Operator: Good morning. Welcome to the Kellogg Company’s Second Quarter 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. At this time, I will turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellogg Company. Mr. Renwick, you may begin your conference call.

John Renwick: Thank you, operator. Good morning and thank you for joining us today for a review of our second quarter results and an update on our outlook for 2023. I am joined this morning by: Steve Cahillane, our Chairman and Chief Executive Officer; and Amit Banati, our Vice Chairman and Chief Financial Officer. Slide number 3 shows our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for Kellogg Company’s 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 KelloggCompany.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. And now, I’ll turn it over to Steve.

Steve Cahillane: Thanks, John, and good morning, everyone. We’re pleased to report another better than expected quarter featuring two key elements depicted on slide number 5. Not only did we sustain top line growth that remained better than our long-term targets, but we did so across our portfolio and geographies with growth in all major category groups in each of our four regions. And we did so even as we lapped the prior year’s retail inventory replenishment and particularly strong in-market performance. We also continued to experience a sooner-than sooner than expected recovery in our gross profit margin. Much of this is related to bottlenecks and shortages diminishing. This recovery is ahead of schedule and it was a principal driver behind our better than expected profit and earnings this quarter.

Also encouraging is the momentum, we’ve continued to see in our biggest, most differentiated brands shown on slide number 6. These advantage brands made up half of our net sales in 2022 and they continue to outpace our overall growth creating both top-line momentum and a favorable margin mix. So when we put it all together the earlier than expected margin recovery and the sustained top-line growth across our portfolio, you can see why we feel comfortable raising our full year sales profit and earnings guidance again. We also remain very active on our social and environmental program Kellogg’s Better Days Promise. Slide number 7 shows just a few examples of actions we took during the quarter, including donations and volunteering in the area of hunger and tie-ins to important commercial programs with customers.

The slide also shows another wave of recognitions that we have received, simply confirming what we already know, that doing what is right is in our DNA. In the center of the slide, you can see that we have published an update regarding our progress toward our Better Days targets. On social goals like addressing hunger or environmental goals like reducing our admissions or in diversity goals like gender representation and management, we remain ahead of pace on our Better Days goals. And of course, we remain very busy in getting ready for our pending separation. Indeed on slide number eight most of what you see under the Q1, Q2 and the Q2, Q3 phases are now complete. The team has done an exceptional job of digging into every detail, every brand, every process, every role to make sure we have left no stone unturned in our quest to create two successful value-creating companies.

And as you look to the Q3 phase, you can see a few milestones that are very much upon us. On July 24th WK Kellogg Co.’s Form-10 was filed publicly providing you with important information about management, strategy, capital structure, and carve out financials. On July 30th, just this past Sunday, we began to run WK Kellogg Co. and Kelanova in parallel. By running the water through the pipes, so to speak, we can identify and address any process gaps and other opportunities well before the separation takes place. Employees in new roles can transition properly. Services under the transition services agreement can be ironed out more completely. And while this requires incremental expenses, they are already incorporated into our guidance. And then less than a week from today on August 9th, we will host our Day at K investor event at which leaders of both WK Kellogg Co. and Kellenova will present to the strategies, the capital structures, and the financial outlooks for both companies.

And we still expect the separation transaction to take place during the fourth quarter. Because we can’t know the exact timing of the various customary approvals, we can’t be more specific than that quite yet. But we have every confidence that it is on track. In sum, the second quarter was another very good quarter in terms of financial results, sustainability actions, and progress toward our spinoff. And now let me turn it over to Amit to take you through our financial results and outlook in more detail.

Amit Banati: Thank you, Steve, and good morning, everyone. Slide number 10 provides a summary of our second quarter and first half results. Net sales growth in quarter two was 7% on an organic basis. Importantly, this growth remained broad-based across category groups and regions, and paces us a little ahead of our previous full-year outlook. Operating profit grew 14% on an adjusted basis. This growth came on top of last year’s 10% currency neutral growth, and it featured the sooner than expected recovery in gross profit margin that Steve discussed. This operating profit performance puts us a little ahead of our previous full year outlook. Earnings per share grew 5% on an adjusted basis, sustaining mid-single-digit growth in spite of macro-related headwinds versus last year on below-the-line items such as interest expense and pension income.

Cash flow through the first half is down year-on-year because of outlays related to the pending spin-off but on track for the full year. Let’s now discuss each of these in more detail. Slide number 11 splits our year-on-year net sales growth into its components. Price mix growth was sustained in the mid-teens with growth in both developed markets and emerging markets. As expected, price elasticities continued to move higher around the world, and this weighed down our volume. Also contributing to our volume decline was lapping last year’s replenishment of trade inventories, particularly as we recovered from the serial strike. Foreign currency translation continued to negatively impact net sales growth by nearly 3% year-on-year in the quarter.

If today’s exchange rates versus the US dollar were to hold, we would expect to see a similar impact in the second half, as the favorable impact of lapping last year’s dollar strengthening is offset by the recent devaluation of the Nigerian naira. So our top line growth in quarter two supports our long-standing planning assumptions for elasticities to rise and for revenue growth management actions to begin to anniversary. Next, let’s discuss gross profit shown on slide number 12. As we’ve discussed numerous times, our objective in this high inflation environment has been to protect gross profit dollars via productivity savings and revenue growth management. In quarter two, our adjusted gross profit increased by 9% year-on-year. On top of a year ago quarter that itself was up more than 6% on a currency-neutral basis.

From a margin perspective, recall that our expectation was for a gradual improvement as the year progresses. But as Steve mentioned, we are ahead of pace in this recovery with year-on-year expansion coming sooner than expected. Much of this is driven by bottlenecks and shortages receding, which eliminates many of the inefficiencies and incremental costs experienced over the past year or more. In addition, productivity and revenue growth management continue to catch up to a high market-driven input cost inflation. So while we have a ways to go before we get back to pre-pandemic levels, this performance gives us increased confidence in our ability to recover margins. For 2023, there is no change to our outlook for expansion in the second half, but Q2’s better-than-expected performance moves up our full year outlook for gross margin to be somewhere around 50 basis points of expansion year-on-year.

Operating profit, as shown on slide number 13, grew 14% year-on-year in quarter two, even as it laps a robust 10% gain in the year earlier quarter, and even with advertising and promotion investment increasing year-on-year. Through the first half, our operating profit was up 16% year-on-year. Our second half comparisons get a little tougher, and we have begun to run W.K. Kellogg Company in parallel requiring incremental expenses year-on-year that are already baked into our guidance. That, we are ahead of pace, and this gives us the confidence to raise our full year operating profit guidance. Moving down the income statement. Slide number 14 shows that our earnings per share growth has been attributable to operating profit, which has grown enough to more than offset what are severe macro-related headwinds in within our below-the-line items.

These below-the-line pressures were expected and will continue through the year. Interest expense increased significantly year-on-year due to higher interest rates. In the second half, we expect to see modestly lower interest expense than we recorded in the first half, owing to the timing of cash flow. Other income decreased sharply year-on-year in each of the first two quarters this year. reflecting the accounting of pension and postretirement plan asset values and interest rates stemming from last year’s declines in financial markets. Owing to favorability in some other items in the slide, Q2 came in higher than both Q1 and the run rate we would expect for the remaining quarters. Our effective tax rate in quarter two was back to the kind of 22% rate we would expect for the full year after being a bit above that in quarter one.

Average shares outstanding were up slightly year-on-year in both quarter one and quarter two. And we would expect that to be the case for the full year as well. Foreign currency translation turned slightly positive to EPS in quarter two, finishing the half with about a negative 1% impact. We leave foreign currency translation out of our guidance because it is out of our control and difficult to predict. But if we took today’s exchange rates, including a substantially devalued Nigerian Naira partially offset by the lapping of other currencies a year ago weakening, we would estimate a similar impact for the full year as that of the first half. A key message here is that these below the line items are collectively weighing down EPS as expected, but it is important to remember that the operational side of our P&L through operating profit remains very strong.

Turning to slide number 15, we see that cash flow is below last year’s high level. This is due to three factors. First, one-time cash outlays related to the spin-off amounting to roughly $130 million. Secondly, lapping unusually strong inflows in the year-ago period, including some related to derivatives. And thirdly, timing of capital expenditure, which last year was much more weighted to the second half due to supply disruptions earlier that year. So while it is down from a high level last year, we believe cash flow is right on track to achieve our full year guidance. Meanwhile, we continue to reduce our debt leverage year-on-year, further enhancing our financial flexibility. All in, our second quarter performance puts us slightly ahead of pace for the full year.

Accordingly, we are once again moving up our full year guidance as shown on slide number 16. We are raising our guidance for organic net sales growth to approximately 7%, which is the high end of our previous guidance range. Our quarter two performance was consistent with our assumption of decelerating growth as the year progresses, which reflects a likely return of elasticity towards historical levels as well as lapping of particularly substantial revenue growth management actions in the second half of last year. This 7% organic growth is well above our long-term target. We are raising our guidance for adjusted operating profit growth to 9%-10% on a currency-neutral basis, which is the upper half of our previous guidance range. This raise reflects a stronger-than-expected Q2 performance, particularly our earlier recovery in gross profit margin, and yet still accounts for some investment shifts into the second half as well as incremental costs in the second half for operating WK Kellogg Company in parallel as a company within a company.

We expect to improve margins this year which combined with our above target net sales growth will deliver operating profit growth that is also above our long-term target. Based on the improved operating profit outlook, we are raising our adjusted earnings per share guidance as well, now looking for a year-on-year decline of 1% to 2%, the upper portion of our previous guidance range. Remember that all and more of this decline is explained by the year-on-year reduction in pension and post-retirement income, a non-operating, non-cash item that is expected to have a negative impact of nearly 7% on EPS this year. The negative impact of higher interest expense due to higher interest rates in the economy is another negative impact of more than 4%.

If it weren’t for these two macro-related impacts, our guidance for EPS growth would also be well above a long-term growth rate. Our guidance for cash flow remains at $1 to $1.1 billion. Recall that, within this guidance, we are expecting a year-on-year increase in our underlying cash flow offset by one-time cash costs and capital related to the spin-off. A couple of elements to keep in mind regarding this guidance. First, while we expect the spin-off to be transacted during quarter four our guidance assumes it takes place at year-end purely for simplicity reasons. And secondly, the impact of our recently completed divestiture of our Russian business does not have a material impact on our guidance. So to summarize our financial position on slide number 17, quarter two was yet another quarter of over-delivery and we have plans in place to sustain our earnings momentum.

Accordingly, we are again raising our full year guidance for 2023. Our profit margins have expanded sooner than anticipated and this should continue, particularly as our service levels return to normal. Our net sales growth remains strong and while we are keeping our assumption of rising elasticity in the second half, along with lapping sizable revenue growth management actions, we are confident enough in our top-line growth to raise our full-year outlook. Our financial flexibility is strong, marked by a solid balance sheet and cash flow that remains in good shape, even with some adverse timing in the first half. We continue to make good progress on setting up both Kellanova and WK Kellogg for operational and financial success, and we are looking forward to sharing with you the two companies’ exciting strategies, capital structures, and financial outlooks next week.

And with that, I’ll turn it back to Steve to walk you through our individual businesses.

Steve Cahillane: Thanks, Amit. With the spin-off approaching, we’ll once again organize our discussion around the businesses that will comprise Kellenova and WK Kellogg. Slide number 19 reminds you of the composition of the two businesses, and on the slide you can see how both remain in good form with good top-line growth. Let’s start by discussing the Kelinova businesses leading off with our emerging markets regions. Slide number 20 shows the financial performance of our EMEA region. This region sustained its outstanding underlying momentum in the second quarter, posting mid-teens organic net sales growth on top of extremely strong comparisons. It again expanded its operating profit margin year-on-year in the second quarter, and it again posted exceptional 19% operating profit growth.

And this performance came in spite of exceedingly high cost inflation and reinvestment into the business. Drilling down into its key category groups, we see on slide number 21 that EMEA’s snacks sustained double-digit organic net sales growth in quarter two, with this growth coming on top of exceptional growth in the year-ago quarter. In market, snacks category growth rates remained elevated and have even accelerated slightly from the previous quarter. Pringles this year has outpaced the salty snacks category that is growing in the high-teens or better across key markets and during the second quarter we continued to gain share in markets like Australia, Japan, Korea and Thailand. EMEA cereal is also sustaining strong growth momentum as shown on slide number 22.

This business delivered growth on top of last year’s strong growth with particular strength in Australia, Africa, and the Middle East, North Africa, Turkey sub-region. And in market, we’ve outpaced a category this year that has grown in the mid single digits collectively across key markets which brings us to noodles and other and slide number 23. Led by Multipro in Nigeria, this business continued to deliver organic net sales growth in excess of 20% in the second quarter. Multipro continues to execute extremely well, widening its competitive moat and staying on an impressive growth trajectory in an always exciting market. Meanwhile, we continue to expand our Kellogg’s noodles business outside of Nigeria. In the second quarter, net sales of Kellogg’s noodles grew significantly year-on-year in both South Africa and Egypt.

As you know the Nigerian Naira has been officially devalued recently but our team has been proactively managing through de facto currency devaluation for some time in order to protect our margins. Much of this proactive pricing which has contributed to the 20% plus growth you see on the slide is behind us now. This reflects the experience and savvy of our local team and the strength of this business. And we expect continued, if moderated top line growth going forward. Clearly, EMEA is a growth engine for Kellogg Company and soon, Kellanova. And it is performing extremely well so far in 2023. For the full year, we continue to expect sustained momentum across all three category groups, delivering yet another year of organic net sales growth, and while improving our profit margins.

Let’s turn to our other emerging markets region, Latin America, starting on slide number 25. Kellogg Latin America, in the second quarter delivered another quarter of strong organic net sales growth on top of equally strong growth last year. This growth was led by our two largest markets, Mexico and Brazil. We again expanded our operating margin in the second quarter leading to another quarter of operating profit growth of 20% year-on-year. As shown on slide number 26, our snacks business in Latin America was up against an unusually high comparison in the second quarter, but its organic net sales growth was a solid 6% year-on-year through the first half. In market, we saw sustained double-digit growth for the salty snacks category in Mexico and Brazil, and Pringles has gained share in both of these key markets.

We also outpaced a very strong portable wholesome snacks category in Mexico and stabilized our share in cookies in Brazil. On slide number 27 you can see that Kellogg Latin America again recorded double-digit organic net sales growth in cereal. This growth was broad-based with good growth across each of our sub regions. In market cereal category growth rates remain robust in the region and in the second quarter we kept pace in Mexico and we gained share in Brazil and Puerto Rico. So Latin America continues to perform well and remains right on track. For the full year, we continue to expect this region to sustain strong top-line momentum with growth in both snacks and cereal and continued recovery in its profit margins, all while working on separating its Caribbean cereal business as part of the spinoff.

Once again, we can see that both of our emerging markets regions are showing current momentum to go with their outstanding long-term prospects. Now let’s turn to our developed markets, starting with Kellogg Europe and slide number 29. The region posted sustained top-line growth, accelerating to 11% organic growth in the second quarter. Operating profit declined once again due to Russia, which we divested just after the end of the quarter. Excluding Russia, Kellogg Europe’s operating profit increased in the mid-single digits in spite of extremely high cost pressures. So our underlying European business is performing very well. On slide number 30, you can see that snacks which represent just over half of our sales in Kellogg Europe continue to lead our growth in this region.

In fact quarter two marked the eighth quarter in the last ten in which we have posted double-digit growth in our European snacks business. This was growth on top of strong year-ago growth and it was driven by both volume and price mix. The growth was also broad-based with double-digit gains in all sub-regions except for suspended shipments into Russia. In market the salty snacks category remains in strong double-digit growth across key markets with Pringles gaining share in key markets like Italy and France and sustaining strong consumption growth in spite of lapping notably robust year ago performance in markets like the UK, Germany and Spain. And in portable wholesome snacks, we are experiencing double-digit consumption growth overall in the region paced by a two-point share gain in the UK led by Rice Krispies Squares.

Our cereal business in Europe, shown on Slide number 31, also sustained growth in the second quarter. Growth has slowed as we’ve discussed previously, owing to category elasticities rising, but we continue to execute well in a challenging market. So it was another good quarter for Kellogg Europe, keeping us right on track for another good year. For the full year, we continue to expect the region to post yet another year of solid top line growth, led by Snacks. We’ll continue to navigate through cost pressures, which were particularly heavy in the first half, and we have a plan to gradually improve margins during the second half. And as we mentioned, we have closed on our divestiture of our Russia business. We’ll now turn to Kellogg North America and Slide number 33.

As anticipated, net sales growth decelerated in the second quarter as elasticity continued to move higher and as we lapped last year’s sizable replenishment of trade inventories. However, mid-teens price mix growth was sustained and we delivered solid organic growth in net sales. Importantly, we continue to recover gross profit margin, reflecting productivity, revenue growth management and diminishing bottlenecks and shortages. This enabled us to increase investments in our brands and still deliver 14% operating profit growth year-on-year. This region again generated organic net sales growth in all three category groups in the second quarter. Slide number 34 shows snacks, which represents over half of our North American net sales. In the second quarter, it grew net sales by 5% on top of a notably strong year earlier quarter, which had included retailer inventory replenishment.

We also grew in frozen foods, shown on Slide number 35. In market, Eggo’s consumption growth improved in the second quarter, continuing to moderate its share losses as our supply has improved. And Morningstar Farms gained share in the quarter as its supply is improving as well. All of the regions and categories we have discussed up to now will be part of Kellanova, and all of them are showing continued net sales growth to go with progress towards recovering margins. Now let’s turn to our North America cereal business which forms the vast majority of what will soon be W.K. Kellogg Co. As shown on Slide number 36, this business continues to recover, growing its net sales in the second quarter despite lapping substantial retailer inventory replenishment last year.

In the US the category remained in high single-digit growth in spite of gradually rising elasticities. Led by brands like Corn Flakes, Frosted Flakes, Rice Krispies and Raisin brand, we continue to gain share year-on-year and we continue to activate more commercial support, increase our distribution and increase our velocities. A similar recovery is happening in Canada, where we also continued to gain share in the second quarter. So this business is back on solid footing with more to come. Turning to Slide number 37. Our North America region had a very strong first half, giving us confidence in our full year expectations. Snacks should remain solidly in growth while Frozen is expected to continue to show improved performance, and our North America cereal business continues its recovery.

We are off to an earlier-than-expected start to margin recovery in this region even as we reinvest more in our brands. So North America is in good shape as we set up for the spin-off of W.K. Kellogg Co. later this year. So let me summarize on Slide number 39. We continue to put up better-than-expected results. Our first half featured top line growth across our regions and across our categories with notable momentum in snacks around the world and our businesses in emerging markets. It also featured an earlier-than-expected recovery in profit margins, which enables us to reinvest in the business and sustain strong earnings and cash flow growth. Thanks to the passion and skill of our organization, we have not allowed the spin-off work to prevent us from delivering and even overdelivering on our plans.

In fact, we’re halfway through the year, and we’ve already raised our full year outlook twice. And the work we are doing for the spin-off will pay off. We are separating this great company into two, even better companies, one with enhanced focus and the fit-for-purpose strategy and resourcing it deserves and the other with a portfolio-oriented solidly towards growth. And we’ll share with you our plans for both companies at our Day 8-K investor event next week. And with that, we’ll open up the line for your questions.

Operator: Thank you. We will now begin the question-and-answer session with publishing analysts. [Operator Instructions] Our first question for today comes from Andrew Lazar of Barclays. Your line is now open. Please go ahead.

Andrew Lazar: Thanks so much. Good morning, everybody. Steve, some food companies, as you’ve noticed this quarter — some food companies this quarter have started to discuss maybe some recent shifts at least in what they’re seeing in consumer behavior, in promotional activity and sort of elasticity in the US, some of which is to be expected as supply constraints are eased, of course. I was hoping you could talk a bit about any more recent shifts that you are seeing in your business, if any? And if they are outside of sort of what your expectations might have been even a quarter ago? Thank you.

A – Steve Cahillane: Yes. Thanks for the question, Andrew. I’d say a couple of things. The consumer behavior is pretty much in line with our expectations. And I know probably underlying your question is also some volume questions around what’s happening in North America, which was also in line with our expectations. You have to remember, obviously, we’ve taken such significant pricing over the last several years and elasticities have been almost nonexistent. So we’ve been forecasting their return for quite some time. And so in line with our expectations, we’re also lapping inventory replenishment from last year. So it’s pretty much where we expected it to be. In terms of consumer behavior, I’d say the shift that we’re starting to see is consumers are really maximizing their pantries.

They’re closely managing their household inventories, their pantry inventories, zealously guarding against waste, as you would expect in this environment. And so we haven’t seen shifts out of our category really. We haven’t seen meaningful moves in private label or anything like that. I would just say a consumer that’s ever more conscious of the strains on their household budgets, and we would expect that to continue moving forward. And as we look at our promotional activities for the balance of the year, we’re also taking that into account. And we’re pleased our service levels are going back up and allowing us to be a little bit more front-footed as we think about display execution, quality, merchandising and things of that nature.

Q – Andrew Lazar: Got it. Thanks so much and see you next week.

A – Steve Cahillane: Thank you.

Operator: Thank you. Our next question comes from Cody Ross of UBS. Your line is now open. Please go ahead.

Cody Ross: Hey, good morning. Thank you for taking our questions.

A – Steve Cahillane: Good morning, Cody.

Cody Ross: I just want to talk a little bit about the volume growth. Hey, good morning. I just want to talk about your volume performance in the quarter as that’s what investors are really primarily focusing on these days. Your volume in developed markets, particularly the US came in below what we expected. How are you thinking about volume growth moving forward into the back half and into next year? And how much visibility do you have to return to volume growth? And what would those levers be to drive it? And then I have a follow-up.

Steven Cahillane: Yeah. Thanks, Cody. As I mentioned, volumes were in line with our expectations. It doesn’t mean we’re pleased about it, but take the level of pricing that we’ve taken, you have to see elasticity’s moving higher, which is exactly what we’ve seen. Our quarter two was amplified by lapping the year ago trade inventory replenishment in North America. There’s no question about that. In Latin America, more than a third of our volume decline in the second quarter came from price pack architecture and calling of lower-margin SKUs, which was very much planned. So we’ve been planning on these elasticities returning and they have returned. I would say, on a go-forward basis, we’re more optimistic and more constructive about our volumes.

So I don’t see – I don’t see this volume continuing this level. I see sequential improvement, and we do see, as we’ll talk about next week in great detail exactly what that looks like as we return to a more balanced equation of volume versus price, but there’s no question, this has been an unprecedented time in this industry with the type of pricing that’s been necessary to take because of the input cost inflation. But we’ve got lots of dry powder as we think about the second half of the year to drive real quality merchandising. I’m talking about display execution, brand building with significant advertising spend, really creating those connections with our consumers. So, in line with expectations, admittedly a high volume decline, but nothing that surprised us going forward.

And maybe Amit can build on that.

Amit Banati: Yeah. So just a couple of further builds, right? I think the one thing I’d point out is in quarter two, the inventory lap was the most pronounced. So I think that was most pronounced in this quarter. And so I think going forward, that will be lesser of an impact. I think from a rest of the year, we continue to focus decelerating sales growth. That’s what’s been implied. That’s what’s implied in our guidance. And it’s a couple of things that’s driving that. One is, we obviously start lapping last year’s substantial revenue growth management actions, which were that much higher in the second half. And we continue to prudently assume higher elasticities for the rest of the year.

Cody Ross: Great. Thank you and I just want to follow up on that question, and you may have alluded to it already in your answer to my last question. But you ship below consumption or at least Nielsen consumption in North America this quarter. What drove that? Was that all lapping the serial over shipment last year of replenishment, I should say? And are you seeing any de-stocking from retailers as they try to manage their working capital. And then I’ll pass it on.

Steve Cahillane: Yes, I’d say a good bit due to the replenishment and we’re potentially seeing some retailer de-stocking. It’s really hard to pin down when you’re talking about a quarter. And we see that as a good thing, Cody. Obviously, service levels for the last year plus have been below normal levels, which required safety stock across the supply chain. As we get to service levels back above 95%, you’d see a renewed confidence, a growing confidence at retail and therefore, not needing to carry the same days of supply. And again, we don’t see that as a negative. And we see, as we said, from a go-forward perspective, lots of confidence in our plans, which has led to us raising our guidance for the top line slightly.

Cody Ross: Thank you. Looking forward to next week.

Steve Cahillane: See you next week.

Operator: Thank you. Our next question comes from the David Palmer of Evercore. Your line is now open. Please go ahead.

David Palmer: Thanks. Good morning. I think you said gross margins should be up 50 basis points year-over-year for the full year. I think I heard that right. If that’s right, that implies something like a 30-plus basis point gross margin decline in the second half. What are some of the puts and takes we should be thinking about for gross margin and maybe a change in trend? And I have a quick follow-up.

Amit Banati: Yeah. So I wouldn’t say there’s a change in trend. I think we had always said gross margin would be up during the year. I think based on — it’s coming in faster than we expected, predominantly driven by bottlenecks and shortages receding faster than what we had thought. So I think the supply chain is performing really well. Are we seeing that in cost, we’re seeing that in service levels. We’d expect that trend to continue. And I think when you kind of put it all together, our forecast right now is that we should be up about 50 basis points for the year.

David Palmer: And then I know from your filing, North America cereal adjusted gross margin was about 26% in the first quarter. I don’t know, if it’s too early for you to have that for the second quarter. But I’m just wondering, I know obviously, we’ll be talking more next week, but how are you thinking about gross margin potential for that business? I would have thought a large-scale cereal business like yours, would be just naturally living at a much higher gross margin level. Just any thoughts? And of course, we’ll see you next week. Thank you.

Amit Banati: Yeah. So I think we continue to recover both share and margin as that business recovers from the fire in strike through the cycle of replenishing inventory and full commercial execution. So that recovery is well underway, both from our top line share as well as a margin standpoint. And I think the go forward, we’ll obviously discuss fully next week.

Steve Cahillane: Stay tuned for an exciting event next week, David.

David Palmer: Thank you.

Operator: Thank you. Our next question comes from Pamela Kaufman of Morgan Stanley. The line is now open. Please go ahead.

Pamela Kaufman: Hi. Good morning. I was on mute. Can you discuss how much investments shifted into the second half of the year? I think you mentioned that in the prepared remarks. And just broadly how you’re thinking about marketing and brand investment relative to your original plan given what you’re seeing from a demand standpoint and increasing elasticities?

Steve Cahillane: Yeah, Pam, maybe I’ll start and then flip it to Amit. I’d say we have clearly increased our investment in A&P in the first half of the year as we said we would. We were maybe a little bit more judicious as we continue to work through bottlenecks and shortages and get our confidence in our supply chain back to where it needs to be to really drive the type of quality merchandising that we want to drive. And so we see more ambitious plans in the second half. So we’ll see an increase above the run rate that we had in the first half as we drive really good program against Pringles and Cheez-It, our cereal business and so forth. So, continued investment in the brands in a constructive way to drive good quality displays, and promotions on the floor into the second half.

And so that’s what you see happening. A little bit of dynamism going forward, but a confidence in our supply chain is a lot more solid than I’d say it’s been really since the pandemic. I don’t know, Amit, if you want to?

Amit Banati: No. I think there’s been some shift. We always talk this year that we’d be lapping last year’s pull down, right, as we went — as we were building inventories in the first half of 2022. So, for the half, we were up mid-single digits on for the half in A&P. And so — the quarter and so I think we’d expect some shifting of that into the second half.

Pamela Kaufman: Great. Thank you. And just wanted to ask what you’re seeing — what you’re observing from the consumer outside of the US your results, especially in Europe were very strong. So, maybe if you could touch on what you’re seeing in terms of consumer behavior across your geographies?

Steve Cahillane: Yes. I’d say — and we’ve talked about this in the past, Europe is probably under more strain in terms of household budgets than North America. But we performed very well in the second quarter, obviously, you saw our snacks grow nearly 20% on an organic basis. You saw positive growth in cereal. And so from that perspective, our brands are performing well. Our relationships with our customers are very, very constructive. We find the overlap of what they need for their consumers, which we share as we think about putting together promotions and programs that address a strained household budget environment in Europe. But I’d say the brands have performed very well. Our customer teams have performed in an excellent manner as we’ve executed unprecedented revenue growth management activities in Europe, and really continue to operate in a situation where household budgets remain under pressure.

And for the foreseeable future, I think we’ll continue to remain under pressure. But underlying that is a resilient consumer who continues to spend against discretionary items like Pringles and like our cereal brands.

Pamela Kaufman: Thank you.

Operator: Thank you. Our next question comes from Steve Powers of Deutsche Bank. Your line is now open, please go ahead.

Steve Powers: Yes. Hey. Thanks. Good morning. I guess I just want to go back to — I think it was David Palmer’s question on the second half gross margin I didn’t — maybe it is me, I just didn’t quite follow the answer. I do think the math suggests essentially no gross margin expansion in the back half, but you sound confident about the momentum you’ve got going into the back half. So, I just wanted to revisit that, if I could. And then a different topic entirely, but just on Nigeria, it sounded like from the way you described it that you didn’t anticipate taking any incremental pricing from here post-devaluation that you’ve kind of been proactive on. I just wanted to play that back and talk through what the dynamics are and just kind of validate whether — what the pricing outlook is in the context of devaluation going forward?

Steve Cahillane: Yes, I’ll start with the Africa topline and then turn it to Amit to build on that and then address your gross margin question. I’d say the African team has really shown their skill, their savvy, their experience because we mentioned in the prepared remarks, we’ve seen the devaluation of the de facto basis and have been transacting pretty much at the rate that it was the value to or close to it. And so that’s why you see the level of pricing that we’ve been able to take, which really protects our margins going forward, and its underlying the performance in Africa. We’ll continue to watch the currency. It’s been, I think, the government, I give great credit for doing the things that are necessary, but very, very tough for the long-term of that economy in that country.

And we’ll continue to watch what’s really happening with the currency as we always have and think about if it continues to work towards a continued evaluation, we’ll price accordingly. And we price constantly to make sure that we’re keeping track of the underlying currency as we see it. And so with that, I’ll turn it back over to Amit then.

Amit Banati: Yeah. Thanks, Steve. So I think the devaluation that we are seeing right now is more of a catch-up in the official rate at which we translate, I think operationally, like Steve mentioned, we’ve been operating against the de facto devaluation that’s happened. And you can see that in our pricing. And you can see that in our NSV growth, which has been north of 20% for the last few quarters. I think from a translation standpoint, Nigeria is about 10% of our sales. So with the devaluation, it’s about a 4% impact on our overall NSV, which will be split between the two years, 2% this year and 2% next year. This has been incorporated into our ForEx guidance. So the guidance that I gave based on today’s rates, of course, of around a 3% impact on NSV that incorporates the Naira devaluation.

I’d also say that the impact on OP and EPS is less than 1%, and that’s also been incorporated into the 1% negative impact of currency on the EPS. So that’s Nigeria. I think from a gross margin standpoint, no, we’re not — we continue to expect gross margins to expand in the second half. So there’s no change in trend. I think there’s a little bit of variation based on seasonality between the quarters. But I think from an underlying standpoint, we continue to expect gross margin to be up in the second half.

Steve Powers: Okay. Thanks. I’ll pass it on.

Operator: Thank you. Our next question comes from Alexia Howard of Bernstein. Your line is now open. Please go ahead.

Alexia Howard: Good morning, everyone. Just a quick one for me. But thinking about the Investor Day next week. Can you clarify whether we’ll get a guidance range on either earnings per share, or adjusted operating profit for each of the two businesses for 2024?

Amit Banati: Yeah, that’s our intent. So I think our intent is to talk both give you a preliminary guidance given it’s early on 2024, talk about long-term growth rates across key measures.

Alexia Howard: And guidance for next year as well, at least preliminary guidance with the range?

Amit Banati: Yes.

Alexia Howard: Perfect. Thank you very much. I’ll pass it on.

Operator: Thank you. Our next question comes from Bryan Spillane from Bank of America. Your line is now open. Please go ahead.

Bryan Spillane: Thanks operator. Good morning, everyone. I wanted to follow-up, I guess, on Pam’s question. She asked a bit about investment shift to the back half. And I guess maybe just stepping back, like just looking at it more broadly, if we look at SG&A as a percentage of sales, it’s running and it’s been, I guess, the last six or eight quarters, it’s been running about 200 basis points as a percentage of sales below where it was before last year. And so, I guess, as we kind of look thinking about that going forward, right? Is that kind of the new run rate? Is there still some rebasing of marketing spends that has to happen? So just really trying to understand, where SG&A as a percentage of sales have been running in roughly 20% range for a long time, and now we’re or 20% to 21% and now we’re kind of high 18%, 19%. Just is this really a good run rate going forward, or is there more spend that still has to be put back? Thank you.

A – Amit Banati: Yeah. I think, so firstly, there’s been some phasing, right, when you compare it versus 2020 versus 2022. And we talked that, we started the year saying it will be much more first half weighted. I think that has shifted a little bit between first half and second half. I think to your question around levels of advertising, we’re pleased with the levels of advertising. So I don’t think we expect any rebasing needed going forward. On SG&A, we are catching up as meetings, travel, business returns to pre-pandemic levels. So I think that you’ll see that catch-up I’d say that overall, you’d expect overheads to be up mid-single digits is to be up slightly higher than what we increased in 2022. So in 2022, we were up we’d probably be up this year as well at a slightly higher rate.

Q – Bryan Spillane: Okay. So it sounds as, if we’re thinking about SG&A as a percentage of sales, if we go back past 2022, right, if you look at 2020, 2021, just the years before, it sounds like it’s going to be net and lower as a percentage of sales, but the run rate was leading up before the pandemic?

A – Amit Banati: Yeah. I mean, there’s been a lot of pricing that has come through. So I think we’ve been in this period of exceptional pricing. So, some of the ratios probably are displaced a little bit as that pricing has worked its way through the P&L.

Q – Bryan Spillane: That’s great. Thanks Amit. That’s very helpful.

Operator: Thank you. Our next question comes from Robert Dickerson of Jefferies. Your line is now open. Please go ahead.

A – Amit Banati: Rob? Are you on mute?

Q – Robert Dickerson: Hello? Can you hear me?

A – Amit Banati: Yes. Now we can.

Q – Robert Dickerson: I am sorry. Yeah. Yes, I just want to ask a broader question around [indiscernible] strike. If you think for like two quarters it seems kind of habitability as to why do you think that actually fully recovered, [indiscernible]?

A – Amit Banati: Rob, I think you were not entirely — you’re a little breaking up, but I think the question was around R-Tech and R-Tech recovery and where we see it. So I’ll answer that question. I think that’s what you’re asking. We continue to recover the share. We talked about in the prepared remarks. In the first half of 2023, we gained 1.5 points year-on-year. We’re also up year-on-year on a 13-week basis and a four-week basis. We’re still recovering items. We’re still recovering distribution points, and we see that continuing to recover. We have a long tail of SKUs we had. We took the opportunity to chop some of that tail to make efficiency gains in our plants, but there’s still some recovery happening with the long-tail SKUs that we did not chop.

And so we still see recovery on the horizon. I wouldn’t really call it a recovery, but I just see it as ongoing momentum as we get back to where we were pre strike from a share perspective. And I think you’ll see some ambitious plans next week. There should be no ceiling for our share ambitions when we think about what the potential of this business is. But we’re pleased with the momentum. We’re pleased with the plant performance. We mentioned also in the prepared remarks, we’re running company and company right now, which is really exciting. We did the cutover over the weekend. And one of the things that means is there’s now a separate sales organization for North American Cereal, which is, I think, one of the really exciting developments as we talk about two companies, two quality companies going forward.

And so you’ll have a sales organization that’s 100% focused on North American cereal and they’ll have goals that are ambitious and I think very achievable as we continue to look forward for North American cereal and what its true potential is.

Q – Robert Dickerson: Okay. Super. And then I guess just one quick follow-up is kind of pertaining, I guess, to Mr. Palmer’s question earlier, just on the North America cereal profitability, that you provided us in Form 10. Is there anything kind of inherent within those profitability margins that could have been, let’s say, kind of weighing on profitability potential again, more broadly speaking, relative to maybe what could come?

A – AmitBanati: Yes. We’ll talk it in context next week. And I think we’ll talk about the history as well as the go-forward plans, suffice to say that we’ve been through fire and in strike and that had an impact on the margin. So, I think maybe we’ll have a fuller conversation on that next week.

Q – Robert Dickerson: Fair enough. Thanks a lot.

Operator: Thank you. Our next question comes from Michael Lavery of Piper Sandler. Your line is now open. Please go ahead.

Q – MichaelLavery: Thank you. Good morning. Just wanted to understand a couple of things on volumes. You’ve walked through the sales growth split by category and ways that would add up to W.K. Kellogg and Kellanova. But can you give how the volume split would have looked for each of those on a company NewCo basis for the second quarter?

A – JohnRenwick: We haven’t .Yes, we haven’t split it out.

A – SteveCahillane: We haven’t split that, Michael. Next week, we will — I mean, you’re going to get a lot of detail next week about what it looks like and what our forecasts are going forward. But in terms of category splits on volume, it’s not a level of detail that we’ve provided.

Q – Michael Lavery: Okay. And just on emerging markets, obviously, you had the serial comp, the restocking and a lot of things in the US and some different dynamics in developed markets. But EMEA volumes were also down that they had — they were down a bit last year. What would be necessary to see better volume growth there? That’s usually kind of historically where you would expect it is emerging markets. And so, can you just give us a sense of maybe what some of the pressure is there? Is it just macro? I know you mentioned the launch — the expansion into places like South Africa, but how does that look going ahead? Should — is that pressure likely to remain? When does it pick up? How do we think about that?

A – AmitBanati: Yes. I think we’ve seen elasticities rising in the quarter, right? We had expected that. We had focused that, and this quarter, in quarter two, we saw that. And I think we saw it in talking on EMEA or Latin America. In Latin America, we saw it in our cereal business, our cookies and crackers business in Brazil. We also did some rationalization of low-margin SKUs as part of our revenue growth management. So you’re seeing that come through in the quarter. And I think it’s really elasticities given the pricing that we’ve taken, and we talked a little bit about currency in Nigeria, where we’ve had to price not just for commodities, but also currency. So you’re seeing the elasticities come through. I think going forward, from a lever standpoint, I think Steve talked about we’ve got — we’re excited about the commercial plan that we have in the second half. And I think as you start lapping the pricing, there’ll be more balance between volume and price mix.

Q – Michael Lavery: Okay. Thanks so much.

Operator: Thank you. Our next question comes from Matt Smith of Stifel. Your line is now open. Please go ahead.

Q – Matt Smith: Hey, good morning. Thanks for taking my question. I want to follow-up on the commentary about the consumer environment and the category dynamics we’re seeing where some categories we’re seeing clearly a softer elasticity response lately. When you think about your promotional spending going forward, are there categories where you expect that to pick up in relation to where it was on a pre-pandemic basis, I’m thinking here, if you’re approaching the cereal category differently than you are the snacking category, given the volume slowdown we’ve seen that seems to be more evident in cereal relative to the snacking categories where elasticities have been more stable overall?

A – Steve Cahillane: Yes. I think a couple of things. First, it’s a bit of a tough comparison when you think about in North America cereal versus our snacks business because our cereal is obviously coming out of a very depressed environment because of the fire and the strike, really no promotional activity, no merchandising activity, and so we’ve got a ways to go to get back to where it was on a pre-pandemic basis, but we have every confidence that we’re moving in that direction — as our supply chain is working. I mean, it’s working really at a pre-pandemic level in cereal, which is terrific. I already mentioned the replenishment of SKUs, the growth of distribution points and ACV. So we see that really moving in the right direction.

From a snacking perspective, it’s always been a very highly impulsive category. And so coming out of bottlenecks and shortages and low service levels, you don’t get the type of quality display that really drives the type that we’re used to seeing if your service levels aren’t above the 95 percentage rate. And so as we think about the back half of the year and some of the things I’ve mentioned around quality merchandising and our confidence in our supply chain, we see that as a big opportunity for us going forward for brands like Pringles, Cheez-It, Rice Krispies treats, which are highly impulsive. Front end is important. Display disruption opportunities throughout the store is really important. And so we see — we’re really pleased with the type of plans that we have in place for the back half of the year that we think will drive continued good performance, which is why we’re more constructive about volume going forward.

And look at this past quarter’s volume performance is in North America, as whether you call it a high watermark or a low watermark, but moving better — moving clearly in a better direction based on everything that we see.

Q – Matt Smith: Thank you for that, Steve. Looking forward to seeing everybody in next week and I’ll leave it there and pass it on.

A – Steve Cahillane: Okay. Thank you.

John Renwick: All right, operator, I don’t think we have time. We are at the half hour here. Thanks, everyone, for your interest, and please contact us if you have any follow-up questions to ask.

Operator: Thank you for joining today’s call. You may now disconnect your lines.

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Q2 2023

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