Kellogg Company (NYSE:K) Q1 2024 Earnings Call Transcript

Kellogg Company (NYSE:K) Q1 2024 Earnings Call Transcript May 2, 2024

Kellogg Company misses on earnings expectations. Reported EPS is $0.776 EPS, expectations were $0.85. Kellogg Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. Welcome to Kellanova’s First Quarter 2024 Earnings Call. [Operator Instructions] At this time, I would like to turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellanova. Mr. Renwick, you may begin your conference call.

John Renwick: Thank you, operator. Good morning, everyone, and thank you for joining us today for a review of our first quarter results as well as an update on our outlook for 2024. I’m joined this morning by Steve Cahillane, our Chairman, President and Chief Executive Officer; and Amit Banati, our Vice Chairman and Chief Financial Officer. Slide 3 shows our forward-looking statements disclaimer. As you are aware, certain statements made today such as projections for Kellanova’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 www.kellanova.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. Also, remember that our 2023 results have been recast to treat the spun-off WK Kellogg Co. as a discontinued operation in accordance with applicable accounting guidelines. Those recast statements can be found in our Q4 2023 earnings press release from February 8 of this year. And now I’ll turn it over to Steve.

Steve Cahillane: Thanks, John, and good morning, everyone. Two quarters ago, we became Kellanova, with a more focused and growth-oriented portfolio, a refreshed strategy, more ambitious financial targets and the continued commitment to deliver long-term value for our share-owners. I’m proud to say that we have continued to deliver solid results even amidst challenging macro and industry conditions. Our first quarter was a very strong start to 2024 with better sales growth, profit margins and cash flow than we had projected, and it was another quarter of on-algorithm performance year-on-year; in fact, at the upper end of our algorithm ranges. We are encouraged by the early signs of headway we are making in the marketplace, including here in the United States, and we continue to deliver strong organic growth in emerging markets.

Put it all together, and you can see why we are able to reaffirm our 2024 guidance today and with an increased level of confidence. But before we dive into the details of our financials and regional performance, let me remind you of a few important drivers of this performance. First is our strategy: differentiate, drive and deliver, shown on Slide 6. Each and every element of this strategy is being addressed and executed, both to deliver our near-term commitments, but also to build for a strong future. The strategy clearly has us further differentiating ourselves as a company driving the actions that deliver share-owner value. Then, of course, there is our global footprint. Another area of differentiation for Kellanova depicted on Slide 7. Our heavy international presence adds diversification and growth, both of which were once again on display in the latest quarter.

And this footprint, with its growth orientation and diversification, will remain a key differentiator for years to come. All of this is driving differentiated results. Slide 8 shows how our organic net sales growth has remained above our peer group median. Recently, we have benefited in part from our ability to raise prices significantly in markets where the currency has devalued sharply of late, but it is differentiated growth, differentiated from our peers and differentiated from our past, and it does reflect the benefits of our sharpened strategy and our more growth-oriented portfolio. Our portfolio is not only more growth-oriented today, but it is also more profitable. Slide 9 shows how our post-spin companies’ margins are higher than we were as Kellogg Company even before the pandemic.

So as stated on Slide 10, we are again reaffirming our full year guidance, and we are doing so with increased confidence. This increased confidence comes from the over-delivery of our first quarter. It also stems from the fact that our return to full commercial activity is gaining traction, resulting in sequential improvement in key end market metrics. A good example is the U.S., where we saw consumption volume and sales improve their trends in March and into April. Meanwhile, category-level elasticities are starting to moderate, which further supports our expectations for stabilizing volumes. We continue to invest in our emerging markets businesses, an important source of our differentiated long-term growth and we are in the process of adding capacity for our biggest brand, Pringles, in these emerging markets.

We continue to restore and expand margins, progressing ahead of our plan in this area. And finally, we continue to enhance our financial flexibility through increased free cash flow and a deleveraged balance sheet. Meanwhile, we also continue to focus on growing the right way and Slide 11 provides just a few examples of our better days promise in action during the first quarter. As always, we had a heavy focus on addressing food insecurity worldwide. But we also know that doing the right thing is good for business. And during the first quarter, we again partnered with customers and leveraged our brands as we supported the communities we serve. We also continue to be recognized for our good work. So now let me turn it over to Amit, who will walk you through our financials before I come back and discuss each of our businesses in more detail.

Amit Banati: Thank you, Steve, and hello, everyone. Slide 13 summarizes our key financial results for quarter 1. As Steve said, we are pleased to report another quarter of on-algorithm results and the fact that these results exceeded our expectations gives us even more confidence in our full year outlook. Our organic growth in net sales was towards the top end of our long-term target range, with much of this organic growth attributable to pricing to offset currency devaluation. But even outside of that, our sales and volume came in a little better than planned. On a currency-neutral basis, our adjusted operating profit grew strongly year-on-year. If you normalize the year ago recast base, to also include the pass-through of transition services expenses, this year-on-year growth would still be in the double digits on a currency-neutral basis, and it was driven by a restoration of gross profit margin that more than covered increased brand-building investment.

Our below-the-line items, more or less offset each other, resulting in growth in earnings per share that was similar to the operating profit and a very good start to the year. Meanwhile, free cash flow is also off to a good start. Slide 14 walks you through the major components of our year-on-year net sales growth. As you can see, our 5% organic growth was primarily driven by price mix, which itself was led by revenue growth management actions taken over the past 12 months to cover what had been rising input cost inflation as well as pricing actions taken more recently in Nigeria to cover currency devaluation. As expected, our overall price/mix growth decelerated sequentially again in quarter 1, and it should continue to do so as the year goes on.

Volume declined on elasticity impacts around the world. Sequentially, from quarter 4, our overall volume decline was affected by Nigeria experiencing less accelerated orders than last quarter. However, in most of our other regions, we’re encouraged by the pace of what we have always planned to be a gradual stabilization and recovery. Moving along the graphs, the small impact from last year’s divestiture of our Russia business will continue for one more quarter as the transaction anniversaries at the start of quarter 3. Foreign currency translation clipped net sales growth by a larger-than-expected nine percentage points in quarter 1, principally reflecting the Nigerian Naira. If exchange rates experienced during quarter one were to hold the full year’s currency impact, would be around negative 7%.

Now let’s look at gross profit on Slide 15. As we’ve discussed previously, the discontinued operations accounting used to recast 2022 and the first three quarters of 2023 takes into account only the expenses associated with our transition services agreement and not the pass-through of those expenses to WK Kellogg Co. Year-on-year, this contributed about 110 basis points of our margin expansion during quarter 1. Currency devaluations affected our country mix, contributing a year-on-year margin benefit in quarter one of approximately 170 basis points. But as you can see, even without these recast and country mix impacts, we continued a multi-quarter trend of increased gross profit dollars and improvement in our gross profit margin. Driving this margin recovery have been a number of factors, including the improved supply environment, a resumed higher level of productivity and last year’s revenue growth management actions against moderating input cost inflation.

The fact that this gross margin restoration has continued to run ahead of pace gives us additional confidence in our full year outlook of more than 35%. The same holds true for operating profit shown on Slide 16. This was driven by our top line growth and recovering gross profit margin, which were enough to fund advertising and consumer promotion that increased faster than net sales. The absence of TSA reimbursement from the year ago recast base was a year-on-year impact of roughly $45 million at the operating profit line, which explains a little less than 150 basis points of the margin expansion and the currency-related mix shift had the effect of adding less than 100 basis points of the margin expansion. Even if we exclude these two factors, we still continue to grow operating profit in dollars and in margin and quite substantially.

Like our gross profit, this operating profit performance was better than expected, another promising sign for the full year. This strong quarter one margin performance lends confidence to our outlook for an operating profit margin of over 14% for the full year. Moving down the P&L, we come to our earnings per share walk on Slide 17. As you can see, all of our EPS growth in quarter one was attributable to our growth in operating profit as below the line items offset each other. Interest expense increased meaningfully year-on-year, reflecting higher interest rates. This was offset by a similar increase in other income, reflecting currency translation gains. As expected, our effective tax rate came in at about 22.6%, and joint venture earnings and minority interests were collectively about a $0.01 drag on EPS.

Our average shares outstanding decreased modestly year-on-year, reflecting share buybacks that we accelerated into the previous quarter. Let’s turn to Slide 18 and look at our free cash flow and net debt. We’re off to a good start on free cash flow, even in what is normally a small quarter for this metric, though some of this is timing related, specifically the timing of a planned distribution from a post-retirement fund, which is expected to be offset later in the year. Meantime, we’ve continued to pay down debt even as we return sizable cash to share-owners, mostly through our dividend. Our debt leverage remains well below our targeted ratio of net debt to trailing EBITDA of 3x. On Slide 19, you can see that we are making no changes to our 2024 financial guidance.

For net sales, we continue to expect organic growth within our long-term targeted range, specifically calling for 3% growth or better in 2024. Outside of Nigeria, we still assume that price mix growth will moderate as we continue to lap prior year actions, that industry-wide elasticities will fade gradually during the year and that our return to full commercial activity will result in volume stabilization and improvement as the year progresses. The exception is Nigeria, where currency influence pricing actions have continued and where we assume we will start to see meaningful elasticity impact on volume. Organic growth, of course, excludes currency translation which based on exchange rates we saw during quarter 1, would be a headwind of about 7% for the full year.

For adjusted basis operating profit, we again reaffirmed the range of $1.85 billion to $1.9 billion. This incorporates a worsened negative impact from currency translation, which based on exchange rates experienced during quarter one would be about negative 2% to 3% for the full year. This operating profit guidance still implies continued margin expansion as an improving gross profit margin more than offset a strong increase in brand investment. In fact, we are taking advantage of our strong quarter one to increase our reinvestment in brands and capabilities. Adjusted basis, earnings per share is still expected to be in the range of $3.55 to $3.65. Interest expense for the year now should be around $315 million versus the $310 million we signaled last quarter and currency translation is running worse than previously expected.

On the other hand, other income’s favorable quarter one brings up the full year, even as remaining quarters are still expected to run at around $15 million per quarter. We also estimate that our effective tax rate will come in below the 23% we previously guided to something more like what we saw in quarter 1. And the collective impact of joint venture earnings and minority interest may continue to run at a similar rate as in quarter 1. And we are reaffirming our outlook for free cash flow of approximately $1 billion with year-on-year growth driven by operating profit and despite capital expenditure temporarily elevated as a percentage of sales for expanded Pringles capacity in emerging markets as well as usual cash outlays related to our two network optimization projects.

Our strong start to the year across all of these metrics gives us increased confidence in this guidance while still allowing some room for potential risks such as further currency devaluations or disruptions in the Middle East as well as the opportunity to add some investment behind brands and capabilities. So in summary, our financial position is solid. We kicked off 2024 with results in the first quarter that were ahead of plan. Our commercial activities are starting to be reflected in improving end market performance and our profit margins are recovering ahead of pace. Plus, we continue to address our future margins and return on invested capital, making progress on network optimization projects, all of which gives us increased confidence in the full year guidance we first provided last August and allows us to increase reinvestment.

Our cash flow and balance sheet are giving us enhanced financial flexibility, and we continue to return cash to share-owners, not only in the form of the opportunistic share buybacks we made late last year, but also the increase in our dividend that we announced just last week. And with that, let me now turn it back to Steve for a run-through of our businesses around the world.

Steve Cahillane: Thanks, Amit. We’ll start with Kellanova North America and Slide 22. Our organic net sales were flat in the quarter against our toughest comparison of the year. As expected, price mix growth is moderating as we lap last year’s revenue growth management actions and last year’s relative lack of merchandising activity. Industry-wide elasticities continued to pressure volume in the quarter, but it is important to note that we again realized sequential moderation in these volume declines and we expect this to continue as our increased commercial activity combines with expected diminishing of elasticities in our categories. North America’s operating profit increased substantially as margins continue to be restored.

Half of this year-on-year profit growth can be explained by the year earlier recast figures, not incorporating the pass-through of transition service expenses. The other half of this growth was driven by productivity initiatives and year-on-year improvements in service levels and logistics. So in spite of soft category demand, North America again delivered financially. Slide 23 shows how both our snacks and our frozen businesses lapped strong year-earlier growth through the first half before beginning to lap the category level rise in elasticities that became more pronounced in the second half last year. Hence, being flattish in quarter one was expected for both businesses. Encouragingly, our U.S. categories in market in quarter one showed moderating volume declines as elasticities began to moderate.

Meanwhile, our ramped up commercial activity is starting to improve our share performance as we had planned. While we returned to merchandising in the second half last year, quality display activity requires lead time, and we are now starting to realize this quality activity with increasing retailer acceptance as we have refined our price points, pack sizes and merchandising periods and events. Slide 24 shows this improvement in two of our most important categories. In both crackers and salty snacks, you can see our upward trajectory in consumption sales and volume, particularly when compared to their respective categories. In salty snacks, Pringles picked up share in March and in crackers, our declines are narrowing rapidly, thanks to increasing merchandising for Cheez-It and share gains by Club and Toasted.

The same is true in our other categories. We gained share in portable wholesome snacks in the first quarter led by Pop-Tarts. Eggo started to narrow its share losses in March on meaningful gains in distribution and MorningStar Farms continues to pick up share. So we are gaining traction, and we have more building blocks taking shape in the second quarter when we pick up distribution on shelf resets and innovation launches, all supported by increased brand investment and merchandising activity. And that’s on top of likely easing of elasticities as last year’s SNAP and other government allotments anniversary. So we fully expect to sustain this improvement in consumption volume and share performance in the second quarter and through the second half.

As indicated on Slide 25, there is no change in our expectations for North America only increased confidence. Our increased innovation is beginning to hit the shelves now and our brand building and merchandising have increased and are of higher quality. Best of all, we’re already seeing this activity start to bear fruit in the marketplace. We expect our volume performance in this region will continue to improve as a result. Meantime, our margins continue to recover ahead of pace, and we are seeing early evidence of the post spin-off benefits of a more focused and agile organization. And I’m just back from the Los Angeles Premier of Jerry Seinfeld’s new Netflix movie Unfrosted, which I can tell you is absolutely hilarious. It’s a farcical take on the launch of our beloved Pop-Tarts.

Only the most iconic brands merit a star-studded movie, so be sure to watch its release tomorrow night on Netflix. Now let’s turn to Kellanova Europe and Slide 26. This region sustained good net sales growth growing organically by 3% in the first quarter even as it lapped prior year revenue growth management actions. Importantly, we realized a modest sequential improvement in volume performance. Even excluding favorable currency translation, Europe’s adjusted basis operating profit grew by 4% year-on-year despite last year’s midyear divestiture of Russia. Profit margins continue to recover nicely in this business, even with significant boost in brand building investment. On Slide 27, you can see that Snacks, which represent over half of our sales in Kellanova.

Europe, continue to lead our growth in this region during the first quarter. Our Snacks’ net sales grew organically by 4% as they lap double-digit growth and as we experienced trade inventory timing in certain markets as well as softened demand in Israel, which is the lone Middle East market serviced out of Kellanova Europe. End market, we saw continued deceleration in retail sales growth for our primary categories on moderating price increases and sustained elasticities. The salty snacks category is growing at low to mid-single-digit growth rates in developed markets while sustaining mid-teens growth in emerging markets like Poland and Romania. Impressively, Pringles has gained share across most markets in the first quarter. In Cereal, we remained on a trend of 1% organic net sales growth.

We gained share in the growing U.K. cereal market, but did see continued categories slowing and shifts to private label in many markets in the region. Slide 28 reviews the elements to watch for in Europe in 2024. Pringles is poised to sustain momentum as we execute our biggest ever campaigns around football, launched a set of limited edition flavors and continue our paper can partnership with a major U.K. retailer. All while we prepare for the launch of Cheez-It starting in the U.K. in the third quarter. In Cereal, we’re excited about the launch of Kellogg’s sponsored football camps across the U.K. affiliated with prestigious professional clubs. We’re also enthusiastic about building momentum behind innovations like new Choco Corn flakes and Trésor Brownie.

The result will be a seventh consecutive year of organic net sales growth for this region even as we progress on plans for an optimization of our cereal portfolio and pending consultation our manufacturing network. Now let’s look at our emerging markets regions, starting with Latin America on Slide 29. In the first quarter, Latin America’s net sales increased by 5% organically. Price/mix growth is moderating as expected as we lap prior year actions to offset high cost inflation. The good news is that volume declines continue to moderate even in spite of the impact of our SKU rationalization and price pack architecture initiatives. Operating profit declined in the first quarter against strong 20%-plus year-earlier growth. Slide 30 shows our Latin American net sales growth by category group.

Organic net sales for our Snacks business dipped year-on-year due to elasticities in Central America and the lapping of a strong year ago quarter. However, end market data indicate that category growth rates for salty snacks generally remain strong, and both Pringles and Cheez-It outpaced the category with double-digit consumption growth in Mexico and Brazil. Our cereal net sales increased by a better-than-expected 10% in spite of lapping a similarly strong year ago performance. End market, the cereal category remains particularly robust in Mexico and Brazil, and we gained share in both of those markets. In fact, in Mexico, we recorded our highest share in the past decade through commercial activation of our core brands and expanded distribution.

Slide 31 reminds you of what to watch for in our Latin America business this year. We expect a seventh straight year of organic net sales growth, with growth in both Snacks and Cereal. Pringles growth should be sustained by innovation and distribution expansion, and we also expect good growth in cereal. Margin should improve, reflecting price pack architecture and other RGM initiatives, operating efficiencies and the potential for moderating input cost pressures later this year. And we’ll finish with our EMEA region, starting with Slide 32. Currency influence price increases drove substantially all of the region’s 19% organic net sales growth in the quarter, and this organic growth was more than offset by adverse currency translation. Nevertheless, our business in Nigeria continues to execute well through this challenging currency environment.

It is priced to keep up with parallel market currency rates and has operated very effectively. Up to now, elasticities have remained manageable, though they are now on the rise given the significant pricing we have had to execute. Stepping back, these short-term challenges are dramatically outweighed by the long-term growth opportunity that this growing market and our advantaged assets provide us. Outside of Nigeria and our joint ventures with Tolaram, our organic net sales declined slightly year-on-year as it lapped double-digit growth in the year ago quarter and as demand has been impacted by the heightened tensions in the Middle East. On a currency-neutral basis, EMEA’s operating profit grew by 29%, though the extremely adverse currency translation brings this growth down to 2% in U.S. dollars.

Excluding our joint ventures with Tolaram, EMEA’s operating profit still grew in the double digits year-on-year, both with and without currency translation as margin recovery continues. On Slide 33, the magnitude of the currency-driven pricing in Nigeria is reflected in the accelerated organic net sales growth for Noodles and other. Pricing has had to continue and while volume has held up well, some of this is related to timing of advanced orders in recent quarters that will likely negatively impact the second quarter and we also are prudently projecting elasticities to finally rise in this business. Meanwhile, our Kellogg’s noodles in South Africa and Egypt continue to grow rapidly, gaining distribution and share. In Snacks, we lapped a notably strong year earlier quarter, and Pringles is feeling the impact of the conflict in the Middle East.

Outside of that subregion, however, our snack sales remained in solid growth, led by Pringles. In Cereal, our organic net sales slipped by less than 1% despite lapping notably strong growth in the prior year ago quarter. Category elasticities persist, though we are encouraged by our sales in Australia. So for EMEA in 2024, we continue to watch for the elements listed on Slide 34. This region looks to extend its enviable track record of consistently delivering organic growth. Noodles remains a growth business for us even as we contend with increased pricing and elasticities. We expect to sustain momentum in Snacks, led by Pringles, though the Middle East situation may slow its overall growth in the region and we expect to sustain growth in Cereal, led by emerging markets.

And EMEA’s restoration of profit margins should continue. So let me summarize with Slide 36. We’re two quarters past the spin-off and already the benefits of a more focused, more growth-oriented and more profitable portfolio are on display. We again delivered continued on-algorithm financial performance that tracked ahead of expectations. Our stronger commercial plans are taking hold with improving end market performance that is leading to improving volume performance and this improvement will continue. We continue to progress ahead of schedule in the restoration of profit margins. All of this enables us to reaffirm our 2024 guidance with an increased level of confidence. Meanwhile, we continue to take value-creating actions for the future including, for example, adding much-needed emerging market capacity for Pringles, expanding Cheez-It internationally and optimizing our global manufacturing network.

Simply put, we have the strategy, the portfolio, the footprint and the financial flexibility to deliver results consistently quarter after quarter and create long-term value for our share-owners. And as always, the biggest reason for our confidence is the talent and energy of our Kellanova team who are working hard every day to deliver value for you, our share-owners. And with that, we’d be happy to take your questions.

Operator: [Operator Instructions] Our first question today is from the line of Ken Goldman of JPMorgan. Please go ahead.

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Q&A Session

Ken Goldman: Hi, good morning everybody.

Steve Cahillane: Hi, Ken.

Ken Goldman: Hi. Just in scanner data. I know it doesn’t cover everything. But – and clearly, you’re able to perform quite well anyway lately. But just noticing that as we’ve seen for a little while now, private label continues to gain share in both crackers and potato chips, maybe at a little faster rate than they are in most food categories. So I’m just curious as we – maybe you think about 2Q and 3Q with some of the maybe elasticity fading trends, as you mentioned, maybe some lapping of last year’s Snap reduction. So how do we think about you as a category, and private label in the context of that and maybe some of the competitive trends within there?

Steve Cahillane: Yes, thanks for the question, Ken. We don’t really see the same thing that you’re talking about in terms of private label. It’s been a little bumpy, to be honest with you. And if you look back to, say, 2019 all the way through this year, there’s no meaningful moves in private label in the categories that you mentioned. And if you look at PWS, portable wholesome snacks, there might be a little bit more movement there. But I think it’s really a story of not much to see there when you take all the noise out, because you do have private label last year spring a little bit more due to supply disruptions, bottleneck shortages. So there’s some of that’s just coming back to where it was. I think equally, there is in the non-measured channels, as you said, growing faster, so you can’t always look at the syndicated data as a complete proxy for our own top line performance because of that growth.

And the growth in away-from-home channels as well, which has been very good. So I think not to be – I hope you don’t take that as a dismissive comment, but I think it’s not as much to see as you might really think, as you really analyze the fulsomeness of the data.

Ken Goldman: It’s dismissive of Nielsen, not me. I’ll take it that way. But I’m curious if we can maybe broaden it out a little bit, just as you think about lapping the Snap productions, what are your estimates maybe forgetting what we’re seeing in private label, just thinking about it more broadly in terms of maybe the lower income, or some of the consumers that are struggling a little bit. Do you expect maybe to see a little bit of improvement just more on a macro basis as we lap some of last year’s trends?

Steve Cahillane: Yes, we do Ken. And you hit it right on the head, the lower-income consumers, as you know and have seen are under a lot more pressure than the balance of the consumers, and that continues where probably as we get into the back half of the year going to be past the worst of that because of the Snap benefits, because of the restoration of having to pay student loans, because of the improving economic environment overall from an employment standpoint and from a wage standpoint. I think we’ve seen the last of it. So we always forecast elasticities, to be the most challenging in the first half of the year, and to improve in the back half of the year. For us, we’re actually seeing a better performance than that. So, if you look at the syndicated data, again, I dismissed it on one hand, but not entirely.

You can see that our performance is improving. We’re getting back to full merchandising activity, which we had said, so we’re moving from really telling everybody what we’re going to do to showing what we’re doing, and you actually see that in our improvement. So, we feel much more confident in our volume performance. I’m speaking about North America now, even into the second quarter. And certainly, that – we see that continuing into the back half of the year. So overall category, I think, back half of the year improvement for us even sooner than that.

Ken Goldman: Helpful. Thank you.

Operator: Our next question today is from the line of Max Gumport of BNP Paribas. Please go ahead. Your line is open

Max Gumport: Hi. Thanks for the question. First, just on the TSA impact. I think we’ve got the moving pieces now, but it sounds like maybe it was $45 million to $50 million benefit on EBIT. And then, maybe the $35 million of that was on the gross profit line? Do I have that right in terms of the size of the TSA with the reimbursement piece?

Amit Banati: Yes. Yes. I think you’ve got that right. I think the TSA reimbursement was around $45 million, and that split between gross profit and SG&A is about right.

Max Gumport: And then how should we…

Amit Banati: I think nevertheless, even if – yes, I think even if you exclude that, we saw strong double-digit growth in our operating profit. You saw our gross margin even if you exclude the TSA, as well as the ForEx impact, our gross margins were up 190 basis points in the quarter. I think from a go-forward standpoint, we’d expect TSAs to continue, to be in that range, but starting to ratchet down in quarter two. As I’ve mentioned previously, we are transitioning the distribution centers into WKKC. So that process is underway. It’s going really well. Service levels are high as we are doing the transition. So as that transition happens through the course of 2024, you’ll see some of the TSA costs move directly, to WKKC. And so, that will start ratcheting down through the year. And of course, in quarter four, you’ll anniversary that. So that’s what’s built into the guidance.

Max Gumport: Great. Very helpful. And then, Steve, you just touched on this. Over the last several months, we’ve been hearing more and more commentary of consumer, particularly a lower income consumer that is feeling stressed. And as a result, eating out less, and that’s only become more, clear through the last several days of restaurant earnings. I think what’s not as clear, is whether or not we’re seeing this result in the shift to food at home. I’m just curious what you’re seeing on this front, and where you think the volume could be going? Thanks very much. I’ll leave it there.

Steve Cahillane: Yes. I think you’re clearly seeing value-seeking behavior. And discretionary income, the consumers under the most pressure from a discretionary income standpoint are eating out less. I think that’s clear. And they are returning to the at-home channels, but they’re still seeking value even among that. So you see growth in different channels that better cater or really focus against the value-seeking consumer. You continue to see lower packs – seeking price points. And so, we’re trying more and more not to vacate those very attractive price points. But yes, that’s exactly what we’re seeing. And as I said in the earlier comment, I think in the back half of the year, that pressure will start to abate.

Max Gumport: Great. Thanks very much.

Operator: Our next question today is from the line of Alexia Howard of Bernstein. Please go ahead.

Alexia Howard: Good morning, everyone.

Steve Cahillane: Good morning, Alexia.

Alexia Howard: Hi, there. So I think you mentioned at the beginning that the first quarter, was coming in a bit better than expected, on both the top and the bottom line. I’m wondering that why there wouldn’t be a guidance raise at this point, or whether maybe there are things on the table that are still highly uncertain. I mean we’ve just mentioned the consumer. Maybe you could just speak to what you see as the key uncertainties as we move through the next few quarters? Thank you.

Steve Cahillane: Yes. I think Alexia, it really comes down to the simple fact. It’s only the first quarter. So there’s always uncertainty with three quarters to remain. But it really gives us the very strong confidence that we’re going to deliver a very good year. And what I mean by that is it allows us to really think about the best levels of reinvestment that we can do. And I’ll give you some examples of that route to market in Latin America and EMEA continues to be really exciting for us. We’re going to invest a little bit more in route to market, everything around digital transformation and artificial intelligence allows us, to lean in more than we had planned, and we were already leading in this year in our plans. We can lean in even more on that.

And then brand, especially brand building. I’ll give you a real-life example of that. I talked about the Pop-Tarts movie. It really is an exceptional movie. And when a comedic genius and icon like Jerry Seinfeld, makes a movie about – full feature length movie about your product, with a star-studded cast, that gives you an opportunity, we didn’t know about it, and we’re leaning into it. We’ve got displays going up all over the place. We’ve got a special pack with Jerry’s picture on it, and we’ve got a 90-second video shot, by Jerry that’s airing right now. None of that was in the budget, and we were able to lean in, in a meaningful way to really accelerate the Pop-Tarts momentum. So, we’re in that type of position right now. So, there’s nothing looming on the horizon that’s scaring us.

It just allows us to really set up the year for an exceptional performance.

Alexia Howard: Great. And could I just follow up? Your leverage is obviously low at the moment. You’ve got this transitional services agreement that’s going to be fading down. What’s your appetite to doing a deal? I know there’s a lot of moving pieces right now. Is it too soon to try to replace the sales and EBIT that were lost with the spin-off of WK Kellogg or are you actively looking at the moment? And if so, I presume it would be in snacking, but would it be domestically or internationally, just curious?

Steve Cahillane: Yes. So we like the health of our balance sheet without a doubt. Our net debt continues to go down. Our leverage ratios continue to go down. So, we have the capacity to do something if it creates share-owner value. And we’re always on the lookout for anything that does create share-owner value. So you’re right, Snacks is – we talk about being a snacking led powerhouse. 50% of our business is outside the U.S. So, we could do something domestically for outside. We’re not really looking to change to proactively change, to be more international or more domestic. We would look at the absolute best deal out there. And we have the capacity to do it. Equally, we’re very excited about organic opportunities, which I just mentioned Pop-Tarts, but Cheez-It internationally continues to be a priority for us.

Adding Pringles capacity is very much a part of our capital plan this year, building two new factories, one in Latin America, another one in Asia. So, we’ve got good uses for our capital with high ROIs, but M&A could factor into that as well.

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

Operator: Our next question today is from the line of Tom Palmer of Citi. Please go ahead. Your line is open.

Tom Palmer: Good morning. Thanks for the question. I wanted to just try to bridge the profit improvement you saw in North America, I think even excluding the TSA contribution that you noted, we’d be looking at almost a 20% increase in operating profit relative to last year’s adjusted number. Clearly, the positive pricing would seem to have offset the volume declines. But just wondering on other items, it does seem like investments were stepped up, but the cost environment maybe is a bit more favorable? And then kind of how does that cost environment progress, as we think about subsequent quarters? Thanks.

Amit Banati: Yes. I think very strong performance in our North America business this quarter, so very pleased with that. I think it’s all the factors that you mentioned. So it’s the benefit of the revenue growth actions that, we took last year. It’s a moderating cost environment. So, we’re seeing that play out. I think this quarter, the supply chain performed well. And from a lapping standpoint, this was the biggest lap from the shortages and bottlenecks. So, those were kind of some of the drivers. We continue to expect to see strong profit performance, both gross and operating through the year, probably not at the pace in – we saw in quarter one, because we’re lapping bulk of the shortages and bottlenecks, we lap that was predominantly in quarter one.

And then some of the mechanical elements like the currency impact was most pronounced in quarter one. That will probably moderate in the rest of the year. I mentioned earlier that we lap – or we anniversary, the TSA reimbursements in quarter four. So, we’d expect continued good performance through the year, but not as pronounced as we saw in quarter one.

Tom Palmer: Okay. Thank you. And then a quarter ago, you guided for all operating segments to report organic sales growth, and constant currency operating profit growth in line with their long-term algorithms? Is this still the case? Or is there any shift here, just given the strong start to the year.

Amit Banati: I’d say broadly in line with what we do. So no major changes. I think it’s coming slightly better than expected. Currency in Nigeria is obviously devalued more than we thought, and the teams there are pricing to recover that. So some changes, but overall, broadly, I’d say, in line with our – in line with the long-term algo that we had guided to.

Tom Palmer: Thank you.

Operator: Our next question today is from the line of Andrew Lazar of Barclays. Your line is up. Please go ahead.

Andrew Lazar: Great. Thanks so much. Amit, a lot of discussion on North America profitability, obviously coming in and far better than most of us had modelled, even adjusting for some of the one-off nature of things. But I assume there was actually also some element of negative fixed cost absorption or – in there due to the fact that volume in North America has continued to be on the weaker side. I guess, how much of a headwind to gross margin might that have been in North America, or to overall Kellanova that I would assume, would also start to moderate or taper off, as volume trends start to stabilize and/or even improve in the back part of the year?

Amit Banati: Yes. I think, Andrew, it was a headwind. But like I said, I think the improved supply chain performance more than offset that. So while the volume line was a bit of a headwind. By far, the biggest driver was the lapping of the improved supply chain performance, the improved service levels. And so, I think that’s kind of more than offset that. And of course, we’d expect the volume leverage to start improving as the volume trends start improving, in the latter part of the year. The benefit of the lapping of the bottlenecks will moderate, some volume leverage would pick up. So that’s kind of the shape of the year.

Andrew Lazar: Okay. And then quickly, Steve, just – we’ve heard a lot of discussion also in general about just consumers – maybe the lower income consumer is obviously reacting to just sort of absolute price points, right, being sort of where they are as opposed to anything having to do with price gaps vis-a-vis private label or anything else. Sometimes there’s an adjustment period here in terms of consumers adjusting their, sort of their reference price points, with what they may have equated with a product on promotion prior to the sort of the last two years of inflation and whatnot. I guess where do you think the consumer is, with respect to adjusting their sort of their reference price points? Do you think they’re making some progress on that front? And maybe that’s part of what plays into hopefully helping industry volumes in the back part of the year as well. I’m just curious your thoughts on that? Thanks.

Steve Cahillane: Yes, Andrew, I think that’s exactly right. We talked, I think, in the last quarter and probably the last two quarters about those very reference price points and talking about the consumer will walk by four or five trips, and not just be able to accept that new reference price point. So, I think we’re there or thereabout, probably the seventh or eighth inning, if you like. At the same time, companies like us continue to also work RGM initiatives, and it’s not shrink-inflation. It’s making sure that you can hold your margin and hit a price point, and sometimes that means a smaller size. And so, I think the combination of all of those things working together leads us to believe that the second half of the year, is going to be the inflection [ph] point for the consumer.

And for us, as I said, I think we get there even faster than that, because of what we’re lapping, because we admittedly came back to merchandising activity perhaps later than we otherwise would have, knowing what we know today. But the fact of the matter is we are there now. We are merchandising more effectively. We’ve got more quality displays. We like our price points. We do like our price points and where they are with consumers. And so, we see all that leading to a better back half of the year, although still not without pressure. So I don’t want to be pollyannish about it. The consumer is still under a good bit of pressure, but I do think that there is brightness on the horizon.

Andrew Lazar: Thank you.

Operator: Next question today is from the line of Michael Lavery of Piper Sandler. Please go ahead.

Michael Lavery: Thank you. Good morning. I just want to come back to the big picture outlook for the consumer. And we’ve touched a little bit already on possibly the food away from home shift to food at home as a possible tailwind. But I guess every company is looking for volume improvement in the second half, even if you think about food away from home shifts adding – growing the pie, private label momentum is still strong. We hear over and over again about the pressured consumer lapping Snap kind of puts an incremental negative in the rearview, but doesn’t replace it with any new boost. So, I guess where does all the volume come from? Is it – do you expect private label share to reverse, is it just that other competitors in the branded space will seed share to Kellanova? How do we think about how that’s meant to unfold?

Steve Cahillane: Yes. So I think if you step back and look at everything, I don’t think that there has been volume destruction, right? If there is a caloric reduction in the population, it is quite minimal. And a couple of quarters ago, everybody wanted to talk about the GLP-1 drugs. I think that’s faded as well. So if you start with the premise that more or less the caloric state remains the same, then the volume goes somewhere. And I think those with the best full commercial activation, with brands that matter to consumers are going to be the ultimate winners. And that’s why we’re excited about where we are in terms of our ability to reinvest, and continue to step up our investment against the consumer and against household penetration. And making sure that we’re delighting our consumers all along the way, because we think the volume potential is still very real, and hasn’t had any full diminishment, if you like.