The speaker welcomes everyone to the Kellanova Third Quarter 2023 Earnings Call and introduces the company's Vice President of Investor Relations and Corporate Planning. They remind listeners that the call is being recorded and that forward-looking statements will be made. The company's Chairman, President, and CFO are also present. The speaker notes that the company will be discussing their third quarter results as Kellogg Company and their outlook for the fourth quarter of 2023 as Kellanova. They will be referring to organic net sales and currency-neutral adjusted operating profit and earnings per share. The speaker also mentions that there will be discontinued operations impacts to Kellanova's historical financial statements available in February 2024.

Steve Cahillane, CEO of Kellanova, is excited to be discussing the company's quarter three results as Kellanova for the first time. He highlights that Kellanova is a strengthened portfolio with a focus on snacks and emerging markets, and that half of their net sales come from five highly differentiated brands. Kellanova also has a sharpened strategy, called "differentiate, drive, and deliver," which emphasizes winning in the marketplace, protecting the planet, and delivering financial returns. Before officially becoming Kellanova, the company had a good performance in the third quarter with sustained organic net sales growth and continued restoration of gross profit margins.

In the third quarter, the company saw a return to normal service levels and implemented productivity initiatives that resulted in savings. Despite increasing brand building efforts, operating profit saw above-algorithm growth. The spin-off was executed successfully and the company is entering the Kellanova era from a position of strength. While the industry is currently focused on current dynamics, the company has been prepared for these changes and they were reflected in their budget and guidance. The decelerated net sales growth was expected due to price increases and a return to typical levels of elasticities. The impact of private label on the company's sales remains relatively small. Additionally, any factors that impacted volumes were anticipated.

Kellanova faced some challenges in the second and third quarter due to inventory replenishment and delayed merchandising activity. However, they have returned to merchandising and are increasing brand-building investment and innovation. Their focus remains on growing their biggest and most differentiated brands, which have been outpacing the rest of the portfolio. They are also committed to growing in a responsible and sustainable way, as shown through their Better Days Promise program.

In this paragraph, Amit Banati discusses the financial results of Kellogg Company, which saw a 4% increase in net sales on an organic basis in the third quarter and 8% year-to-date. Operating profit also increased by 10%, sustaining double-digit growth despite higher advertising and the divestiture of their Russia business. Earnings per share decreased by 2% in the third quarter but increased by 2% year-to-date, and free cash flow was higher than last year despite one-time expenses related to the spin-off. Overall, the company's growth in net sales and operating profit were on track with their goals, and they were well on pace to achieve their full year guidance.

In the third quarter, price elasticities increased globally, leading to pressure on volume. However, volume was slightly better than projected. Price/mix was lower than recent quarters due to lapping of previous revenue growth management actions. The divestiture of the Russia business also affected net sales growth. Foreign currency translation was a negative factor, primarily due to the devaluation of the Nigerian naira. Despite these challenges, Kellanova's business segments performed better than the overall Kellogg Company in terms of organic growth. Gross profit dollars have increased every quarter this year, and the gross profit margin is also improving faster than expected, although it has not yet reached pre-pandemic levels.

The progress made by the Kellanova business is evident in the absence of North America cereal, as well as the implementation of various strategies to improve revenue growth and productivity. This has resulted in double-digit growth in operating profit and margin expansion in each quarter of the year. The divestiture of Russia and increased brand building efforts have also contributed to this growth. The company expects to continue improving margins in the future, driven by strong brands and growth-oriented categories and markets. Despite macro-related headwinds, adjusted basis earnings per share growth in quarter three was mainly driven by operating profit, offsetting the impact of below-the-line items such as increased interest expense.

The decrease in other income in the first three quarters of the year is attributed to pension and post-retirement plan asset values and a higher effective tax rate. Despite this, the company's free cash flow is ahead of the previous year and they are on track to achieve their full year guidance. The company has also been able to reduce their debt leverage and transfer net debt to W.K. Kellogg Company. The outlook for Kellanova is discussed now that W.K. Kellogg Company is no longer part of their portfolio.

Work is being done to prepare Kellanova's financials for the next few quarters, and they will be shared at the next quarterly earnings release in February. For the fourth quarter of 2022, Kellanova is projected to have net sales of $3.1 billion, with organic net sales growth meeting long-term targets. Gross profit margin is expected to continue to increase and reach over 33%. Adjusted basis operating profit is estimated to be between $380 million to $390 million, with adjusted basis earnings per share of $0.73 to $0.76. These projections are in line with the company's long-term growth targets. Looking ahead to 2024, Kellanova expects to sustain growth in sales and profit.

In summary, we are currently in the budgeting process and will provide more details in February. Our financial performance is strong, with top line growth exceeding our long-term target and profit margins recovering faster than expected. Our balance sheet is solid and our free cash flow has remained strong despite a major spin-off. Next, Steve will discuss our businesses around the world, starting with our portfolio's focus on growth and our regions most exposed to emerging markets. Our AMEA region continues to generate double-digit organic net sales growth and has expanded its operating profit margin, despite high cost inflation and reinvestment into the business. Snacks in this region also saw double-digit organic growth in net sales.

Kellogg's organic growth in the third quarter was broad-based across Australia, Asia, Africa, and the Middle East. Pringles and AMEA cereal both saw strong growth, with notable performance in Australia, Japan, and Korea. The noodles and other business also continued to show exceptional growth, especially in Nigeria. Kellogg's plans to sustain strong growth and restore profit margins while investing for the future. In Latin America, Kellogg's had another quarter of strong organic growth, led by Mexico and Brazil. However, some volume decline was due to changes in pricing and SKU rationalization for improved profitability.

In the third quarter, the company saw a 20% growth in operating profit for the fourth consecutive quarter. The Latin America snacks business had strong organic net sales growth, with double-digit growth in Mexico and Brazil. Kellogg also saw growth in the cereal market in Mexico and the Pacific subregion. Despite a small portion of the business being spun off, Latin America is expected to continue its strong momentum. The emerging markets regions are also showing strong growth potential. In developed markets, Kellogg Europe had another quarter of strong organic net sales growth and increased operating profit, driven by snacks.

Quarter three was a successful quarter for Kellogg Europe, with double-digit organic net sales growth in their snacks business. This growth was seen across all sub-regions, particularly in the salty snacks category where Pringles outperformed the market in several countries. The portable wholesome snacks category also saw double-digit growth. The cereal business in Europe saw a small decline, but Kellogg is confident in their plans for quarter four. Kellogg North America saw a deceleration in net sales growth, but gross profit margin is recovering due to productivity and revenue growth management. The divestiture of their Russian business was necessary, but overall the region is showing good momentum.

In the third quarter, the company was able to increase investment in its brands while still achieving high single-digit operating profit growth. This was due to rising elasticities and a more measured approach to merchandising activity. The snacks, frozen foods, and cereal businesses all faced challenges such as category elasticities and competition, but the North America region as a whole is expected to finish the year with balanced financial delivery and an early start to margin recovery.

The spin-off of W.K. Kellogg Co marks the beginning of a new era for North America as Kellanova. Despite challenges in the industry, the company has shown strong growth and profit margins, and successfully executed the spin-off. The transition to Kellanova is from a position of strength, with full commercial activity, strong cash flow and balance sheet, and a plan for continued success. The CEO expresses gratitude to all employees for their hard work and dedication in making the spin-off a success, and wishes the best for their former colleagues at W.K. Kellogg Co.

The company has entered a new era with a growth-oriented portfolio, a sharpened strategy, and ambitious financial expectations. The team is confident in their ability to deliver on these expectations and is open to answering questions. During the Analyst Day, a base earnings number of 3.35 was given for this year, but it may not be the best number to use as it will be updated in February. The company is on track to meet their 2023 growth rates, but the 3.35 number was for a full year estimate and may not be the exact number reported due to the acquisition of Kellanova.

Jason English and Amit Banati discuss the current state of the company's performance and the noise surrounding it. English mentions the long-term algo and how it may not be realistic to expect it in all regions next year. Steve Cahillane explains that the company does not need to be on long-term algo in all regions to be successful, and that the delayed merchandising activity and spinoff may have affected the current performance in North America.

The speaker discusses their optimism for the upcoming year in terms of merchandising activity in North America. They mention that their brands are strong and they have a more ambitious innovation plan for 2024. They also express confidence in their long-term performance as a company. The speaker then addresses a question about volume growth, acknowledging that while revenue has been strong due to pricing, volumes have not seen the same growth. They mention that their focus on pricing may have affected this, but they are still seeing growth in comparison to their global snacking peers. The speaker also mentions that white space and global expansion will be key drivers for future growth, and they are currently developing global P&Ls for their key brands.

In the fourth quarter, the company expects organic revenue growth to be within the algo range of 2% to 4%, with a negative impact from the Russia divestiture and currency translation. The company is seeing similar trends to the current quarter, with a 1% negative impact from the divestiture and a 3% impact from currency translation. The company is optimistic about future performance and has a good understanding of its financial performance at a SKU and geographic level.

The speaker mentions that the company's algo growth is expected to be between 3-5%, excluding 3% of international growth. They also expect international to grow faster than the US and for volume to decline but moderate in quarter 4. The speaker mentions that merchandising activity for Cheez-It and marketing will improve in the future, leading to a gradual improvement in quarter 1 of 2024. The speaker also mentions that they are not able to talk about details for 2024 yet, but The Street is expecting volume growth in the second quarter of next year, which the speaker is unsure if it is reasonable.

The speaker discusses the company's margin drivers, including pricing, productivity, and normalization of supply chain disruptions. They mention that pricing has offset inflation and the supply chain is performing better, resulting in a nice margin performance. The speaker also mentions additional costs from parallel operations but does not quantify them. They expect a gradual return to volume growth in 2024.

The company's gross margin has improved faster than expected due to two main drivers. There were some parallel costs incurred in the third quarter but they are not expected to significantly impact next year's results. The consumer is facing strain and is trading down and shifting channels, but the company's categories are considered affordable luxuries and the consumer remains resilient.

The company is not seeing a significant shift towards private label products or a structural change in consumer behavior. They have experienced a decline in volume due to pricing increases and a slower return to merchandising and innovation. However, they believe that the industry environment will improve in the future due to a return to quality merchandising and consumers becoming more accustomed to different price points. The decline in volume can be attributed to the lapsing of trade inventory build, slower category growth, and share performance.

The speaker discusses the company's performance in terms of pricing, innovation, and merchandising activity, and expresses optimism about the health of their brands. The impact of SNAP on sales growth is also mentioned, with a comparison to results from a large grocery retailer. The questioner asks for clarification on the hard currency-neutral dollar targets for sales and EBIT by segment mentioned in the Day at K presentation.

During a conference call, Amit Banati confirmed that the company will still use their previous growth rate ranges as a guide for modeling in 2024. However, he also mentioned that the actual numbers may differ due to currency changes and the company's performance being ahead of pace for 2023. The company is currently in the process of finalizing their budget for 2024 and expects their long-term growth rates to be on track. Banati also mentioned that there may be a faster recovery in margins than previously anticipated, potentially exceeding the implied margin of just under 14% for next year.

In a recent conference call, Kellogg's executives discussed the company's margin recovery and promotional activity. They stated that they were late in returning to normal promotional levels, which may result in a return to quality merchandising and higher list prices. The company also mentioned that their leverage is comfortable and they are focused on organic growth opportunities rather than M&A at this time.

The company is prioritizing investments in expanding capacity for Pringles in emerging markets and will continue to evaluate M&A opportunities in snacking and emerging markets. There have been changes to price pack architecture and SKU rationalization, particularly in Latin America, to improve profitability. This has also been done in North America to address shortages and bottlenecks. These changes will be lapped in the coming year.

The speaker discusses pricing and its impact on the company's top-line. They mention that there may be opportunities for incremental pricing in certain emerging markets, but the company is trying to avoid taking more pricing in developed markets. In emerging markets, there will still be routine price increases, but they will be more measured compared to the past two years. The company will use RGM levers to maintain affordability for consumers.

Steve Powers of Deutsche Bank asks the speaker to explain the recent decline in pricing and growth in the AMEA market, and how the company is managing currency fluctuations. The speaker explains that there is a lag between the devaluation of the naira and official rate changes, but the company has been taking multiple rounds of pricing to cover this. Despite this, volumes and shares have held up. The recent devaluation has brought the transaction and translation rates closer together, resulting in a decline in pricing and growth.

The business is growing at a double-digit rate and taking pricing to cover margins. There is a lag in the P&L, but the team has focused on protecting margins and has been successful. There will be similar currency headwinds in the fourth quarter as in the third quarter, resulting in a 3% hit to the top line but a positive impact on EPS. The call is now ending.

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