The speaker, John Renwick, welcomes the audience to Kellanova's First Quarter 2024 Earnings Call and introduces the company's Vice President of Investor Relations and Corporate Planning, John Renwick. Renwick then introduces the other speakers, Chairman, President, and CEO Steve Cahillane and Vice Chairman and CFO Amit Banati. The speakers provide a disclaimer about forward-looking statements and refer to the company's public SEC filings for more information. They also mention that the 2023 results have been recast to treat a spun-off company as a discontinued operation. Cahillane then begins his presentation.

Kellanova has seen strong results in the past two quarters, despite challenging market conditions. They have reaffirmed their 2024 guidance and have a clear strategy in place to differentiate themselves and drive shareholder value. Their global presence also adds to their growth and diversification. This has led to above-median organic net sales growth compared to their peers.

The company has been able to raise prices in markets with devalued currency, leading to differentiated growth and increased profitability. They have reaffirmed their full year guidance with increased confidence due to over-delivery in the first quarter and a return to full commercial activity. The company is investing in emerging markets and expanding margins. They are also focused on growing in a responsible way, with a heavy focus on addressing food insecurity and doing the right thing for business.

The company had a successful first quarter, with strong financial results that exceeded expectations. They partnered with customers and leveraged their brands to support communities and were recognized for their good work. The financials were presented by Amit Banati, who reported that organic growth in net sales was towards the top end of their target range, with much of it coming from pricing to offset currency devaluation. Adjusted operating profit grew strongly, driven by a restoration of gross profit margin. Below-the-line items balanced each other out, resulting in growth in earnings per share. Free cash flow also had a good start. Net sales growth was primarily driven by price mix, which was led by revenue growth management actions and recent pricing actions in Nigeria to cover currency devaluation.

In the first quarter of the year, the company's overall price/mix growth slowed down compared to the previous quarter, and this trend is expected to continue. Volume also declined due to elasticity impacts, but there are signs of gradual stabilization and recovery in most regions. The divestiture of the Russia business had a small impact on sales growth, and foreign currency translation had a larger-than-expected negative impact. However, the company's gross profit margin continued to improve due to factors such as improved supply environment, productivity, and revenue growth management actions.

The company's gross margin restoration has exceeded expectations, giving them confidence in their full year outlook. Operating profit has also improved due to top line growth and a recovering gross profit margin, even with increased advertising and consumer promotion expenses. The absence of TSA reimbursement and currency-related mix shift had a small impact on margin expansion. The company expects an operating profit margin of over 14% for the full year. All EPS growth in quarter one was due to growth in operating profit, as below the line items offset each other. Interest expense increased due to higher interest rates, but was offset by currency translation gains. The company's effective tax rate and joint venture earnings had a small impact on EPS. Average shares outstanding decreased due to share buybacks. The company's free cash flow and net debt will be discussed on Slide 18.

The company is reporting a strong start to the year in terms of free cash flow, despite some timing-related factors. They have also been able to pay down debt while returning cash to shareholders. The company's debt leverage remains below their target ratio. They are maintaining their 2024 financial guidance, expecting organic growth and margin expansion. However, they anticipate a negative impact from currency translation and plan to increase reinvestment in brands and capabilities.

The company expects its earnings per share to be between $3.55 and $3.65 for the year, with interest expense projected to be around $315 million. Other income will offset the impact of currency translation, and the effective tax rate is expected to be lower than previously guided. The company also reaffirms its outlook for free cash flow of approximately $1 billion, despite increased capital expenditures for expanded Pringles capacity and network optimization projects. The company's strong start to the year and improving end market performance give it confidence in its full year guidance and the ability to increase reinvestment.

The company's cash flow and balance sheet have improved, allowing for increased financial flexibility and return of cash to shareholders through share buybacks and increased dividends. The North American business had flat organic net sales in the quarter, but operating profit increased due to productivity initiatives and improved service levels. Both the snacks and frozen businesses saw flat growth in the first quarter, as expected, due to lapping strong year-earlier growth and facing industry-wide elasticities. However, there were signs of moderating volume declines in the U.S. market.

The company's commercial activity is improving their share performance as they have focused on quality display activity and made adjustments to price points, pack sizes, and merchandising periods. This has led to an increase in consumption sales and volume in key categories such as crackers and salty snacks. The company expects this trend to continue in the second quarter and through the second half of the year, as they have more building blocks in place, including increased brand investment and merchandising activity. This has increased their confidence in their performance in North America.

In conclusion, the company expects their volume performance in the region to improve, while margins are recovering ahead of schedule. The recent release of a movie about one of their iconic brands, Pop-Tarts, highlights the success of their focused and agile organization. In Europe, net sales and profit margins continue to grow, particularly in the Snacks category. Despite some challenges in certain markets, Pringles has seen an increase in market share.

In the first quarter, Kellogg's saw 1% organic net sales growth in its Cereal division, with gains in the U.K. market but also a slowdown in certain categories and a shift to private label. The company is preparing for the launch of Cheez-It in the U.K. and is excited about its partnership with a major retailer. In Latin America, net sales increased by 5% organically, with moderating price/mix growth and improving volume declines. However, operating profit declined due to strong growth in the previous year. Snacks business saw a dip in organic net sales, but Pringles and Cheez-It outpaced category growth in Mexico and Brazil.

In the Latin America region, cereal net sales increased by 10% despite tough competition. The company gained market share in Mexico and Brazil through effective marketing and distribution strategies. The company expects continued growth in both Snacks and Cereal categories, with improved margins and potential for lower input costs. In the EMEA region, organic growth was driven by price increases, but was offset by adverse currency translation. The business in Nigeria has performed well despite currency challenges, and the long-term growth potential in the region outweighs short-term challenges. Outside of Nigeria, organic net sales declined slightly due to lapping strong growth in the previous year and tensions in the Middle East impacting demand.

In EMEA, operating profit grew by 29% on a currency-neutral basis, but the impact of currency translation brought this down to 2% in U.S. dollars. Excluding joint ventures, operating profit still grew in double digits. In Nigeria, pricing has had to continue, but volume has held up well. In Snacks, sales were impacted by a strong year-ago quarter and conflict in the Middle East, but remained in solid growth overall. In Cereal, organic net sales slipped slightly, but we are encouraged by sales in Australia. Overall, EMEA is expected to continue delivering organic growth and sustain momentum in Snacks and Cereal, while also restoring profit margins.

The company is seeing the benefits of their recent spin-off, with a more focused and profitable portfolio. They have exceeded expectations and are seeing improvements in end market and volume performance. They are confident in their 2024 guidance and are taking actions to create future value. The company credits their success to their talented team. In terms of scanner data, private label is gaining share in crackers and potato chips, but the company is still performing well. They anticipate some challenges in the coming quarters, but are confident in their strategy and portfolio.

Steve Cahillane, the CEO of a company, was asked about private label and competitive trends. He responded by saying that there hasn't been much movement in private label in the categories mentioned, and that the data can be misleading due to supply disruptions and growth in non-measured and away-from-home channels. He also mentioned that as they lap the impact of last year's trends, they expect to see some improvement on a macro level.

The speaker agrees that the lower-income consumers are under more pressure, but believes that this will improve in the second half of the year due to factors such as Snap benefits and a better economic environment. They also mention that their performance is improving and they feel confident about their volume performance. The next question is about the TSA impact, which the speaker confirms was around $45-50 million, with $35 million of that being on the gross profit line.

The TSA reimbursement was around $45 million and split between gross profit and SG&A. The company saw strong double-digit growth in operating profit and gross margins were up 190 basis points in the quarter, even if the TSA and ForEx impact were excluded. The company expects TSA costs to continue in the same range but to start decreasing in quarter two as they transition distribution centers into WKKC. This may result in a shift towards food at home as consumers, particularly lower income ones, are feeling stressed and eating out less. They are still seeking value even in at-home channels.

The speaker notes that the company is seeing growth in different channels that cater to value-seeking consumers. They are also trying to maintain attractive price points and expect the pressure to abate in the second half of the year. The first quarter is coming in better than expected, but there is still uncertainty for the rest of the year. The company plans to reinvest in route to market, digital transformation, and brand building, specifically with the Pop-Tarts movie.

The speaker discusses the success of the movie "Bee Movie" featuring the product Pop-Tarts and how it has allowed them to lean into marketing efforts. They also mention their low leverage and potential for making a deal in the snacking industry, both domestically and internationally.

The company is excited about organic opportunities, such as expanding the Pop-Tarts and Cheez-It brands internationally. They also have plans to build new factories for Pringles in Latin America and Asia. The company saw a 20% increase in operating profit in North America, mostly due to positive pricing and a more favorable cost environment. They expect to continue seeing strong profit performance throughout the year, although not at the same pace as in the first quarter due to lapping supply chain issues.

Amit Banati, the CFO of Kellogg Company, discusses the company's strong start to the year and its impact on North America profitability. He mentions that the currency impact will likely moderate in the rest of the year and that they will continue to see good performance, but not as pronounced as in quarter one. He also notes that the negative fixed cost absorption due to weaker volume in North America was a headwind, but was offset by improved supply chain performance.

The main driver for lower sales volume was the improved supply chain performance, which offset the impact of the volume line. The company expects volume leverage to improve later in the year as volume trends pick up and the bottlenecks are resolved. There has been a shift in consumer behavior due to inflation, but the company believes they are nearing the end of this adjustment period. They are also implementing initiatives to manage costs and improve sales.

The company's CEO believes that the second half of the year will be an inflection point for the consumer, with a combination of factors such as effective merchandising, quality displays, and competitive price points leading to better performance. While the consumer is still under pressure, there is optimism for the future, especially with the potential shift towards food at home and the company's efforts to gain market share. However, the source of volume growth in the second half is still uncertain, with potential factors including private label share reversal and competitors losing share to the company.

The speaker believes that there has not been a significant decrease in the amount of calories consumed by the population. They also mention that the popularity of GLP-1 drugs has decreased. They believe that the companies with the best marketing and consumer engagement will be the most successful. They are excited about their ability to reinvest and increase household penetration. The speaker also mentions that consumer behavior, such as reducing food waste and using leftovers, may contribute to the changes in volume.

The speaker discusses the current state of the economy and how it may affect consumer behavior. They mention the possibility of a return to pre-inflation times as discretionary income grows. They also mention the performance of their LATAM business and state that the SKU rationalizations are largely behind them. The speaker then addresses a question about their guidance for North America snacks organic sales growth and discusses the balance between price and volume in the region. They note that there has been too much price and not enough volume in the past, but they are now seeing a better volume performance.

The company is seeing a gradual recovery in their volume performance and is confident in the back half of the year. They expect to see a balance returning to their business and have optimism that it will continue. The return to full merchandising activity is the main driver of the volume recovery, along with reinvestments in their brands and share improvements. The supply chain was not a disadvantage in the past, but it did limit growth spending and productivity initiatives. There are no specific metrics mentioned, but the supply chain is expected to be a big helper in the current quarter.

The speaker explains that their company has been more conservative than others in maintaining high supply fill rates, which has led to a strong performance in their supply chain. They are back to pre-pandemic levels of productivity and have implemented successful productivity initiatives. They are confident in their supply chain in North America and globally. When asked about the impact of pricing and volume leverage on margins, the speaker states that there are many factors at play, but they are confident that gross margins will be above 35%. Inflation is expected to be neutral, and the improved performance of the supply chain is a positive factor. The price/mix is also moderating.

The company is expecting gross margin expansion due to improved volume trends and other factors. They are also excited about expanding their Cheez-It brand overseas, starting with launches in Canada, Mexico, Brazil, and Europe in the next few years. They will continue to build on their success in each market before expanding further. The call has ended and the company encourages follow-up calls for more information.

The speaker is giving permission for the audience to disconnect their lines.

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