So leading up to that, we'd be providing all the information as well as having the invested days as you'd expect. So towards the end of the year is what we're working towards.
I think the 300 million, it's a combination of one-time costs related to executing the transaction. So, consultants, I think we're working very closely with some Blue Chip advisors on program management, ensuring that we have a comprehensive...
program to manage the change and develop a comprehensive plan of action. I think it includes your typical banker law of fees as well. As well as some capital expenditure to realign the supply chains to get ID systems.
up and running for the new serial company.
for the new serial company.
Thank you very much.
Thanks so much.
Thank you. Our next question comes from Ken Goldman of JP Morgan. Your line is now open. Please go ahead.
I just wanted to ask about your guidance for a I think the word was stabilizing gross margin this year. Just curious does stabilizing mean down versus 22 but a maybe
Decelerating rate of decline and I'm just curious what it implies for S, G and A, either as a percentage of sales or on a dollar basis, it would seem to imply that both would have to come down a little bit, but just curious what your thoughts on there.
I think on a full year basis it will be flat to slightly up on gross margins and I think it will improve progressively as we go through the year. So I think that's kind of the range we are on gross margin. And then I think just the puts and calls in gross margin, obviously from a positive we'd be laughing the fire and the strike.
We do expect bottlenecks and shortages to moderate as we go through the year. We are starting to see that as well. So that I think would be a positive tailwind from a gross margin standpoint. I think from an input cost standpoint we expect a mid-teens inflation and that's what our business stocks will reach your door for a lower rally and lower Edinburgh regarding the prices of products that have made a minimum literary hit.
guidance in corporates. So it's still elevated. It's moderated from what we saw in 2022 but still elevated. And I think we continue to see input cost inflation in oils, in corn, in wheat, rice potatoes. So that's been built in.
And I think from a phasing standpoint, we'd expect gradual improvement in the year-on-year change of growth profit margin as the year progresses.
And then I think you're up. Yeah, and then I think to your question on S-DNA.
Now I think on your question on SG&A, I think we'd expect an increase in overheads, probably in line with inflation. I think as normal activity continues to restore and then from a brand building standpoint, we'd expect an increase as supplies restored.
you know, for the Euro brand building through the year.
year or brand building through the year. Great, thank you so much.
Thank you. Our next question comes from Andrew Lazar from Barclays. Andrew, your line is now open. Please go ahead.
Great, thanks so much. Steve, there's a concern, I think among investors, for the group as a whole, that supply constraints ease and the benefit from pricing wanes, food companies will somehow choose to ramp promotional spending to, you know, maybe more irrational levels to drive volume. And I guess this concern...
seems particularly acute, I think, in the ready serial space, partly because Kellogg is obviously heading towards a split of the business. And I'm just curious how you'd kind of respond to that concern and get a sense for what your plans are in terms of in-market sort of activity as you go through the year. Thanks so much.
Yeah, Andrew, we really don't have that concern. We haven't seen anything that would point to an irrational environment on the horizon. And as our supply has improved, we've been gradually restoring merchandising activity, which is an effective complement to our brand building always has been. And so it's not a bad thing. It's not a bad thing that obviously drive displays as you well know.
which is out there and available. I see a very rational environment on the horizon.
Thanks so much. Thank you. Our next question for today comes from Robert Mosco from Credit Suisse. Robert, your line is now open, please go ahead.
Hi, thanks. Amit, I was hoping for a little more color on the phasing for your operating profit growth by quarter. Like first quarter, for example, I think you have an easy comparison on gross profit dollars, but then you're going to increase SG&A investment. So do you think first quarter profit growth is...
higher than your annual average or, you know, is it not really much different?
Yeah, I think, you know, certainly, you know, from a gross margin standpoint, as I mentioned, right, we'd be lapping the fire and strike in quarter one. But I think, you know, on the brand building in particular, right, if you recall last year in quarter one and quarter two, right, we had pulled back back as we were emerging from the strike.
So you're going to have that negative lap in quarter one and into quarter two as well. So it's kind of, now those are the puts and calls from an operating profit facing standpoint.
Okay, a quick follow up. Can you give a little more color on what your process was for pursuing the spinoff of Morningstar? Did you also seek a buyer in this process? And what do you think the results will be like in 2023?
Can they improve off of 2022 or expect a week year? Yeah, I would say definitely will improve in 2023 that is our plan. And the process was very thorough. We said from the beginning we were going to pursue a spin, but we would look at other strategic alternatives.
And if you recall, when we began this process, valuations for peer companies were stratospheric compared to where they are today. They've come down quite substantially. So the thesis when we started the process was to truly unlock shareholder value if we could attract the same types of multiples in the public market, we should pursue that. The environment has clearly changed.
And when we look at what's on the horizon for this category, we see an imminent shakeout coming. It's happening already. And there'll be a couple of players left standing in Morningstar Farms, still has some of the highest household penetration, highest name recognition, fantastic foods, strong in the freezer space.
where the consumer is migrating back to and profitable unlike many of the peers. So as we step back and look at it, we're the best parent for Morningstar Farms. And when we shared with our people this morning that we were keeping the business, there was elation.
And so there's a lot of momentum underlying in our people, in their plans, and we're optimistic for 2023. And more importantly, we're optimistic beyond that because when the shakeout continues, there'll be a few left standing. And the underlying consumer drivers around health and wellness, around environmental concerns, around moving away from animal proteins.
please go ahead.
Thanks operator. Good morning everyone. I want to see maybe just to take a step back on the snacking business and obviously there's a lot of focus on getting these businesses separated. But if we look forward.
Like, how do you, how opportunistic or how, how aggressive can, can you be in M&A? You know, there's a lot of opportunities for acquisitions and, and snacking. It's a, it's definitely proven to be a very resilient category through everything we've been through the last couple of years. So just, trying to get a sense of how quickly, you know, you might be able to,
to the portfolio, or it's not really part of what you think the strategy will be going
Yeah, thanks, Brian . I think it will be part of the strategy. Obviously, we're going to execute the spin. That's priority number one. And we'll execute the spin and we'll have a global snacking company with a very strong balance sheet. The serial company as well. And so as we look for opportunities, we'll look for organic and inorganic opportunities. And organic opportunities, as you can see with...
Pringles remain exceptional with cheese at Rice Krispies treats, remain exceptional. Cheese is only now really leaving the United States and expanding overseas in Canada, Brazil, and soon other geographies as well. So on balance, we'll look at those opportunities for continued organic growth, but where we can supplement our portfolio with additions.
we'll definitely look to that because we do have great capabilities in snacking, great route to market, and you know bolt-ons or bigger will be part of our considerations going forward.
Okay, and then just as a follow-up, just as we're thinking about the split going forward, how dependent, like is there any risk that if the market's really melt down or valuations change or, you know, just what's the risk that you decide to pull it or is there, you know, like what conditions would create?
you know scenario where were you delay it or or or pull it well Ryan you never say never obviously right but we are very very confident that there's no condition by which we won't execute this bend by the end of this year you know it's a tax free spin off a dividend to our shareholders really
And so we don't have to rely on the debt markets. We don't have to rely on IPO markets, equity markets. It's a dividend to our shareholders, and nothing is without risk. But we have a very high degree of confidence, and we absolutely plan on executing this by the end of the year.
Great, thanks, Steve Luke Scott, for seeing you guys down at Cagney. Thanks, Brian .
Thank you. Our next question comes from Eric Larson of Seaport Research Partners. Eric, your line is now open. Please go ahead.
Yeah, thanks for squeezing me in everybody. Congratulations on a good year. So my question is really this. Europe seems to be the one area that might have a little more uncertainty for the kind of the forward look. It's probably a pretty difficult first half comparison.
Maybe better second half. Do you expect Europe to make a good positive contribution this year up to the year total and Are there any special? one-time events that you had last year, you know either as a headwind or a tailwind You know such as you know promotional events where Pringles has been very strong and think like soccer events etcetera. Is there?
You know, can you kind of peel back that onion a little bit for us on kind of the forward 12 month outlook for Europe ?
Yeah Eric, thanks for the question. I'd say there's nothing unusual that we're lapping aside from an easier comp when we get to the Russian comparisons is one. And the first half is really the catch up, you know, pricing catching up to costs and we're very confident that we're going to do that. The underlying brand strength remains very strong, you know. Europe is
you know, just completed their fifth year of growth. And so it's been a long story of underlying momentum driven by great execution on Pringles. You know, we've got a great plan for Pringles again, you know, based on a number of different activities, strong consumer engagement, strong customer engagement with Pringles.
happening and then we gives us a great great deal of confidence that there'll be a six year of growth in Europe . You want to add anything? No I think just building on the phasing comment I think you know we'd be expecting to catch up on the pricing at a increasing rate through the first half and then I think in the second half you know the combination of the pricing having been caught up.
as well as easier comp and hopefully moderating inflation, I think would lead to higher growth, OP growth in operating profit growth in the second half.
Thank you. One quick follow-up. Given that your pension income is really kind of a non-cash event, but I think it gets priced and looked at as a cash event. Have you ever considered reporting your EPS on a cash EPS basis as opposed to...
the way you report it now. No, we haven't, but we'll certainly study that.
Thank you.
Thank you. Our next question for today comes from Steve Powers of Deutsche Bank. Steve, your line is out open. Please go ahead. Hey, great. Good morning. Thanks, guys. Maybe to start just to follow up on a couple of topics that came up earlier, just the first one on the...
cash cost the cat that's associated with three hundred million is that is there any kind of timing element on that does that we you know that come pretty equally throughout the year is it build is the get closer to the actual event and on pricing you know i'm sure there's incremental pricing in
in 23 in the emerging markets. It sounds like there's pricing to come in Europe . My question is, is there any kind of material magnitude of pricing anticipated in the US? And if so, could you give us a little sense of the magnitude there?
I'll start with the pricing and let Amma take the CapEx. You know, I'll start with, you know, what we always talk about in terms of we're not going to get into forward-looking pricing and customer negotiations and things of that nature. But we always start with the first line of, you know, what we're going to do is we're going to go through the process of, you know, what's going on in the market.
defense against rising costs is productivity. And so this is, you know, the receding of bottlenecks and shortages have given us the opportunity to really put together more historic productivity plans because all that noise is starting to recede. And so we will have an aggressive productivity plan.
But as Amit talked about, our intention is to stabilize margins to slightly grow them. So that's going to require revenue growth management throughout the year. And that'll look different throughout the year depending on what geography it is. But that is our intention. And I think in terms of the one-time course and the phasing through the year, I mean, you know, we're right in the middle of the program. And so I think...
Thinking about the North American serial company and its anticipated prospects over the course 23 relative to the the total enterprise and the guidance you gave this morning is there a way to frame
the expectations of organic growth and operating profit growth of that North American serial portion of the business relative to the total company guidance you gave today.
Yeah, we don't go into that category level, but you can look at the momentum that we have and the comments I made earlier, we plan on continuing that momentum, you know, getting back TDPs that were lost, that's been very successful up to this point, and to continue to grow as margin. We came to a low point, obviously, because of the fire and strikes, so we're coming off that.
But the underlying momentum, the trajectory of the business, we feel very good about and we aim to continue that trajectory.
Thank you for joining today's school, you may now disconnect your lines.