Q3 2023 Kellanova Co Earnings Call
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Good morning, welcome to the calendar third quarter of 2023 earnings call. All lines 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.
Time, I will turn the call over to John Renwick, Vice President of Investor Relations and Copa filing a full color <unk> company. Please go ahead.
Thank you operator, good morning, and thank you for joining us today for a review of our third quarter results. When we were Kellogg company and a discussion of our outlook for the fourth quarter of 2023 during which we will be post spin off <unk>.
I'm joined this morning by Steve Kay Helane, our chairman, President 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 projections for <unk> future performance are forward looking statements.
Actual results could be materially different from those projected for further information concerning factors that could cause these results to differ please refer to the third slide of this presentation as well as to our public SEC filings.
A recording of today's webcast and supporting documents will be archived for at least 90 days on the investor page of Www telenovela Dot com.
As always when referring to our results and outlook unless otherwise noted we will be referring to them on an organic basis for net sales and on a currency neutral adjusted basis for operating profit and earnings per share.
Please note that we will have discontinued operations impacts to killing of us historical financial statements available during our fourth quarter earnings release in February 2024 until then any commentary about killing over performance is based on estimates and should therefore be viewed as directional.
And now I will turn it over to Steve.
Thanks, John and good morning, everyone, while our quarter three results predated the spinoff it is exciting to be talking to you as <unk> for the first time.
It bears reminding that <unk> is a strengthened portfolio with the business brands and geographies that make Helen over our global snacks led powerhouse.
As shown on slide number five over 80% of our annual net sales comes through snacks in emerging markets, both of which have been and will continue to be above average growth categories and markets.
Half of our net sales come from five highly differentiated brands Pringles cheez. It pop tarts rice, krispies treats and ego that offer above average growth and accretive economics, and we generate half of our revenue from outside of the United States, and Canada, giving us geographic diversification global reach access to fast growing <unk>.
<unk> markets and the opportunity to expand big United States brands into international markets and when you see temporary softness in one market. It can be offset elsewhere, which is precisely what we saw in the third quarter.
Kaelin Ova is also a company with a sharpened strategy, one that better suits, our global snacking powerhouse, while still emphasizing the capabilities that enable us to win in the marketplace protect our planet and serve our communities and deliver attractive and dependable financial returns this strategy appropriately called differentiate <unk>.
Drive and deliver is shown on slide number six but before we enter the kellen over here, let's talk about our final quarter as Kellogg company on slide number seven we turned in another good performance in the third quarter organic net sales growth was sustained in an algorithm pace. Despite a challenging environment marked by our financials.
Strained consumer and the long awaited return toward normal levels of Elasticities were pleased with our continued restoration of gross profit margins as service levels have returned to normal levels productivity initiatives are delivering savings and pricing has caught up with input cost inflation and this enabled us to deliver above algorithm growth and.
Profit, even as we increased our brand building at a double digit rate our free cash flow was strong ahead of last year, even with upfront outlays related to the spinoff and speaking of the spinoff we executed with excellence. So it was another busy and successful quarter and we were heading into the killing over here from a position of strength.
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Externally the focus lately has been less about our improved portfolio strategy and long term growth prospects and much more about current industry dynamics.
Fair enough, but I would remind everyone that most of what we're seeing today from decelerating cost inflation to restoration of service levels and margins to have returned to normal levels of less disease have been in our budget our guidance and our commentary for quite some time. This is illustrated on slide number eight the decelerated net sales.
Growth was inevitable because after significant cumulative price increases, including right through the second quarter of 2023, there was going to be returned to typical levels of elasticities in our industry and.
And across our categories and across our regions. We have seen this rise in elasticities every quarter. This year. We don't think this is about price gaps over private label, which largely remain below 2019 levels and the relatively small shares of private label in our categories remain around their 2019 levels.
We did have a couple of additional factors that impacted our volumes in the quarter, but again. These were anticipated one was lapping trade inventory replenishment from last year, notably in North America cereal and snacks and the other also in North America was our decision to delay merchandising activity earlier this year in order to gain full confidence.
And a return to high service levels, particularly given the lead time required for quality display activity. This cost us some volume in the second and third quarter, but by the latter part of quarter. Three we had returned in merchandising and we'd expect quality display activity to follow.
In short these conditions and timing differences will pass our brand building investment is increasing we are returning to merchandising and we are ramping back up our innovation, we will return to more balanced volume and price mix within our net sales growth over time, accompanied by sustained improvement in profit margins.
Meantime, our brands remain in great shape, and our focus remains on growing our biggest most differentiated brands around the world shown on slide number nine these brands accounted for half of <unk> as net sales in 2022, and a little more than that so far in 2023 as the growth continues to outpace the rest of the port.
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In the quarter and year to date periods, we increased brand building investment behind these advantaged brands at strong double digit rates year on year faster than the rest of the portfolio as we prioritize investment behind these brands, we expect them to continue to lead our growth and contribute positively to margin mix.
Our focus is also on growing the right way and slide number 10 shows some of the ways our better days promise program manifested itself during the third quarter, we unveiled new more ambitious targets for <unk> sustained our legacy of helping our communities and found ways to link these activities to our commercial endeavors and.
We continued to be recognized for our efforts. So let me now turn it over to Amit who will walk you through our financials before I come back and discuss each of our businesses in more detail.
Thanks, Steve Good morning, everyone.
Slide number 12 summarizes the results I'll forget all company because the spinoff Alcoa after the quarter end.
Net sales increased by about 4% on an organic basis in quarter, three which is right on the second half base implied by our full year guidance Eurodac this translates into 8% organic growth.
Operating profit increased by 10% on an adjusted and currency neutral basis sustaining double digit growth in spite, Ohio, E&P investment and the divestiture of our Russia business.
Year to date this translates to 14% growth, which is ahead of the base implied by our full year guidance.
Earnings per share on an adjusted and currency neutral basis decreased by about 2% Euro during quarter, three and increased by 2% year to date.
This is ahead of the pace implied by our full year guidance delivering year on year growth. In spite of some 11 to 12 percentage points of headwind from macroeconomic factors driving higher interest expense and lower pension income.
And free cash flow came in at $894 million, which is higher than last year.
Even in spite of onetime outlays related to the spin off.
This put cash flow well on pace towards our full year guidance for Kellogg company.
So as you step back you'll see that our growth in net sales and operating profit were on algorithm all better in the quarter and year to date period, and EPS would have been as well were it not for the macro related pressures on our nonoperating items.
And we're well on pace to achieve the full year guidance, we had given for the Kellogg company.
Now, let's take a look at each metric in closer detail starting with our net sales growth on slide number 13.
As expected price elasticities roles around the world putting pressure on volume, though this volume did come in modestly better than projected.
Horizon makes moderated sequentially from recent quarters as we began to lap some of our largest revenue growth management actions last deal.
The divestiture of our Russia business, which I'll call. It in July clipped about a percentage point from our overall net sales growth in quarter, three and we will do so again in quarter four.
Foreign currency translation once again was a headwind of about negative three percentage points and based on where rates are today, we are probably facing a similar headwind in quarter four.
Most of this is related to the devaluation of the Nigerian naira, partially offset by strength in the euro bond styling and Mexican peso.
We estimate that portions of the business that represent telenovela generated better organic growth than total Kellogg company in the third quarter.
So even with the long anticipated ryzen lots of cities and the lapping of last year's pricing actions.
Net sales growth remains within our long term target range.
Now, let's discuss gross profit starting with slide number 14, as we've stated many times our focus during the period of heightened input cost inflation and supply bottlenecks and shortages was on growing gross profit dollars.
And as you can see we have done just that every quarter this year.
And as you can see on slide number 15, we have also made good progress in restoring our gross profit margin as well.
We're still not back to our 2019 pre pandemic levels, but this restoration of margins is proceeding faster than expected with your on your expansion in each quarter. So far this year.
This progress also applies to the Caledonia business, let's get an immediate lift from the absence of North America cereal and should continue to benefit from the same drivers going forward.
Price realization catching up to input cost inflation, improving supply chain conditions and the ongoing combination of productivity revenue growth management and mix shift towards our most differentiated brands.
Slide number 16 shows how our sustained top line growth and margin expansion resulted in another quarter of double digit growth in operating profit.
Keep in mind that this growth includes the divestiture of Russia and it also includes a double digit increase in brand building on a currency neutral basis.
Slide number 17 indicates that we are not only restoring our margins at the gross profit level.
But at the operating profit level as well.
We have delivered year on year expansion in operating margin in each quarter. This year, putting our year to date margin a full 100 basis points ahead of last year and I head up our own projections at.
Pascal Lenovo will start immediately with a modestly higher operating margin just from the absence of North America cereal and we expect to continue to improve our margin going forward as we discussed at our dad gay investor event.
This along with top line growth propelled by our strong brands and growth oriented categories and markets give us confidence in sustaining profit growth.
Moving down the income statement slide number 18 shows that adjusted basis earnings per share growth in quarter. Three was once again, mostly attributable to operating profit.
Which has grown enough to more than offset what a severe macro related headwinds within our below the line items.
Those below the line pressures were expected and will continue through the year.
Interest expense increased significantly year on year in the quarter and the year to date period due to higher interest rates.
Other income decreased sharply year on year in each of the first three quarters this year.
<unk>, the accounting of pension and post retirement plan asset values stemming from last year's decline in the financial markets and the rising interest rates.
Our effective tax rate in quarter, three was up year on year, keeping our year to date rate at the 22% we've been expecting for the full year.
Average shares outstanding were again up slightly year on year and quarter, three and we would expect that to be the case for the full year as well.
Foreign currency translation was positive to earnings per share in quarter, three our strengthened European and Mexican currencies more than offset what is a relatively small impact from Nigerian naira at the EPS level.
Turning to slide number 19, we see that our free cash flow year to date is ahead of the prior year.
Even in spite of one time cash outlays related to the spin off and despite lapping a year ago period in which our capital expenditure was delayed because of supply disruptions.
We're pleased with our cash flow conversion, which is higher than last year. Despite these two factors.
This year to date free cash flow performance put us well on our way to achieving our full year guidance.
One to one $1 billion that we had communicated for the Kellogg company.
Meanwhile, we continue to reduce our debt leverage year on year further enhancing our financial flexibility.
Slide shows our net debt continued to decrease even as we continued to deliver higher operating profit and therefore EBITDA.
This was our net debt at the end of quarter three prior to the spin off.
Upon the spinoff the transfer of net debt to W. K Kellogg company was executed and is estimated to be approximately $600 million.
Now, let's discuss our outlook as Keller NOLA now that W. K Kellogg company in North America cereal business is no longer in our portfolio.
Work is underway to prepare Kelly NOLA financials for all four quarters of 2022, and the first three quarters of 2023 trading WK Casey as a discontinued operation.
We will have those completed a few months from now and we plan to share them with you at our next quarterly earnings release in early February.
In the meantime, slide number 20 offers estimates in absolute dollars for the fourth quarter, our initial quarter as Keller NOLA.
<unk> is projected to deliver net sales of approximately $3 $1 billion in the quarter.
Excluding WK Casey from the base and excluding about 1% negative impact of the Russia divestiture and foreign currency translation that at current rates would be similar to the negative impact we saw on net sales in quarter. Three we believe organic net sales growth will be within it.
Long term growth target, even as we assume continued elasticity impact and the lapping of the your price increases.
We expect the restoration of gross profit margin to continue increasing year on year, and reaching a level in quarter four of just over 33%.
We project adjusted basis operating profit.
Of approximately $380 million to $390 million.
Which we estimate will translate into year on year growth that is within our long term growth target.
Excluding <unk> from the base and excluding the small impact of this year's Russia divestiture and currency translation.
We project adjusted basis earnings per share of approximately 73 to 76 cents after accounting for interest expense of around $85 million and other income of around $25 million, both of which will continue to reflect the year on year headwinds we've experienced audio.
In short, we expect Telenovelas quarter for 2023 to remain within our long term algorithm for net sales and operating profit growth.
Looking to 'twenty four as indicated at our dead gay Investor event, a few months ago, we expect to sustain on algorithm growth on sales and profit.
We are still in our budgeting process and we will provide those details at our normal time in February.
Allow me to summarize on slide number 21.
We feel very good about our financial performance and condition heading into quarter four as the Nuc, Illinois law.
Our top line growth remains ahead of our long term target.
Our profit margins continue to recover more quickly than we had anticipated.
Alan sheet as solid as it off your free cash flow, even as we executed our transformational spinoff.
Let me now turn it back to Steve for a run through of our businesses around the world.
Slide number 23 splits our portfolio into category groups to help remind you of their relative sizes and how <unk> portfolio is clearly oriented towards growth beginning in the fourth quarter calendar, but will no longer have the North America cereal portion nor the very small Caribbean zero portion of international cereal as you can see on the slide.
The businesses that will remain with killing over continued to drive most of our growth in quarter three as we walked through our regions, which is how we are structured we will once again organize our discussion around the businesses that comprise kellen over first followed by the North America cereal business that is now part of W. K Kellogg co we'll start with the region's most.
[noise] exposed to emerging markets.
Slide number 24 shows the financial performance of our EMEA region. Once again this region generated double digit organic net sales growth on top of extremely strong comparisons. It again expanded its operating profit margin year on year in the third quarter and it again posted exceptional operating profit growth up 14% on an adjusted and <unk>.
See neutral basis, and this profit was delivered in spite of high cost inflation and substantial reinvestment into the business.
Within EMEA, we see on slide number 25 that snacks turned in another quarter of double digit organic growth in net sales. This organic growth was again broad based across Australia, Asia and Africa in the Middle East.
In market Pringles continues to gain share in the region with notably strong outperformance relative to the category this quarter in Australia and Japan.
As shown on slide number 26, EMEA cereal also sustained growth in the third quarter in spite of lapping elevated year ago growth growth was broad based with notable growth in Australia Africa and Southeast Asia.
And in market, our overall share gain in the region was led by notably strong performance in Korea, and New Zealand.
And then we come to noodles and other as shown on slide number 27, and this business continues to post exceptional growth even as it begins to lap substantial price increases taken last year to offset cost inflation and weakened currencies our business in Nigeria continues to grow strongly owing to the strength of <unk> brands and the huge competitive.
<unk> advantage of our distributor arm multi probe. We also continue to expand our kellogg's noodles business outside of Nigeria.
EMEA enters the killen over here with solid momentum.
For the full year, we continue to expect to sustain strong growth across all three category groups delivering yet another year of organic net sales growth and we plan to do that while restoring our profit margins and investing for the future.
Now, let's look at our other emerging markets region Latin America, starting on slide number 29, Kellogg Latin America in quarter three delivered another quarter of strong organic net sales growth on top of exceptionally strong growth last year. This organic growth was once again led by our two largest markets, Mexico and Brazil.
Specific sub region also posted strong growth. It is important to note that roughly half of our volume decline both in the third quarter and year to date was attributable to price pack architecture changes and SKU rationalization that we have undertaken to improve profitability.
We again expanded our operating margin in quarter, three leading to a fourth straight quarter of operating profit growth of 20% or better.
On slide number 30, we see that our snacks business in Latin America generated strong organic net sales growth in the third quarter led by sustained momentum in Mexico and Brazil.
Both of those markets saw double digit category growth in salty snacks and Pringles gained share in both of these key markets and in portable wholesome snacks, we continue to outpace the category in Mexico.
On slide number 31, you can see that Kellogg Latin America grew net sales organically again in cereal in spite of lapping exceptional growth in the year ago quarter. This growth was led by Mexico, and our Pacific Subregion keep in mind that a sliver of this business our Caribbean cereal business has since been spun off with W. K Kellogg co.
But this business represented only about 5% of our Latin America cereal business last year. So it is quite small.
So Latin America is performing well as it heads into the kellen over here for the full year. We continue to expect this region to sustain strong topline momentum with growth in both snacks and cereal and continued recovery and its profit margins. Once again, we can see that both of our emerging markets regions are showing current momentum to go with.
Our outstanding long term prospects.
Now, let's turn to our developed markets regions, starting with Kellogg Europe and slide number 33. This region sustained yet another quarter of strong organic net sales growth on top of a strong year earlier growth operating profit increased sharply year on year, owing to good topline growth moderating cost pressures and solid margin expansion.
<unk>, all of which more than offset the impact of divesting, Russia earlier in the quarter.
If we look deeper into the business on slide number 34, you can see that snacks, which represents over half of our sales in Kellogg Europe continued to lead our growth in this region in fact quarter three marked the ninth quarter in the last 11 in which we have posted double digit organic net sales growth in our European snacks business.
The growth in quarter. Three also continued to be broad based with double digit gains in all three of our subregions in market. The salty snacks category remains in double digit growth overall with pringles outpacing the category in markets like the U K, France, Spain, Italy and Poland.
And in portable wholesome snacks category growth rates have accelerated into the double digits and we continued to gain substantial share in the U K led by double digit growth in rice krispies squares.
Our cereal business in Europe shown on slide number 35 posted a small organic decline in net sales in the third quarter. As we've discussed previously this business has slowed owing to the rising category elasticities, but we are confident in our quarter four plans, which includes incremental brand building shifted from previous quarters.
So it was another strong quarter for Kellogg Europe for the full year, we continue to expect the region to post yet another year of solid top line growth led by snacks. We also remain on track to deliver improved margins. During the second half in spite of sustained cost pressures, our divestiture of our business in Russia.
It was a necessary move in an unfortunate situation.
But overall this region is showing good momentum as it heads into the killing over here.
We will now turn to Kellogg North America, and slide number 37 as anticipated net sales growth has decelerated in recent quarters as elasticity continued to move higher and as we begin to lap last year's sizable replenishment of trade inventories. However, we continued to recover gross profit margin, reflecting productivity revenue grow.
Management, and diminishing bottlenecks and shortages this enabled us to substantially increase investment in our brands and still deliver high single digit operating profit growth year on year in the third quarter.
The rise in elasticity as well as the lapping of last year's strong growth and inventory replenishment can be seen in all three category groups in the third quarter Slide number 38 show snacks, which represents over half of our North American net sales.
In the third quarter. Its net sales were up very slightly against a very big quarter last year in market. All three of our snacks categories experienced rising elasticities, particularly in higher cash outlay items like multi packs. In addition, we took a more measured approach than many in restoring merchandising activity.
It was a similar story in frozen foods shown on slide number 39 are frozen foods net sales were flat in the third quarter.
Snacks, our Eggo business faced a rise in category Elasticities. In addition, our Morningstar farms brand continued to feel the impact of a shakeout in the plant based category, even as it continued to gain share.
Now, let's turn to our North America cereal business, which forms most of what is now W. K Kellogg co you'll get more detail from W. K Kellogg co and its own earnings release, but as shown on slide number 40. This business face the same dynamics as the <unk> businesses in the third quarter flattish sales, reflecting a continued rise in cattle.
Lori elasticities, and the lapping of strong year ago growth.
Turning to slide number 41, our North America region is having a good year in terms of balanced financial delivery. We now are back to full commercial activity and feel confident in our ability to execute snacks should finish the year solidly in growth. While frozen is expected to continue to finish with improved performance. We are off to an early.
Than expected start to margin recovery in this region, even as we reinvest more in our brands and with the spinoff we become that much more focused and streamlined behind snacks and frozen foods.
Simply put North America too is ready to start our new Euro as Kelly Nova.
So let me summarize with slide number 43.
The third quarter closes the books on the 117 year old Kellogg company and does so in a solid way in spite of rising elasticities across the industry. We continued to deliver good topline growth, while getting our service levels back to where they should be and continuing to restore profit margins faster than we had anticipated and we delivered on.
All of that while executing the spinoff of W. K Kellogg co during.
During the quarter, we made all the final preparations to ensure business continuity and the sustained success of both companies our company and a company parallel operations were successful and our transition services agreements are in place and in operation.
And we now enter the killing of it here from a position of strength, we're back to full commercial activity, our free cash flow and balance sheet are strong, giving us good financial flexibility. We are proactively mitigating stranded margins and we have a plan that you continue to deliver the kind of financial algorithm that you would expect from a portfolio that is weighted.
Towards snacking emerging markets and highly differentiated brands and some we are on track and ready to deliver as Kelly <unk>.
So in closing I want to first express a heartfelt congratulations and thank you to our entire family of Kellogg employees for their tireless efforts and endless passion that went into executing the spinoff and creating such a promising future for both companies we wish our former colleagues all the best as they embark on their next chapter.
W. K Kellogg co and two are killing over employees I share in your excitement for our future. We entered this new era with a more growth oriented portfolio, a sharpened strategy and more ambitious financial expectations and we have just the team to deliver on it and now we'll be happy to take your questions.
Thank you.
Wonder if you'd like to ask a question you can press star followed by one on your telephone keypad.
If you'd like to remove your question you May press Star followed by two please.
Please ensure your unmated locally when asking your question.
Our first question phosphate comes from Jason English of Goldman Sachs. Your line is now open. Please go ahead.
Hey, good morning folks thanks for sneaking me in.
A couple of questions in regard to your reader.
A couple of questions in regards to your reiteration of long term algo for next year.
First you gave a base estimated base earnings number at your analyst day of around $3 35 for this year is that still the right base to use.
Yes, I think I think Jason.
Update the details.
When we get into a normal cycle in February once.
Once we've had.
Actual latest foreign exchange rates. So I think it will we'll update the absolutes as we kind of get to.
February.
We're right in the middle of our budgeting process right now.
But as I mentioned in our prepared.
Our remarks, we fully expect.
There will be on our algorithm for growth rate, we had shared in August.
Okay.
Okay, but that.
<unk> 35 number for this year, even though were.
10 months through May not be a good number to anchor to that.
Hearing that right.
No.
We are on track from a quote from a 23 standpoint, we are ahead of pace.
In.
In the last nine months.
I mentioned, we are on track alcohol 23 standalone so.
We will share the specific details.
When we get to February.
But jeremy.
So we gave for.
2023, as we indicated at that time that was for a full year estimate of what Cal Novo might look like it's not quite the real what Youll see US report because we will have three quarters of Kellogg company, one quarter Kelly Nova.
Wonderful.
A way for you to calculate.
Okay.
Yeah, and which is why I am still trying to anchor to it just because.
As evident in today's press release, it's really muddy right. There's a lot of noise here. So I'm just trying to keep it simple.
Okay, and sticking with that I'll turn it over.
So I'm sorry to align business performance then on ROIC, we're right on track with the 2003.
Yeah, that's good to hear and I think it came through our results, but there is a lot of noise.
And sticking with a long term algo I think Steve mentioned this upfront like your diversified business with a diversified global footprint and you've got long term algo by each segment, but there will be points in time, where some are going to lag and some are going to do better.
And it now feels like it's one of those points in time, where the developed world, particularly North America is lagging.
Don't think it's structural but it's a moment in time your emerging market businesses are doing quite well.
Investors are concerned that you are not able to LTE.
LTE algo across all segments next year.
Is it reasonable to say that that shouldn't be a concern you don't need to LTE algo across all segments next year. It could be looked very much like what we're seeing right now where perhaps north America does lag, but the strength you have elsewhere.
It could offset that.
Or do you actually do do you really expect or you're anchoring to a return to our long term outgrow in North America.
I think a couple of things Jason Youre exactly right, we don't need to be on long term algo in all regions in order to make it corporately because of the power of the portfolio, having said that I think what youre seeing in North America, just to put it in context.
We did return to emerging merchandising activity later than most that was purposeful in hindsight, perhaps we could've come sooner, but we're back now we were also going through obviously, the spin which was a massive amount of work and so as we approach 2024, we look to North America with much more optimism in terms.
Turning back to quality merchandising activity.
Each of our brands. We know is is theyre very very strong.
We've relaxed and innovation for the same reasons holding back to get our supply chain back to where we wanted it to be so we've got a much more ambitious innovation plan in 2024, so as we look at North America in 2023 series of.
Events, obviously led by the spin, but also again measured return to innovation in merchandising activity will all be very different in 2024. So we have more confidence our long term algo in North America, which bolsters our confidence in our long term algo overall as a company.
Understood. Thank you guys I'll pass it on.
Thank you our next.
Our next question comes from Nik Modi from RBC. Your line is now open. Please go ahead.
Thank you good morning, everyone.
Uh huh.
Hoping you can comment on.
Good morning on volume growth you know, obviously revenue has been very strong driven by pricing, but volumes continue to lag some of your global snacking peers have actually posted volumes up so I just wanted to get some context on how you're thinking about that.
And then just a second question. This is more of a kind of a.
Abstract question that I was just thinking about one of the big growth drivers in the future for <unk> will be white space and global expansion with some of your existing brands and I wondered if you do have global P&L for your key brands or is that something that still needs to be developed as you as you spin out the company. Thanks.
Yes, so I would say on the volume question clearly when you take the type of pricing that we've taken.
Mid teens pricing on top of mid teens pricing a year ago youre going to have elasticities. The difference from for us relative to some competition as I mentioned earlier, we did return to merchandising activity Peter than most we.
We did return we're returning to innovation activity later than most.
In fact, and obviously, we had the spin as well as.
Those other items, which leads us to be much more optimistic about 2024, there's nothing structural in our volumes were up performance, where our brand health that points to anything other than optimism in 2024 and beyond.
In terms of white space, but the global Pinos, Yes, we track in detail the financial performance of all of our brands.
SKU level and at a geographic level, so very good understanding of that.
Excellent pass it on thank.
Thank you.
Thank you. Our next question comes from David Palmer of Evercore ISI.
David Your line is now open. Please go ahead.
Thank you good morning.
Question on the fourth quarter.
You mentioned good morning, you mentioned organic revenue growth would be within algo, I assume that 2% to 4% up including our Russia drag and I'm also wondering how youre thinking about it for Q sales breakdown between North America and other segments and the reason I'm asking about that is is really this.
Scanner data.
To date it shows down roughly four 5% in what we see in terms of U S measured channels. So it would look like you would have to be pretty heavy lifting for international for that for that to stay that way and for that to reflect what sort of organic revenue growth you would have in North America and <unk>.
Or.
Put a lot of burden on international so any thoughts about what we're seeing there or thoughts about improvement in North America, what we're seeing is not real or perhaps any particularly strong growth internationally would be helpful.
Yes, I think it will have similar trends to what we are seeing right now.
From a quota standpoint, if you exclude Wpa Casey from the base the.
The ratio of divestiture will be about a 1% negative impact.
And then currency translation.
3%, So I think if you thought of.
Exclude those three youll get to the you will get to our outdoor growth.
Somewhere between 3% to 5% for the overall business.
We would expect international to grow faster than the U S. In the next quarter. We continue to expect a price elasticity. That's always been on other items. So we expect that to <unk>.
We'd expect volume to be down.
The decline to moderate in quarter four as we get back to full all merchandising, particularly in the U S. So that's kind of the shape of what we're expecting in quarter four.
And my follow up to that is if its down if north America were down 4% and international would have to be something like up 10. So that's why I'm asking it just seems like you must be expecting North America to improve from now I know back at the analyst day in August you were talking about merchandising activity for Cheez, it and some <unk>.
Marketing coming coming through so I'm wondering are you expecting a meaningful improvement or do you expect that sort of heavy lifting from international.
Okay.
Yes, I was going to say, it's a lot like quarter, three and you can see in the scanner data that we did return to merchandising activity, we haven't yet gotten to quality display activity that we're now seeing so you're going to see a gradual improvement going into Q1 of 2024 as well.
Great. Thank you.
Thank you next.
Our next question comes from Ken Goldman of Jpmorgan. Your line is now open. Please go ahead.
Hi, Thank you with that.
Caveat that youre not quite ready to talk about certain details in 2020 for yet.
The Street is and it is great to hear that youre expecting in on algo year.
But the street is looking for volume growth.
As soon as the second quarter of next year and I wasn't quite sure if that was reasonable and I don't know if I'm asking a question that you can even answer at this point in time, but my hope is that you know.
Street numbers can maybe be a little more reasonable at some point if that's the case just given some of that you'll still have some pricing flowing through and there's still certain challenges around the world I just wouldn't want people to come out and have.
<unk> numbers that are too high and disappointed so it didn't know if you could talk about that at this point, if there's any kind of commentary you could provide on that.
Volume growth into next year at this time, given the lack of visibility I understand.
Yes.
I said, we're working through our budgeting process right now.
I think we'd expect a gradual return to volume growth in.
In 24, obviously.
Youll start lapping some of the price increases.
Tom.
The volume in <unk>.
Three the laps get easier but.
That's probably the shape of.
How are we looking at 'twenty four right now.
Okay. Thank you.
Thank you. Our next question comes from Michael Lavery from Piper Sandler.
Your line is now open. Please go ahead.
Okay.
Thank you good morning.
Good morning touched on some of them.
Yeah. Good morning, just wanted some of the margin drivers the pricing now offsetting inflation better the productivity the normalization of where the supply chain disruptions have been can.
Can you maybe give a sense of.
Order of magnitude or really trying to understand what are the most sustainable and how to think about looking ahead and then.
Part of that is there any way to quantify you mentioned some of the.
Additional costs from the parallel operations, but they're still had against our expectations. So a nice margin performance can.
Can you quantify some of that was that significant and.
Obviously, you're lapping matter do you put that in the rear view, how much of a lift should that be looking ahead as well.
Yes, so I think in terms of gross margin I think you hit on the two biggest items right. So it is broad and catching up with inflation.
It is a much better performing supply chain.
It's too big.
Biggest drivers.
Ill.
Gross margin improvement.
Improvement and it's been coming in better than what we had expected and faster than what we had expected.
More of a timing in terms of the catch up happening faster than what we had planned for.
So I think in terms of a parallel path, we did incur some payroll costs in quarter three four as we kind of ramp that operation I think that's now behind us post the spin.
I wouldn't say, it's significant lap item for next year, so with input costs, but.
They werent really significant.
From a lift standpoint.
Okay.
Helpful.
Follow up on your color on the consumer just in.
In the release and prepared remarks talking about.
How they're stretched or elasticities are getting sharper.
Can you just maybe give us a sense of how much visibility you have on on the broader dynamic in terms of trading down from food away from home.
What.
In theory give a lift to packaged food, but then obviously the pressure you are seeing with either trade down.
Just some of the consumer dynamics.
That all nets out for you than we've seen in this quarter, obviously, what that looked like but maybe some of what you expect.
In the fourth quarter or looking ahead.
Get better does it get worse or is it more of the same you touched a little bit on the volume thoughts for 2024, but just curious for the the consumer perspective behind that that you see is the real driver.
Hey, Michael I'd say the consumer is clearly strained there is evidence that there is some degree of channel shifting there is some degree of trading down to smaller sizes. There is definitely traffic patterns when they're shopping more trips all those types of things, having said all of that though I think the overarching liners.
Still the resilience of the consumer and particularly for our categories. We're talking about affordable luxury as we've talked about that in the past and we're not really seeing any meaningful shift to private label.
Or anything there.
That points to a structural change in consumer dynamics.
And we've said this in the past when you take the type of pricing you're talking about 30 plus percent pricing over the last 18 months. The type of volume decline that we've seen in aggregate is still much smaller than you would otherwise expect we've seen it more recently, obviously in a real catch up but I think we're probably at the high watermark in terms of elasticities.
As we go into next year.
We're lapping a lot of this pricing consumers are becoming much more used to different price points.
We talked about our return to quality merchandising a lot of things to believe.
Oregon are pointing to a.
Good industry environment. Despite all the macro pressures that are well understood and that are putting pressure on the consumer.
Okay, great. Thanks, so much.
Thank you. Our next question comes from Max Gum pull of BNP Powerbar. Your line is now open. Please go ahead.
Hey, Thanks for the question just on the volume in North America, you've given some color already I know you've touched on.
The slower return to merchandising and innovation and also the lapping of trade inventory build last year I was just hoping you could maybe quantify some of those buckets in terms of just order of magnitude how much of a decline.
Due to the lab, how much was due to the slower return and maybe how much is due to just slower category growth our share performance I realize this is all very tough to give just hoping for a bit more color. There. Thank you very much.
Yeah, Yeah, Max I'd say, just directionally the big buckets are the merchandising activity.
And the pricing and the innovation.
Those are really the three big buckets all entirely controllable.
Look to the future the pricing we are lapping the innovation, we've got a better plan the merchandising activity we're returning.
So that's why I say when we look at the health of our brands, we're very encouraged because youre talking about pringles rice krispies treats cheez. It. These are big power brands that are loved by the consumer showing no signs dimunition with consumer loyalty and so those are the three items that really.
Make up the biggest that's pressured volume up to this point.
Got it and then one more on the U S.
Large.
<unk> retail or this morning that reported results and they called out that they now have evidenced that.
The emergency allotments of snap rolling off maybe have been a bigger impact than expected I think their numbers were.
Yesterday, we would've expected a minus 200 basis point impact on sales and now it's looking more like a minus 400 basis point impact on sales growth just curious if you're seeing.
A similar type of impact demand among year lower income consumers. Thanks.
Yes, I haven't seen those results yet, but snap is obviously.
One part of the elasticity.
<unk> story.
We've taken as an industry significant pricing, while the consumer has been under pressure and so I think its probably youre seeing that in the overall elasticities.
What snap is it's hard to quantify for us, but we'll certainly studied what you've just mentioned.
Thank you. Our next question comes from Bryan Spillane from Bank of America.
It is now open. Please go ahead.
Hey, Thanks, operator, good morning, everyone.
Okay.
Just wanted to ask one clarification and I have a question in the appendix of the.
Dave K presentation there.
There are hard currency neutral dollar targets for sales and EBIT by segment. So just.
I'm just trying to understand is are those not valid anymore. Just because you reiterated kind of being an algorithm for 'twenty four but didn't really address that the hard targets I just want to make sure. We should be still should we still be using those as a guide as we're modeling for 24.
Yes, So I think Brian will give you those details when we close out 23, right I think it will have a growth rate standpoint, like I said.
We fully expect to be on.
Our long term growth algorithm for 2024, I think on the unappreciated driver currencies will be different when we build out 23 versus the assumptions that we've made in August.
Yeah.
Like I had mentioned on 'twenty three we are at the end of nine months. We are ahead of pace.
Does the guidance that we've given.
And so.
Rollout from 'twenty three standpoint, so I think it will go.
Based in currency adjustment would cause.
The absolute to before but.
But we were right in the middle of all of that work as part of our budget.
I fully expect our.
Our long term growth rates should be an algorithm.
I guess, but those ranges or currency neutral that you provided so I don't know maybe the accounting changing it's just.
So I guess, we'll wait till told yes.
Currency neutral right.
The overall rates that we had given for the company included <unk> right. So that was for the total Kellogg company the ones that we had given in our preliminary 20 full guidance.
Whether our currency neutral numbers.
Won't be impacted by deal, although it will be off the long term growth rate.
Okay, and then just to change depending on where we end up on 2003.
Okay, and then just you talked about margins kind of recovery happening a little bit faster than normal. So again, there was an implied margin that is just under 14% I guess in the middle of that range currency neutral next year, So should we.
Is it possible that since Youre running ahead, we could even be a little bit further ahead in terms of margin recovery for next year.
Yes, we felt that as we kind of complete the budgeting process, Brian I think it's a bit premature for me to comment on that.
Margin recovery is recovering foster youll see that in our results.
We will give you the specifics on 2004, when we get to it.
Okay. Thanks.
Thank you. Your next question comes from Alexia Howard of Bernstein.
Your line is now open. Please go ahead.
Good morning, everyone.
Good morning, and thank you Dan.
Hi, there.
Couple of questions here, you mentioned a couple of times that you were late coming back with merchandising and promotional activity.
And that therefore, it with quite a bit lower in the first half of 2023 than your normal run rate would be does that mean that as we lap that.
Lower promotional period.
In 2020 for that in the developed markets, we could actually see pricing modestly down I don't know about the timing of the price increases, but I'm just wondering how we should think about that cadence.
No I wouldn't say you'd see pricing pricing down I think you just see a return to quality merchandising offer.
Inescapably higher list prices and so.
That's really the dynamic that youll see.
Great. Thank you very much that's clear and then on the leverage it looks as though your leverage is.
Fairly comfortable at the moment, probably around $2 45 times.
That $600 million of government W. K Kellogg.
How does that mean you might make.
Where does that put you in terms of M&A aspirations, particularly on the acquisition side I think you were thinking about further deals.
Which geographies and what type of criteria would you would you be thinking about on that front.
Yes, so hopefully I think we.
We like the organic opportunity that's in front of us and I think despite the short term volume.
Right I think the growth potential of our portfolio is strong.
Got plenty of organic growth opportunities I think from a capital allocation standpoint broader rising investments into the organic opportunity, particularly in capacity expansion and pringles.
In emerging markets.
The immediate priority, we would always evaluate M&A opportunities I think largely in the areas of snacking and emerging markets.
No.
If something we'd run a very disciplined process.
And so we continue to evaluate opportunities.
Great. Thank you very much I'll pass it on.
Thank you next question comes from Robert <unk> of Jefferies. Your line is now open. Please go ahead.
Great. Thanks, so much.
Steve I just wanted to ask about the.
Some of the volume impacts.
And I think you said some changes the price pack architecture and also SKU rationalization.
Maybe if you could just kind of dive into that just a little bit more detail I'm not sure that.
Kind of across the overall global portfolio or this is more North America based.
Kind of what's driving that.
That rationalization in the near term and then I guess as we think about next year is it yes, we have this better base with rationalization fully come through in 'twenty, three and we should be able to add in that by the end of this year, which therefore allows us some higher probability volume growth next year. Thanks.
Yeah.
Yes, so things Rob first the biggest impact was in Latin America, where we made very purposeful SKU reductions price package architecture to improve profitability and we're very pleased with the program and how that worked out in North America. There is also elements we've gotten out of some.
Laura lower margin Cracker business for example.
We did rationalize skus, when we had severe shortages and bottlenecks.
Last year to get better performance in the plants and so we'll be lapping that.
The biggest headline is definitely Latin America, followed by North America.
Okay, Alright fair enough.
And then just secondly quickly on the.
Pricing side.
Clearly, it's still part of the top line.
So, let's just not sure exactly.
No.
How many rounds going in and kind of what time on a per segment basis.
But as we think through 'twenty four.
Give me a maybe.
This pertains more to some of the emerging markets.
Do you foresee kind of.
Incremental pricing moves it doesn't sound like that's.
Something many of US are discussing at this point, but like when I look at EMEA.
Pricing relative to currency, maybe there are some opportunities maybe there can be some incremental pricing.
Incremental pricing potential uncertainty.
Geographies excuse me thanks.
Yeah, I'd say a couple of things first in the developed markets. We're looking at a more benign inflationary environment going forward and we certainly feel like the consumer has taken enough pricing and are working hard to mitigate any potential needs to take more pricing going forward and again.
Turning to quality merchandising means promotional activity and benefits to the consumer in the emerging markets generally.
Every year, we're going to be taking pricing whether that be currency, whether that'd be inflation just cost of doing business. That's that's fairly routine and we see the same thing happening in our emerging markets for next year, although not to the same levels that you.
<unk> seen over the course of the last two years and we will exercise all of the <unk> levers that we have in those emerging markets.
To maintain affordability to maintain.
In the shopping baskets of our consumers in the emerging markets, but it's more of a.
I would say a more normalized environment in emerging markets relative to the past two years, but that doesn't mean deflationary and it doesn't mean.
It doesn't mean flat it means just more measured price increases going forward.
Alright, great. Thanks, guys. Thank you.
We might have time for one last question quick.
Thank you. Our next question comes from Steve powers of Deutsche Bank.
Open. Please go ahead.
Okay, Great maybe just to pick up on that last question from Rob.
Specific to me.
For a while pricing was.
Was running well above.
The currency headwinds so you were seeing double digit.
U S dollar growth about pricing.
It was running.
Below so youre seeing the double digit organic growth, but you're seeing kind of double digit declines in U S. Dollars. So could you frame for us what's going on there and maybe give us a little bit more of a tutorial around timing of when pricing.
Has it been or can be taken in that market relative to currency fluctuations and then just how you are net of all that how youre thinking about kind of a real real growth in that market in dollar terms over time. Thank you.
Yeah. So I think it will I think the easiest way to think about it is there's a lag between.
The devaluation that happens on an operating transaction basis.
When the official rate mode.
But we've been seeing the devaluation of the and I are on the ground from an operating basis.
All the way through 2022 23.
I have been taking pricing to cover that.
And I think the business has done a remarkable job taking multiple rounds of pricing.
And the Great news and it's the estimate just to the strength of our brands on our route to market that despite the pricing that we've taken volumes have held up.
Sure.
So.
So thats been happening and like you said <unk> been seeing that come through with elevated growth rates.
Through 'twenty two it into the first half of 'twenty. Three then you have the devaluation.
That happened.
In the last quarter.
The transaction and the translation have gotten more in sync as a result of that and so that's why now we are seeing a bit of a lag I mean, the business continues to be growing at double digit rates and we continue to take pricing.
There is that lag that's kind of flowing in and the way it flowed through the P&L.
But I think.
From an overall standpoint.
We are taking the pricing.
To cover our margins.
We protected our margins.
And that's been the focus of.
The team and we've done that.
Please go ahead.
Okay.
Okay. Okay, that's great and just real quick you talked about similar currency headwinds in the fourth quarter relative to the third quarter. So we take that to mean round about the <unk>.
<unk> drag on EPS from from FX.
Well EPS thats been its been a help to EPS.
Our references they awards from all from a topline standpoint about a 3% drag on the top.
Earnings growth EPS was actually positive in the.
In quarter three right.
And so but I think from a topline standpoint about a 3%.
Hit to the.
The top line and from an EPS I would say.
The exchanges that we have probably flattish.
So much of an impact on the top line than the EPS.
Understood. Thank you very much.
Okay. Operator, we are at time. So thank you. Thank you everyone for your interest and please do not hesitate to call. If you do have follow up questions.
Thank you for joining today's call you may now disconnect your lines.