Q1 2023 Kellogg Co Earnings Call

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The jump in with our first play of the.

Good morning, welcome to the Kellogg company's first quarter 2023.

You have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session with publishing analysts at this time I will turn the call over to John Renwick, Vice President of Investor Relations and corporate planning for Kellogg Company.

Mr. Renwick, you may begin your conference call.

Thank you operator, good morning, and thank you for joining us today for a review of our first quarter results and an update on our outlook for 2023.

I'm joined this morning by Steve Caitlin, our chairman and Chief Executive Officer, and Amit Banotti, Our Vice Chairman and Chief Financial Officer.

Slide number three shows our forward looking statements disclaimer as you are aware certain statements made today such as project.

Performance are forward looking statements actual results could be materially different from those projected.

And concerning factors that could cause these results to differ please refer to the third slide of this presentation as well as to our public SEC filings.

A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of Kellogg Company Dot com.

As always when referring to our results and outlook unless otherwise noted we will be referring.

As for net sales and on a currency neutral adjusted basis for operating profit and earnings per share.

And now I will turn it over to Steve.

Thanks, John and good morning, everyone. We're pleased to be able to report a very strong start to the year. In fact, it was stronger than we had anticipated and puts us in the enviable position of being able to raise our outlook for the full year.

Our top line growth momentum continues as shown on slide number five this was our fourth consecutive quarter of double digit organic net sales growth and beneath the magnitude of our Q1 growth our promising trends, we continued to deliver above our long term growth target, we continued to deliver broad based growth across each of our.

Four regions and across each of our four major category groups.

Our soon to be <unk> businesses continued to grow strongly led by snacks and emerging markets all paced by our highly differentiated world class brands are soon to be W. K Kellogg co businesses continued to show recovery in net sales consumption and share we have continued to execute revenue growth.

Management actions across our businesses right through the first quarter in order to keep up with high input.

And we have supported our growth with sustained innovation and with the supply improving increased brand building investment.

So we feel very good about our topline growth momentum and outlook.

We also feel good about restoring our profit margins.

He said that this would be a year in which we stabilize and even improve our margins after being pressured the last couple of years by soaring input cost inflation, and inefficiencies and costs related to bottlenecks and shortages.

The chart on slide number six shows that margins are indeed stabilizing in fact better than expected margins are what drove most of the first quarter over delivery versus our expectations.

Aside from what we're lapping.

Underlying margin performance is what gives us increased confidence in the full year.

Second we continue to improve our service levels and the bottlenecks and shortages that had created.

Our finally receding.

Well costs remain high we are pleased with it.

Profit margin recovery.

And it's not just the financials that are off to a good start in 2023, Kellogg's better days promise, our social and environmental program continues to be a strategic priority for us and as shown on slide number seven we were as active as ever in these areas during the first quarter from.

From actions visible in the marketplace.

H to philanthropic and sustainability activities in the middle column.

Action oriented approach and the far right column shows that these actions continue to be recognized.

We believe ESG is one of Kellogg company's differentiating strengths and we will continue to be when we our Keller Nova and W. K Kellogg.

And speaking of <unk> and W. K Kellogg, we are very pleased with how our spinoff work is progressing.

Slide number eight offers a high level timeline of the work we are doing in order to be able to set up both companies for success provide you with a strategic and financial information you need and execute the transaction everything is progressing well the announcement of new company names has been well received by stakeholders the.

Design work is finishing up with leadership team members already announced and the remainder of talent placements coming later in the second quarter.

The design and setup of systems and processes for W. K Kellogg is underway and various post spin transition services continue to be ironed out.

Prior year carve out financials are being prepared and we expect to have them audited in the next couple of months.

During the third quarter, we plan to test run W. K Kellogg on its own from procurement and manufacturing to invoicing to financials.

And best of all employee sentiment and engagement remains very high.

We expect to be able to provide you with information via a form 10 sometime in late summer followed by an investor event lightly in late third quarter during which we will be able to share with you the strategies capital structures and financial outlooks for both companies that will all lead to the transaction which takes.

Place in the fourth quarter again, some of this is dependent on timing of regulatory and other customary approvals, but it should give you assurance that the information and transaction or not.

And most importantly, all of this preparation work has only.

That this spinoff creates value for shareowners, we are setting up both companies for success.

K Kellogg co will benefit from focus and resource prioritization and <unk> will be a higher growth company with 80% of sales coming from snacks and emerging markets.

Now, let me turn it over to Amit who will provide you the financial details of our first quarter and full year outlook. Thank you, Steve and good morning, everyone.

Slide number 10.

Quarter of financial results.

It was a very strong start to the year.

14% organic net sales growth was driven by sustained growth in price and mix.

Net sales were better than expected principally because of volume.

Okay.

On profit margins than we had expected leading to a very strong 18%.

The operating profit on a currency neutral basis.

This higher operating profit drove adjusted earnings per share to be 3% higher than last year on a currency neutral basis.

I remember this growth is in spite of significant macro related headwinds.

In fact higher.

Interest expense and lower pension accounting income EPS down by about five and eight percentage points, respectively year on year in the quarter.

Cash flow in the first three months decreased year on year as expected.

This is related to the payout of 2020 twos incentive compensation in quarter one.

Cash outlays related to the spinoff and the timing of certain working capital items and gap.

Now, let's look at each metric in a little more detail.

Slide number 11 lays out the components of our strong net sales growth in quarter one.

Price mix growth was sustained in the mid teens, reflecting revenue growth management initiatives around the world.

In 2020, due and right through quarter, one 2023 as we can.

Set high input cost inflation.

Volume declined reflecting price elasticity, though not as much as we had expected for quarter one.

Foreign currency translation reduced net sales by about three points, reflecting the stronger U S dollar against key currencies versus the prior year.

As we'll discuss in a moment, we are raising our organic net sales guidance for the year.

Our outlook continues to prudently assume that price elasticities will sustain that upward move towards historical levels.

And depending on the direction of input cost inflation that price mix will begin to lap last year's sizable revenue growth management actions.

Nonetheless, there is no.

Posting better than expected growth yet again in quarter one.

As we've discussed numerous times our objective in this high inflation environment has been to protect gross profit dollars why productivity savings and revenue growth management.

As you can.

Good job at this even.

And transitory impact in quarter, four 2021 and quarter, one 2022 of our fire and strike.

And we've done this in spite of economy wide bottlenecks and shortages, which have created significant inefficiencies and incremental costs.

In the first quarter, we made our most progress yet productivity and revenue growth management continue to catch up to our high market driven input cost inflation.

Bottlenecks and shortages diminished in the quarter, a little sooner than we had projected.

We did lap a negative revenue impact from the fire and strike, but even excluding that estimated impact from loss deal.

Those profit dollars increased year on year.

We also improved gross profit on a percentage margin basis, as we lap the fire in strike and narrowed our underlying margin declined by more than we expected.

Our plan was always to have a better second half than first half due to gradually improving supply conditions and the lapping of accelerated input cost inflation.

Slide number 13.

Whose quarterly year on year changes this year.

Greatly affected by year ago comparisons Asics.

As expected.

SG&A in this years quarter, one increased at a double digit rate year on year as we lap an unusual decline in the year earlier period.

That was when brand building had been pulled back because of supply disruptions, most notably during North America cereals inventory rebuild and as we lapped overhead that was low because of low travel and meetings during the pandemic.

As you can see on the slide we start to lap a resumption of brand building and travel and meetings in quarter, two but it was really the second half.

Toward full restoration of both and also raised our incentive compensation accruals.

But in absolute numbers, we feel good about our levels of investment in brands and capabilities and we remain on track portfolio.

Moving to slide number 14, we can see that our growth in net sales and gross profit were more than enough to cover this year on year rise in SG&A expense.

<unk> in our 18% currency neutral growth in adjusted basis operating profit.

This is our fourth straight quarter of solid year on year growth.

Importantly, we have sustained our multiyear upward trajectory on operating profit.

Even excluding from the year earlier quarter and estimated impact of the fire and strike we continue to grow our dollars year on year.

In fact, our quarter one.

Than previous year's quarter on operating profit as well, even dating back to prior to the keebler divestiture.

So obviously a strong start to the Yo and this gives us the confidence to raise our full year guidance.

Moving down the income statement slide number 15 shows.

Growth was more than enough to offset what well Seville.

Below the line items.

These below the line pressures were expected and will continue through the year.

We should see.

In each of the remaining.

Reflecting accounting of pension and post retirement plan asset values and interest rates stemming from last year's decline in financial markets.

Cause of some favorability and some other items in this line. This quarter one figure is probably a little higher than what we will see in the remaining quarters.

Our effective tax rate came in a little higher than expected largely due to country mix and some other differences and it was a little above.

The tax rate of about 22%.

Average shares outstanding were up slightly year on year, and we would expect that to be the case for the folio as well.

In addition, foreign currency translation was a headwind of a little more than 2%.

So while these below the line items are weighing down EPS as expected. It is important to remember that the operational side of our P&L through operating profit is very strong.

Now, let's turn to our cash flow and balance sheet on slide number 16.

As I mentioned earlier.

Cash flow in quarter, one was lower than last deals as we had expected.

In addition to lapping a particularly strong year ago period. This quarter, we experienced the payout of 2020 twos incentive compensation as well as incremental cash outlays related to the spin off cash flow was also impacted Europe .

Quarter four our guidance assumes it takes place at year end.

Today reasons.

Similarly, while the divestiture of our Russian business away its government approval our guidance assumes it remains in our portfolio for the folio and the divestiture impact will be immaterial to adjusted basis EPS, we are raising our guidance for organic net sales growth to 6% to 7%, reflecting a better than expected performance in quarter one.

Which continue to demonstrate price realization and solid momentum across all.

We are raising our guidance for adjusted operating profit growth to 8% to 10% on a currency neutral basis.

This percentage point increase to the range reflects a stronger than expected quarter one.

We feel increasingly confident in our ability to improve margins in Brazil, which combined with our above target net sales growth will deliver operating profit growth that is also above our long term target based on that improved operating profit outlook. We are raising our adjusted earnings per share guidance as well now looking for a year on year decline of 1% to 3%.

Remember that this decline is more than explained by the year on year reduction in pension and post our diamond income.

Nonoperating noncash item that is expected to have a negative impact of nearly seven percentage points on EPS the sale.

The negative impact of higher interest expense due to higher interest rates and the economy is another 4% plus if it one for those two macro related impacts our guidance for EPS would be well above our long term growth target.

Our guidance for cash flow remains at one to $1 1 billion.

Recall that within this guidance, we are expecting a year on year increase in our underlying cash flow offset by onetime cash costs and capital related to the spinoff so to summarize our financial position sustained price realizations continue to generate strong top line growth around the world and across our categories drops we like how our business.

As a performing and we have confidence in our full year sales outlook productivity and revenue growth management actions, along with diminishing bottlenecks and shortages and improving service levels have gotten us off to a good start towards improving our profit margins our financial flexibility strong marked by a solid balance sheet and cash flow that remains in good shape.

Even with some of it was timing in the first three months our guidance for 2023 has moved higher continuing to expect net sales growth and operating profit growth that is above our long term targets. The fast out of quarter. One gives us that much more confidence in this full year outlook, even giving us some flexibility relative to readying ourselves for the spinoff.

We continue to make good progress on setting up both <unk> and W. K Kellogg for financial success.

In addition to carving out of their financials, we are managing upfront expenditures minimizing standalone costs for W. K Kellogg and standard margin per gallon Novo and we are ensuring solid capital structure and financial flexibility for both.

And with that I'll turn it back to Steve to walk you through our individual businesses. Thanks, Amit will organize our discussion around the businesses that will comprise <unk> and W. K Kellogg.

Slide number 20 remind you of the composition of the two businesses and on the slide you can see how our top line momentum in quarter, one continue to span across our portfolio with both kellen, Nova and W. K Kellogg posting double digit organic net sales growth clearly we are heading into the spin off with good momentum.

Let's start by discussing the <unk> businesses, leading off with our emerging markets regions slide.

Slide number 21 shows the financial performance of our EMEA region.

As you can see this region sustained its exceptional momentum in the first quarter posting a third consecutive quarter of organic net sales growth of at least 20% and equally impressive. It expanded its operating profit margin and accelerated operating profit growth to 21% year on year and all of this in spite of ixia.

Leading the high cost inflation and reinvestment into the business.

Let's break the region down into key category groups, starting with snacks on slide number 22, EMEA snacks posted yet another quarter of explosive top line growth in the first quarter growing net sales at an organic rate of 26% year on year.

This growth was broad based across all of our major sub regions and it was led by its biggest brand pringles in market Pringles continues to significantly outpace the high teens growth of the salty snacks category in the region with notable growth and share gains in markets like Australia, Korea, Japan and Thailand.

<unk>.

In market, we have outpaced the cereal categories mid single digit consumption growth in the region.

Which brings us to noodles and other and slide number 24 led.

Led by multi pro in Nigeria. This business continued to deliver organic net sales growth in excess of 20% in the first quarter.

Even amidst high inflation and currency Demonetization initiative multi pro continued to thrive.

Clear evidence of its competitive advantage and experienced management team.

Meanwhile, we continued to expand our Kellogg noodles business outside of Nigeria. So clearly Kellogg is firing on all cylinders for the full year. We continue to expect sustained momentum across all three category groups delivering yet another year of organic net sales growth all while improving our profit margins.

Now, let's discuss Latin America, starting on slide number 26 <unk>.

Kellogg Latin America in the first quarter delivered another quarter of double digit organic net sales growth. This growth was led by Mexico, but we also saw strong growth in Brazil, and our Central America and Caribbean Sub region. We.

We expanded our operating margin in the first quarter, helping to grow our operating profit by 20% year on year, albeit lapping, notably high costs in the year earlier quarter.

Our snacks business in Latin America continued to deliver double digit organic net sales growth as shown on slide number 27. This growth was led by pringles with notably strong growth in Mexico and Brazil.

In market, the salty snacks category sustained double digit growth in those two markets and pringles gained share in both.

We also have kept pace with a very strong portable wholesome snacks category in Mexico, and stabilize our share in cookies and Brazil.

Kellogg Latin America also recorded double digit organic net sales growth in cereal as shown on slide number 28. This growth was broad based with good growth across each of our sub regions in market category growth rates remain robust in the region and our consumption has kept pace in Mexico and gained share in Brazil.

In Puerto Rico.

So Latin America continues to perform well and for the year. We continue to expect this region to sustain strong topline momentum it will be led by snacks, but also by growth in cereal with both supported by strong innovation and relevant brand news.

We also expect Latin America to improve its profit margins this year and it plans to do all this while working on separating its Caribbean cereal business as part of the spinoff. So both of our emerging markets regions are showing current momentum to go with their outstanding long term prospects.

Now, let's turn to our developed markets, starting with Kellogg Europe and slide number 30.

Here, we continued to post strong 8% organic net sales growth in quarter, one with organic growth across our categories salty snacks wholesome snacks and cereal the Kellogg Europe net sales growth would have been in the double digits were it not for Russia, which we are in the process of divesting.

Operating profit declined slightly year on year, but it was comparing against an unusually strong year earlier quarter. In addition, if we were to exclude the Russia business Kellogg Europes operating profit would have been up year on year in the high single digits. So our underlying European business is performing very well.

In snacks, which represents just over half of our sales in Kellogg Europe , we posted another strong quarter as shown on slide number 31.

In fact, the first quarter marked the seventh quarter in the last nine in which we have posted double digit growth in our European snacks business.

In market Pringles sustained its double digit growth momentum gaining share in the region led by the United Kingdom, and France and in portable wholesome snacks, we're experiencing double digit consumption growth overall, and we have gained two full share points in the U K led by Rice Krispies squares, our cereal business in Europe also.

Sustained growth in the first quarter as shown on slide number 32, the growth was slower than recent quarters as we have seen rising price elasticity as well as intentional reduction of certain less profitable merchandising activities. Nevertheless, we continued to execute well in a challenging market.

So when we look at the full year for Kellogg Europe , we continue to expect the region to post another year of solid top line growth led by snacks. In fact, this should be a sixth consecutive year of organic net sales growth in our European snacks business. As mentioned previously we are navigating through cost and supply pre.

And now I will turn to Kellogg North America, beginning with slide number 34 as.

This revenue growth management, along with productivity and diminishing bottlenecks and shortages enabled an expansion and profit margins that drove operating profit up 21% year on year.

Importantly, we again generated organic net sales growth in all three category groups during the first quarter.

And in portable wholesome snacks, our decision to discontinue various kashi bars, and the prioritization of capacity constrained pop tarts, Skus mass continued momentum and rice krispies treats and a resurgent special K bars business.

Our frozen foods business also grew net sales in the first quarter as shown on slide number 36.

Here the growth has been more modest in part because of supply disruptions both in our Eggo frozen breakfast business and especially in our Morningstar farms plant based foods business.

Meantime, both Eggo and Morningstar farms are leading brands with strong commercial programs planned. So we are confident in our ability to improve our frozen performance as the year progresses.

All of the regions and categories. We've discussed up to now we will be part of Telenovelas and all of them are showing strong and continued net sales growth to go with progress toward recovering margins.

Now, we're going to turn to our North America cereal business, which forms the vast majority of what will be W. K Kellogg co <unk>.

As shown on slide number 37. This business continues to recover rapidly and posted another quarter of double digit organic net sales growth.

In the U S. The cereal category grew at a double digit rate in the quarter and we gained nearly three points of share year on year as our resumed commercial activity is producing share gains across our portfolio led by rice Krispies special K Raisin bran and frosted flakes.

This recovery is evident in our U S away from home business as well, we gained several points of share across each of our major channels convenience stores and foodservice in schools.

And in Canada, where the restoration of inventory has come a bit more recently, our consumption growth was even more pronounced and we gained roughly six points of share year on year.

So the recovery continues in our North America cereal business turning to slide number 38, our North America region is off to a strong start in 2023, giving us confidence in the full year.

<unk> is expected to sustain its momentum while we have plans in place to improve our performance in frozen and our North America cereal business continues its recovery we are off to a good start on our margin recovery in North America, even as we reinvest in our brands.

So the business is in good shape as we set up for the spinoff of W. K Kellogg.

So let me summarize on slide number 40, we're off to a very strong start to this year around the world and across our key categories and brands, we have clearly sustained growth momentum and our profit margins impacted over the last 18 months by accelerated input cost inflation economy wide bottlenecks and shortages.

And even a fire and strike are starting to recover.

These underlying trends with a strong first quarter already in the books are what give us increased confidence in a raised full year outlook that had already called for sales and profit growth above our long term targets, but while we are executing our plan and delivering on our current year results were also busy creating the future. This includes most notably.

Our planned spin off of our North America cereal business. We are full steam ahead on this work as we work through every detail of this important undertaking we have become only more confident that this will create real value for our shareowners will have a more focused W. K Kellogg able to leverage its scale in North America.

Cereal with a fit for purpose strategy expertise and resource allocation and we will have greater visibility into a global snacking oriented <unk> that has been and will continue to be delivering above average financial performance.

I couldnt be more proud of and grateful for our team members around the world, who are executing with agility and passion amidst an external environment that remains incredibly dynamic and with that we'll open up the line for questions.

Thank you.

We will now begin the question answer session with publishing analysts analysts may entered the queue by pressing the star key and the number one on the telephone keypad.

That's a cut CTO colleagues.

Get yourself to one question.

Our first question today comes from the line of David Palmer from Evercore ISI. Please go ahead. Your line is now open.

Hi, Thanks, a question on gross spending I would imagine this is the year that youre getting past a lot of supply chain, both supply chain issues, both upstream and within the company and I'm wondering.

If you could just talk to where the biggest growth spending energy is being applied whether that's advertising and promotion and innovation in areas of the world in parts of the business. Thanks.

Yes. Thanks for the question, David I want to make sure I understand the question.

But in terms of reinvesting in the business. We are we are certainly investing in brand building. There's no question about that we're investing in innovation and we're investing in capacity and so we are obviously coming out of the pandemic and the supply disruptions to bottlenecks and shortages as so many other companies are and we are investing for growth and you see.

That you see that enter upgraded guidance for the top line you see that in the better service levels that we're delivering to our customers you see that in pringles expansion around the world, which are required requires capex and so it's really in those main areas.

Again, if I understood. The question Thats, that's essentially where we're looking to deploy those resources.

Yes, I mean, I guess I am just looking for examples.

And metrics with regard to.

The number of new products the ability for you to get those things on the shelf.

And whether you are going to be layering in promotion spending as you go through this year I think there's some concern that volumes in this space don't improve or don't hold up through the year as pricing rolls off so.

These types of things can help people feel better about those volume metrics as you get later in the year.

Yes, David so.

I have heard some of the commentary around promotions and so forth, but brand building is up innovation is up and this notion that merchandising is returning to pre pandemic levels, we're not quite there yet, but it is improving and remember merchandising, which some C is one element of the outcome.

Price promotion get your product out on the floor. It gets your consumers interrupted in their shopping patterns and we see it as a good thing in terms of just going forward in innovation.

The bar of innovation I've said this in the past has clearly gone up SKU counts went down during the pandemic. So thats been raised and we are.

We are very.

Pleased with our top line performance with pleased with our ability to.

To raise that guidance and we're pleased with our margins where they are in the recovery in margins. So all that being said I think the environment is a good environment, it's an environment that we're being successful and we're being competitive in.

And I think it's a it's a positive environment as we look as we look into the future.

Thank you.

Yeah.

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

Great. Thanks, good morning, everybody.

Steve I guess I've got a bit of a higher level sort of high theyre, a little bit of a higher level industry question for you.

It looks as though we may finally be heading in earnest towards a more normal operating environment. Following three plus years of all of the anomalous dynamics and I guess I'm curious how you think this transition for the group to normalcy will look not just for kellogg, but or the industry as a whole.

So in other words do you think this transition to normalcy can be made in a somewhat quarterly way or should investors have their expectations in check.

Maybe potentially for more more uneven results for some time as you know as pricing has lapped and perhaps it takes more time for volumes to pivot more positively based on I'm, just trying to assess whether we see more of a like a hard or a soft landing. If you will for food manufacturers as we kind of move into a more normal operating phase if you will thanks so much.

Yes. Thanks for the question Andrew I Love some of the words you used in their normal.

And predictable and soft landing clearly we've come through the last three plus years in.

Facing all these unprecedented challenges, we said as Kellogg that we would exit the pandemic a stronger company and many of our competitors said the same thing and we certainly have and I think that puts us in the industry in a good position to actually come into this next kind of year.

And a much stronger fashion without some of the disruptions and challenges that you alluded to I mentioned to David in the earlier comment. The BARDA innovation has been raised that is unquestionable. There is there is no question that innovations have to be better they have to be performing right out of the gate shelf space.

<unk> is more valuable than it's ever been.

In my years in the business supply change I've had to become more agile Theres no question about that our supply chains have all been challenged to degree they never had before they become more agile, but they've also used and utilize new technologies, we're deploying technologies like artificial intelligence and machine.

Turning we're getting better and better at predictive really end to end the relationships with our customers.

Again during the pandemic it was about how do we serve our consumers our joint consumers in ways that we never had to face before we had all sorts of challenges with respect to that but now supply chains have come through stronger as well and the relationships with consumers I think are more end to end than they've ever been before and so.

So looking to eliminate friction is something that we talk to our customers. All the time about joint business plans start with how do you eliminate waste and to and how do you grow the size of the prize while we serve.

Common consumer and I guess the final thing I'd say is the whole world of marketing is changed like it never has before the true promise of one to one marketing that we've been talking about for so many years is upon us with data and analytics more sophisticated than they've ever been first party data.

More robust and more available than it's ever been to really target consumers in a way that market is marketers have dreamed up for years and so you put all these things together and it is not 1987 anymore. I think it is it really is.

Not to be too.

Too rosy about it but it's a new morning, and it's I think a very very promising outlook as we look towards our.

Our industry and how Kellogg will perform in the future, we're very optimistic about the future for all of those reasons.

Really appreciate the thoughts thank you.

Thank you.

Question today comes from the line of Bryan Spillane from Bank of America. Please go ahead. Your line is now open.

Alright terrific. Thanks, operator, good morning, everyone.

I wanted to just ask a little bit about inflation I'm not sure I might have missed it but did you give us an update on where cost of goods inflation was in the quarter and what youre expecting I guess.

For the balance of the year and maybe if you can just give us a little bit of color on kind of what's moving in each direction I think we're beginning to see some relief unlike rather than some packaging costs. So just if you can just sort of unpack for us a little bit just kind of the Cogs basket.

Where it stands and kind of what we should be looking at as we go forward.

Sure. So I think if you look at.

Costs came in largely in line with expectations from a commodity standpoint, I think our outlook for the year continues to be made.

Mid teens inflation, so no significant change than what we have talked in our last call.

Certainly there are some movement and some in some commodities.

Like we've talked previously we obviously have a hedging program. So some of that will flow through.

As hedges.

Roll across.

Very pleased with the performance in the first quarter I mean, if you look at our gross profit dollars. They were up 16% on a currency neutral basis with strong double digit growth in our gross profit dollars.

No question aided by the fire and the strike in quarter, one, but even if you look at it from a full year standpoint, I think based on our quarter. One performance. We are now saying that gross profit dollars would be slightly ahead of our net sales growth. So we had talked previously of flattish gross margins for the year I think based on what we're seeing right now.

We expect our gross margins to be up.

Slightly for the year.

<unk>.

Okay, great. Thanks for that and just as we're thinking about the flow of that does the inflation moderate as the year goes on or is it pretty steady through the year.

I think the last I'd.

I'd say overall, it's in the mid teen inflation I think in other labs.

Moderates in the second in the second half.

Because that's when we saw commodities kept going up last year. So you will start lapping that in the second half so the year on year.

The moderation will certainly be more back half weighted.

Alright terrific. Thanks, Amit.

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

Hi, Thanks very much.

I wanted to ask a quick question on Latam.

The volumes were down year on year, I think by the largest negative number in a few years, obviously a lot of that was to be expected given the pricing, but just sequentially pricing wasn't up quite as much as <unk>.

Was in the volume comp wasn't I guess that burdensome. So I'm just curious how you think about that particular region. Some of the tonnage numbers, we're seeing there.

How that relates to the previous questions about leaning into promotions a little bit more.

Yeah, Thanks, Ken I'll start with overall very positively disposed to our results in Latin America. When you look at the disruption and you look at.

Macroeconomic standpoint, and all the things that are challenging in emerging markets in General Latin America has been a pretty.

It's been a pretty steady place to be for the last several years.

Up until about two years ago, where we started to see a return to some of the macroeconomic challenges the geopolitical challenges and so forth so with that.

Very pleased with our performance, but we are seeing a rise in elasticity in Latin America.

And Thats no surprise, you see very high price increases.

To overcome the input cost inflation and it's worsened by transactional forex over the past several quarters as well it has been most pronounced in cereal, but we continue to perform well in cereal in Mexico, especially big cereal business and then when you look at our Pringles business in key markets doing very well, obviously, we added some capacity.

A couple of years ago in Brazil put some lines of Pringles in Pringles continues to perform very well in Latin America. So our outlook for Latin America remains strong.

We're pleased with the performance there, but it's obviously an emerging market. So it comes with some volatility.

Great. Thanks, Steve.

Okay.

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

Hey, good morning folks.

Yes.

Yes.

You made early Steve about.

<unk> R. W. K Kellogg Keller.

Calling it maybe not yet.

But as that business effectively.

It up and running independently in the third quarter it was interesting.

Much functional overlap will there still be.

And I guess, what I'm kind of a win out here. It sounds like you may actually be we're all we're all freaking out about like how big the stranded costs and separation is going to be.

What the overall cost legacy be it sounds like.

You may actually be absorbing a lot of that in this year's guidance is that right.

That is right that is right Jason that is in our guidance the incremental cost of standing that up we're doing something called company <unk> company, which is essentially running water through the pipes. So that we make sure that when we do spin off the business.

It's ready to go and what I'd say in terms of stranded cost trend in margin, obviously, that's coming but any kind of.

The way you portrayed that I would say, we're very confident very confident in our ability to stand up. These two companies with strong capital structures and very strong outlooks and so I think I think many investors will be quite pleased when they see has come in the summertime during during our Investor day, we can't say much right now, but I am <unk>.

Confident that those two businesses will be stood up stood up strong with very strong outlooks.

And I think youll see the value creation and the value unlock will be an aha moment for those who don't quite get it yet.

Great I'll leave it there thanks.

Thank you.

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

Good morning, everyone.

Good morning Alexia.

Alright, I think you mentioned at the beginning of the prepared remarks that volume came through a little better than expected I know, it's still down but it sounds as though that with strong can you give us a bit of color about where it was stronger and do you expect that volume trajectory to improve as price flows through the course of the.

Yeah.

How much do you expect to take place.

Yes, Thanks, Alexia I'll start and May want to add and so volume was clearly better and if you look at it compared to historical elasticity. It's better everywhere. There is no question about that and Thats not unexpected in a world where inflation is across the board right. So it's all relative and you have to.

Thinking about the relativity of our categories versus more discretionary categories, having said that.

Three good performance in North America relative to historical Elasticities very strong performance in EMEA relative to elasticities I talked about Latin America, where we had elasticity is rising a bit more Europe , you see a lot of noise in there based on Russia, and so forth, but a little bit more elasticities, there and so cross.

The board very good performance standout performance in North America, and EMEA relative to over performing versus elasticities. When we think about the back half of the year. The remainder of the year. We are prudently assuming that elasticities start to increase and approach not quite historical levels, but on a march towards historic.

<unk> levels, and we think that that's just a smart planning assumption, we will see how it unfolds.

Yes.

Great. Thank you very much I'll pass it on.

Thank you.

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

Great Hey, thanks, and good morning.

It's actually going to ask a very similar question to the one that the adjacent answered or asked I think you answered that one pretty clearly I guess, the other thing I'd tack onto it maybe as you mentioned you.

You cited that both Kelly Nova.

At W. K Kellogg pro forma grew low double digits in the quarter and I realize you're constrained by giving us too much details, but just.

As you know given that disclosure.

And I'm thinking about is I think about the 6% to 7% full year organic growth guide is there any any way you can frame for us a little bit about how you expect those two businesses to be contributing to that 6% to 7% on the year. So we get a little sense of expected momentum as we as we go into the the.

The new regime. Thank you.

Yes, I would say, Steve we've got great momentum in both businesses I think you've seen the results of care Lenovo good broad based growth across all our categories. Both in the U S internationally and across all categories as well.

On North America cereal, we're very pleased with the recovery that we're seeing there from a share standpoint.

And that will continue to be the focus for the rest of the year. So there's good momentum across both the businesses.

We understand your question correctly Steve.

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

But thank you.

Yes, we do.

Don't have that.

Steve So I think what we can do is probably in the Investor day, we'll probably give you a lot more details of each of the two businesses I mean, obviously, Illinois was about 85%.

So the 6% to 7% that we're talking for the overall company is being driven by Lenovo.

On North America cereal, what you saw in the first quarter we were.

Clearly lapping the fire and strike.

No.

The double digit growth was lapping that you would expect that to normalize.

As we go through the course of the year.

Yes, Steve I think you maybe if it is helpful. As you look at syndicated data you can look at the North American cereal business and you see a lot there and then as Amit said, 85% of the business is <unk> you look at the EMEA results you look at the Europe and look at North America snacks, you can probably get a pretty good sense of what that looks like.

Yeah, No I think that's all fair I was just looking to see if you had a few.

Got it thank you very much.

You bet. Thank you.

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

Hi, good morning.

Good morning, a question on the <unk>.

On your EPS guidance for the year, just given the magnitude of the Q1 beat.

Raise your full year guidance by more than a percent.

Q1 results more in line with your internal expectations versus where the street was.

Or are there factors weighing on the EPS growth outlook over the rest of the year that temper the flow through of Q1 upside.

Yes, I think like we talked.

Earlier in the call and in the prepared remarks.

We are very pleased with the Q1 over delivery.

I think it's still early in the year.

We talked a little bit about being prudent on elasticity assumptions on price elasticity assumptions for the rest of the year.

We are being prudent.

From all <unk>.

Separation and spin standpoint, Steve talked a little bit about building into the guidance.

Some of the costs associated with the spin in quarter three.

<unk>.

I think it's a balance of being prudent on our volume assumptions and elasticity assumptions for.

For the year.

It's early but obviously very pleased with the underlying momentum in the business and a strong start.

Got it. Thank you and then just on Europe pricing came in very strong there, but volumes did soften what are you seeing in terms of consumer behavior in Europe and have you finalized your price negotiations there.

Yes, so what we're seeing in Europe is as I mentioned earlier, a little bit more elasticities are little bit more channel shifting than we're seeing in some of the others.

Obviously, a big impact on Russia, which obviously.

We stopped shipping in Russia, and we are divesting the business in Russia, but getting back to Continental Europe shoppers are doing some channel shifting as I just mentioned hard discounters clearly.

Growing their businesses that has a disproportionate benefit to private label.

Within our portfolios, we're seeing a little bit more and these are modest coming from small basis, but a little bit more private label growth in Europe and Europe cereal, then we would be in the rest of the world. So no surprises Europe is.

<unk> environment, but again, our results in that challenging environment.

We're very proud of a very proud of the way the team has delivered and as we said in our prepared remarks, when you strip out the effect of Russia, you see even better performance. There. So one to watch, but one that where we've got very very good plans in place for the back half of the year and even indeed into next year.

Okay. Thank you.

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

Yeah.

Hey, Thanks for the question and relief in the prepared remarks today.

Just supply bottlenecks.

Shortages that are beginning to moderate this has been a key pressure points, but then.

Industry, both in terms of supply chain disruption, we've seen and also inflation given conversion costs associated with upstream suppliers in particular.

I was hoping you could double click on the drivers of improvement that Youre seeing there and also how much recovery is still left to go.

Yes, so Matt I'll start and again, Amit can add I would say.

The easy answer the short answer to that question is supply constraints bottleneck shortages are improving almost everywhere and so everything from the driver shortages that we talked about the ocean freight shortages containers being in the wrong place at the wrong time, all these things that only a year ago.

The entire industry was struggling with have become much more normalized we still have the odd shortages inventory not being in the right place from some of our suppliers, but I mean literally every day, it's getting better we talked I know a couple of times on these calls about our control tower approach that we took.

And things that were elevated too.

At the top of the control tower. If you liked it took manual interventions to get done those are down dramatically. So the type of automation and the type of.

Supply chain that we have.

Before the pandemic is much closer to.

To being real today than it was we're not back to just in time inventories were not back to where we were I don't think anybody is but we're much closer and the outlook going forward continues to be one.

Definitely much more of optimism than what we saw.

Up to this point in the second half of the year, we see continued improvement.

The only thing I'd add is we are seeing that flow through into the P&L and I think that was one of the drivers of the improved margin performance of quarter one.

And certainly the reason why we have confidence in raising our guidance.

Our gross margin.

Well great to hear thanks very much.

Thank you.

The next question today comes from the line of Rob Dickerson from Jefferies. Please go ahead. Your line is now open.

Alright, great. Thanks, so much.

Maybe just a quick question for you Amit.

Just around here.

For a few comments about kind of the.

Actually very attractive to them.

The two separate businesses remember at Cagny, you kind of went through.

Incremental detail I believe in the TSA agreement.

Excuse my ignorance here for everybody already knows this but I was just kind of looking for kind of.

Maybe a perfect clarification, how the TSA agreement actually works.

Our sense is kind of what I feel is.

Theres actually a payment to the snacks co that provides you time.

To offset the dis synergies.

Does that makes sense, maybe if you could just kind of clarify how that works thats all I have thanks.

Yes, so we're making good progress on the TSA the transition service agreements across a number of areas.

And we're putting those into place.

DSA is couple of areas like <unk> services.

Global shared services.

Transportation logistics.

So those will be the bulk of the transition service agreements they are wearing in nature and from a <unk> timing standpoint, but could extend.

Up to two years.

And obviously.

<unk> provides a stability business continued as well as helps offset.

The synergies.

It gives both organizations time.

To address.

<unk> put in place the right long term structure is appropriate for their businesses. So that's kind of where we are.

Okay.

Alright.

That's all thank you.

Operator, we have time for one quick last question.

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

Thank you and good morning.

Just was wondering if you could elaborate.

Good morning, I was wondering if you could elaborate a little more on the restoration of marketing spending.

Specifically, maybe if youre thinking of that in dollar terms or as a percent of sales obviously with pricing driven sales growth on a unit basis. The spend goes a little further if you do it as a percent of sales just curious where you land there and how to think about how that all evolves.

Yes, so we're pleased with the overall level of spending.

And we would expect it to be up overall SG&A to be up similar to what it was up last year low single digit rates I think within the Euro obviously theres a lot of phasing. If you recall last year, we had pulled back in the first quarter and then even in the second quarter as we were restoring.

Supply on the U S cereal business. This year, obviously, we've got a full commercial plan.

So I think in the quarter, we were up double digits against a low base I.

I think youll see that reverse out in the rest of the year.

But overall when you kind of look at it and if you put it put aside.

The noise of the lap of the fire and the strike.

We'd be very pleased with the levels of investment that Steve mentioned.

We are investing across across the world.

And our brands as well as an innovation.

And we are pleased with the levels.

I'll spend that we have.

Okay, great. Thanks, so much.

Well. Thank you operator, we are at 10 30 so.

If you don't mind, we'd have to close it out right now, but if anyone has any follow up calls please do not hesitate to call us.

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

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