The Kellogg Company's Second Quarter 2023 Earnings Call began with the operator muting all lines to prevent background noise, followed by John Renwick, Vice President of Investor Relations and Corporate Planning, giving a review of the second quarter results and an update on the outlook for 2023. He was joined by Steve Cahillane, Chairman and Chief Executive Officer, and Amit Banati, Vice Chairman and Chief Financial Officer. A forward-looking statements disclaimer was provided, as well as the option to listen to a recording of the webcast and view supporting documents. Results and outlook were discussed on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. Steve Cahillane then took over to discuss two key elements depicted on slide number 5.

In the first quarter of 2022, Kellogg's experienced top line growth across their portfolio and geographies, a sooner-than-expected recovery in gross profit margin, and continued momentum in their biggest and most differentiated brands. Additionally, they remain active on their social and environmental program, Kellogg's Better Days Promise, with donations, volunteering, and progress on their goals.

Steve is discussing the progress of the company's pending separation, which is expected to take place in the fourth quarter. The team has done an exceptional job getting ready for the separation, and important milestones such as filing the Form-10 and running the companies in parallel have been completed. The company will also host an investor event on August 9th to present the strategies and financial outlooks of both companies.

Slide number 10 provides a summary of the second quarter and first half results, which showed net sales growth of 7% on an organic basis and operating profit growth of 14% on an adjusted basis. Cash flow is down year-on-year due to spin-off related outlays, but is still on track for the full year. Price mix growth was sustained in the mid-teens, and foreign currency translation negatively impacted net sales growth by nearly 3%. Elasticities continued to move higher around the world, and the devaluation of the Nigerian naira is expected to have a similar impact in the second half.

In quarter two, the gross profit increased by 9%, and the operating profit grew 14% year-on-year. The productivity and revenue growth management have helped to recover margins, and the company is confident that it can expand its gross margin by 50 basis points year-on-year. Operating profit was up 16% year-on-year in the first half, and the company has raised its full year operating profit guidance.

Slide number 14 shows that despite headwinds from below-the-line items, such as higher interest expense and lower other income, operating profit has still grown enough to offset the headwinds and increase earnings per share. This was aided by a favorable second quarter, with an effective tax rate of 22% and average shares outstanding slightly higher than the previous year. Foreign currency translation had a negative 1% impact on earnings per share for the first half, and is expected to be similar for the full year. The key takeaway is that operational profit is still very strong despite the headwinds.

Cash flow is below last year's high level due to one-time cash outlays and lapping of strong inflows in the year-ago period, as well as timing of capital expenditure. Despite this, WK Kellogg Company is slightly ahead of pace for the full year and is raising its guidance for organic net sales growth to approximately 7% and adjusted operating profit growth to 9%-10% on a currency-neutral basis. This raise reflects a stronger-than-expected Q2 performance and is expected to deliver operating profit growth that is above the company's long-term target.

The company is raising their adjusted earnings per share guidance, now expecting a year-on-year decline of 1-2%, largely due to macro-related impacts. The cash flow guidance remains at $1-1.1 billion, and the spin-off is expected to take place at year-end. Profit margins have expanded and net sales growth remains strong, leading the company to raise their full-year outlook.

In the second quarter, the EMEA region of Kellanova's emerging markets sustained its strong momentum with mid-teens organic net sales growth and expanded its operating profit margin year-on-year. Pringles gained market share in multiple countries, and the salty snacks category grew in the high-teens or better across key markets. WK Kellogg will share its strategies, capital structures, and financial outlooks next week.

Kellogg's EMEA business has seen strong growth in Australia, Africa, and the Middle East, North Africa, Turkey sub-region, with the Multipro business in Nigeria delivering organic net sales growth of over 20%. Kellogg's noodles business has also seen growth in South Africa and Egypt. The team has been proactively managing currency devaluation in order to protect margins, and the company expects continued top line growth going forward. In Latin America, the company has also seen strong organic net sales growth in the second quarter on top of strong growth in the previous year.

Kellogg Latin America had double-digit organic net sales growth in the second quarter in both snacks and cereal, with strong growth in both Mexico and Brazil. Kellogg Europe also had sustained top-line growth, increasing to 11% organic growth in the second quarter, with mid-single digit operating profit growth excluding Russia.

In the second quarter, Kellogg Europe experienced double-digit growth in its snacks business, driven by volume and price mix, and saw double-digit growth in its salty snacks category across key markets. Its cereal business also experienced growth, though at a slower rate due to rising category elasticities. The region is on track to have another good year and is expected to post solid top-line growth led by snacks, though cost pressures are expected to remain.

In the second quarter, Kellogg's North American net sales saw solid organic growth, enabling them to increase investments in their brands and deliver 14% operating profit growth year-on-year. In particular, the snacks category, which makes up over half of their net sales, grew by 5%, and their frozen foods also grew. Their cereal business, which makes up the majority of what will soon be W.K. Kellogg Co., also continued to recover, growing its net sales and gaining share in the US and Canada.

The North America region had a strong first half, with snacks in growth and Frozen and Cereal businesses recovering. The company has seen an earlier-than-expected margin recovery, enabling them to reinvest in the business and sustain strong earnings and cash flow growth. The company has twice raised their full year outlook and will be sharing their spin-off plans at an investor event next week.

Steve Cahillane discussed the consumer behavior and volume in North America, which is in line with their expectations. Consumers are closely managing their pantry inventories and guarding against waste, and there has not been any significant shift out of their category. They are taking into account the strain on household budgets when considering promotional activities for the rest of the year.

Steve Cahillane explains that the volume decline in the second quarter was in line with their expectations, as it was amplified by lapping the year ago trade inventory replenishment in North America and the calling of lower-margin SKUs in Latin America. He is more optimistic and constructive about the volume going forward, and does not expect the volume to continue at the current level.

This quarter saw a high inventory lap, leading to a deceleration of sales growth. This was due to lapping last year's substantial revenue growth management actions, as well as higher elasticities. Additionally, the shipment was below Nielsen consumption in North America, which was attributed to the serial over shipment last year of replenishment and possible de-stocking from retailers to manage working capital.

Steve Cahillane and Amit Banati discussed the potential for retailer de-stocking and the resulting replenishment of safety stock across the supply chain. They noted that as service levels return to above 95%, retail confidence will grow and lead to reduced days of supply. This is seen as a positive, and the company has raised its guidance for the top line slightly. In terms of gross margins, Banati stated that they are increasing faster than expected due to bottlenecks and shortages receding faster than anticipated, and they expect this trend to continue. The forecast is for a 50 basis point increase for the year.

Steve Cahillane and Amit Banati discuss the gross margins of the North American cereal business, and how they have been recovering from the fire and strike. They also mention that they have increased their investments in A&P in the first half of the year, but plan to be more ambitious in the second half.

Steve Cahillane reports that the Kellogg Company has seen strong results in Europe, with snacks growing nearly 20% on an organic basis and cereal also experiencing positive growth. He attributes this to the constructive relationships with customers and the overlap of what they need for their consumers, as well as Kellogg's investment in promotions and programs that address a strained household budget environment.

The African team has been successful in managing the devaluation of the de facto basis and have been transacting at the rate that it was valued at or close to it. Steve Powers asked about the gross margin expansion in the second half and Steve Cahillane discussed the African team's success in managing the devaluation of the de facto basis. He then asked Amit to discuss the pricing outlook in the context of devaluation going forward.

Steve gives credit to the Nigerian government for taking the necessary steps to protect the economy, but the currency has still been devalued. This devaluation has a 4% impact on overall NSV, with 2% of that impact being felt this year and 2% next year. This has been incorporated into the ForEx guidance, and has a less than 1% impact on OP and EPS. Despite this, the company still expects gross margins to expand in the second half.

Bryan Spillane asked Amit Banati about SG&A as a percentage of sales and whether there is still some rebasing of marketing spends that has to happen. Banati responded that SG&A has been running about 200 basis points as a percentage of sales below where it was before last year, and that they expect it to stay at the current rate of high 18%-19%.

Amit Banati, the speaker, is answering a question about the levels of advertising, SG&A, and pricing in comparison to 2020, 2021, and 2022. He explains that they are pleased with the levels of advertising and that SG&A will be up mid-single digits, slightly higher than what they increased in 2022. He also explains that pricing has influenced the ratios of the P&L.

Amit Banati explains that R-Tech has been recovering its share in the first half of 2023 and there is still some recovery happening with the long-tail SKUs. There is now a separate sales organization for North American Cereal and they have ambitious goals that are achievable. Robert Dickerson then asks a follow-up question.

Michael Lavery of Piper Sandler asked about the volume split between W.K. Kellogg and Kellanova on a company NewCo basis for the second quarter. AmitBanati and SteveCahillane both responded that they had not split out that level of detail. Lavery then asked about what it would take to see better volume growth in emerging markets, to which SteveCahillane replied that they would provide more detail next week. He added that the pressure in emerging markets could be attributed to macroeconomic factors.

AmitBanati discusses the elasticities seen in the quarter, such as in the cereal and cookies and crackers businesses in Brazil, and the need to price for commodities and currency in Nigeria. Steve has noted that the commercial plan in the second half of the year should create a balance between volume and price mix. Matt Smith follows up by asking about the softer elasticity response in some categories.

Steve Cahillane states that the cereal category is coming out of a difficult period due to the fire and strike, but they have confidence that it is moving in the right direction with the replenishment of SKUs, growth of distribution points, and ACV. For the snacking category, it is an impulsive category and they are expecting to benefit from quality merchandising and service levels above 95%. This will provide opportunities for Pringles, Cheez-It, and Rice Krispies Treats.

Steve Cahillane and Matt Smith discussed their plans for the back half of the year that they feel will lead to continued good performance. They are optimistic about the volume performance in North America and encouraged everyone to contact them with any follow-up questions. The call then concluded.

This summary was generated with AI and may contain some inaccuracies.