Kellogg Company (NYSE:K) Q4 2022 Earnings Call Transcript

Kellogg Company (NYSE:K) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning and welcome to the Kellogg Company’s Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s 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 fourth quarter and full year 2022 results as well as our outlook for 2023. I’m 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.

This is a particular note amidst the current operating environment, which includes unusually high input cost inflation, global supply disruptions, and other uncertain global macroeconomic conditions, all of whose direction, length, and severity are so difficult to predict. 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.

Steven Cahillane: Thanks, John and good morning, everyone. The fourth quarter completed what was an excellent year, competitively, financially, and in terms of the grit and skill, our organization demonstrated in executing through what were truly extraordinary circumstances. The strength of our snacks portfolio was clearly evident with double-digit net sales growth across all regions underpinned by strong end market performance. We sustained exceptional growth in emerging markets led by our noodles and other portfolio in Africa, but also posting strong growth in snacks and cereal across EMEA and Latin America. We mitigated the profit impact of unusually high input costs that accelerated during the year, leaning into productivity and carefully executed revenue growth management actions.

We navigated through economy wide supply bottlenecks and shortages and worked to restore capacity in much of our business, most notably in North America Cereal and North America Frozen Foods. The result of all of this was strong financial delivery that exceeded expectations throughout the year prompting us to raise guidance more than once this year for net sales, operating profit and EPS and still over deliver that guidance thanks to a strong fourth quarter. We also announced, planned, and made significant progress towards a separation of our company that will not only improve performance of North America Cereal Co., but provide clearer visibility into the strength of the snacks oriented parent company. With all of this going on and amidst global supply disruptions and high costs, we kept our focus on sustaining momentum in all of our businesses.

We stay true to our deploy for growth strategy, leveraging our growth shaped portfolio, orienting our brand building and innovation towards winning occasions and sustaining momentum in our biggest world class brands, all while working to restore service levels and leveraging all levers of revenue growth management in an attempt to keep up with soaring cost inflation. The results of this focus on sustaining momentum are shown clearly in our organic net sales growth which is shown on Slide Number 6. Not only did our sales come in ahead of expectations every quarter, but our growth accelerated sequentially every quarter and this growth was impressively broad based in all four of our regions and in all four of our major category groups, snacks, cereal, frozen and noodles and other.

We also remain committed to our better day’s strategy towards environmental, social, and governance practices. Slide Number 7 show some examples of tangible actions taken and recognitions received during the fourth quarter alone, illustrating this continued commitment. And you can expect us to maintain this focus on execution and reliable financial delivery in 2023. Slide Number 8 shows that you can expect many of the same drivers of this financial delivery as we saw in 2022. Our snacks business, which is roughly half of today’s Kellogg Company should see sustained momentum led by truly world class brands. In our strong emerging markets businesses, we expect to continue to drive growth and manage through what are always interesting macroeconomic conditions.

Input cost inflation remains high, which means we will again be focused on realizing productivity and cost savings supplemented by utilizing all levers of our database revenue growth management disciplines around the world. And we continue to progress on our supply recovery in specific businesses. As a result, we are forecasting growth in net sales and operating profit that are above our long-term targets even as we continue to invest in the enhancement of capabilities, service levels, and the strength of our brands. Meanwhile, we continue to March towards the separation into more focused companies, starting with the spinoff of North American Cereal Company still scheduled for late this year. Work has progressed on the carving out of financials, the designing of new organizations, and the separation of key systems and processes.

Separately, you’ll recall that we were exploring strategic options for the plant based food business which represents about 2% of our company’s net sales. Given current market conditions as well as our confidence in this business as a long-term growth vehicle, we have decided to retain it as part of global snacking company. We remain as confident as ever in the value to be created by making global snacking company and North American Cereal Company more focused with better visibility into and valuation of their performance and outlook. In short, we are poised for another good year of results. Before discussing our businesses in detail, let me now turn it over to Amit for a review of our financials.

Amit Banati: Thanks, Steve, and good morning, everyone. Slide Number 10 provides a summary of our 2022 financial results. A better than expected performance in quarter four drove us to hit or exceed our guidance for the full year. Our net sales led the way accelerating to 16% organic growth in the fourth quarter and resulting in 12% organic growth for the year, which was higher than expected. This top line growth more than offset a sizable year-on-year increase in investment resulting in our adjusted basis operating profit growing 20% on a currency neutral basis in quarter four. This brought our full year growth to 7%, also exceeding expectations. Our adjusted basis earnings per share increased 17% on a currency neutral basis in quarter four despite being weighed down by the as anticipated increase in interest expense and reduction in pension income related to the decline in financial markets.

This quarter four performance resulted in full year EPS growth of 5% on a currency neutral adjusted basis, ahead of our expectations. Cash flow came in at about $1.2 billion and increased from the prior year and in line with our expectations. Excluded from our currency neutral results of course is foreign currency translation, which reduced our net sales, operating profit, and earnings per share by about four percentage points in quarter four and about the same for the full year EPS. Now let’s look at each metric in a little more detail. Slide Number 11 plays out the components of our strong net sales growth. Our double-digit organic growth and net sales in 2022 was driven by price mix which accelerated in the second half as we continued to execute revenue growth management actions around the world to cover accelerated input cost inflation.

Volume grew slightly in the quarter due to continued recovery in North America Cereal and declined only modestly for the full year, reflecting both price elasticity that has not moved up as much or as soon as we had expected, as well as our replenishment of trade inventories during the year as our supply improved. Foreign currency translation was a headwind all year, with particularly adverse impacts in quarter three and quarter four. Let’s discuss gross profit on Slide Number 12. Supply disruptions created incremental costs and inefficiencies throughout the year and input cost inflation accelerated across the year. Yet because of productivity efforts and effective revenue growth management actions around the world, we were able to largely offset the dollar impact of those higher input costs and we grew our overall gross profit dollars this year.

In fact, our gross profit dollars came in higher than expected both in quarter four and the full year. From a percentage margin perspective, though, there is a mechanical impact of matching input cost inflation which price realization. And because we could not cover the unpredictable inefficiencies from economy wide bottlenecks and shortages. We did see year-on-year increase in gross profit margin in quarter four as we lapped the first of two quarters impacted by the fire and strike and we finished the full year in line with expectations we had communicated. In 2023 we expect to continue to grow gross profit dollars while our margin stabilizes and improves slightly during the year. Some of this is related to the fire and strike impact being one time in nature largely isolated to quarter four 2021 and quarter one 2022.

And some of it will come from bottlenecks and shortages gradually diminishing. But this improved margin performance will also be driven by price realization catching up to input cost inflation that is expected to moderate in the back half of the year. Moving down the income statement on Slide Number 13, we see how our SG&A accelerated its year-on-year increase across the year just as we said it would. After having been curved during severe supply disruptions including the fire and strike in North America our advertising and promotion investment was ramped back in the second half and finished the year roughly flat with 2021. Overhead meanwhile increased year-on-year in all four quarters as we gradually returned to travel and meetings and as we accrued higher incentive compensation related to our above budget financial performance.

In 2023 the quarterly phasing of SG&A expense will be affected by lapping last year’s North America’s Cereal pull back on brand building in the first half and rapid ramp up in the second half. Slide Number 14 shows our continued upward trajectory on operating profit. Operating profit in the fourth quarter was up 16% year-on-year including a negative currency translation impact of almost 4 percentage points. While it was lapping a year earlier decline due to last year’s fire and strike, this year’s quarter four profits was above that of two years ago. Importantly it featured exceptional topline growth and a significant year-on-year increase in investment. For the full year our operating profit increased by 4% after a negative 3% impact for currency translation.

As you can see on the slide, this operating profit was not only higher than 2021, it was also higher than two and three years ago. Slide Number 15 shows are below the line items which were again collectively negative to EPS growth in the quarter and therefore the full year. Driven by non-operating factors, they will be an even larger headwind in 2023. Interest expense was up sharply year-on-year in quarter four as rising interest rates affected the roughly one fifth of our debt that is floating. The quarterly run rate for 2023 interest expense will likely be a bit higher than this quarter four level. Other income decreased in quarter four and the full year. Most of this was related to the media remeasurement of certain U.S. benefit plans, though in quarter four it was partially offset by better than expected FOREX gains and interest income that we do not expect to repeat.

As we have discussed previously, the decline in benefit plan income is related to 2022’s fall in financial markets, which reduced the value of planned assets and raised interest rates. We remeasured about half of our planned exposure in the second-half of 2022 and 2023 will feel the impact of remeasuring all of our plans. Hence, we could see a year-on-year decline in other income in 2023 that is almost twice the decrease we recorded in 2022. Our effective tax rate came in a little higher than expected in quarter four and therefore the full year, mostly reflecting geography mix. For 2023, we expect the tax rate to be approximately 22%. Our JV earnings and minority interests were collectively flattish year-on-year in quarter four, finishing the year higher than last year, led by good performance by our joint ventures.

Collectively, these are expected to be relatively flat in 2023. And average shares outstanding were flattish in 2022 as increased options exercises by employees over the course of the year offset the benefit of share buyback executed early in the year. Our cash flow and balance sheet also remained in very good shape as shown on Slide Number 16. Our cash flow increased year-on-year despite year-on-year swings in sales and receivables in December as we lapped last year’s fire and strike. This increase in cash flow over the past few years has helped us to reduce our debt right through 2022, leading to lower leverage ratios. This has given us enhanced financial flexibility even as we have continued to increase cash return to shareowners in the form of an increased dividend and buybacks this year.

Let’s now pivot to 2023, starting with Slide Number 17 and some key assumptions behind our guidance. First and most importantly, we expect to sustain a strong business momentum. Between price realization, the momentum of our categories, and the strength of our brand plans we are confident we can achieve another year of above algorithm net sales growth. And while input costs inflation remains high, it should decelerate year-on-year in the second half, and the same can be said for bottlenecks and shortages. Therefore, we expect to generate above algorithm growth for operating profit as well in 2023. Next, our guidance reflects the impact of headwinds on our non-operating below the line items. Interest expense will increase substantially because of the rise in interest rates worldwide.

And non-cash pension income will drop sharply owing to lower asset values entering the year and to a higher interest charge reflecting the rise in interest rates. The pending spinoff of North America Cereal Co, is still targeted to be executed towards the end of the year. For simplicity reasons only our guidance assumes it remains in our results for the full year. Slide Number 18 shows our guidance by key metric. Organic growth in net sales is forecast to be in the 5% to 7% range, another strong year. Given the cost environment this growth will be weighted towards price mix, reflecting revenue growth actions from both 2022 and this year. Importantly, this net sales growth is expected to be broad based across our portfolio and led by momentum in snacks and in emerging markets.

On an adjusted basis and excluding currency, we expect operating profit to grow in the 7% to 9% range. This above target growth will be driven by the strong net sales, which drives the growth in gross profit dollars that fuel increased brand building. At the earnings per share level, the strong operating profit growth will be more than offset by the pension and interest headwinds we discussed earlier. The impact of the accounting re-measurement of pension and post retirement alone is negative 7 percentage points to EPS growth. Again, it should be emphasized that this is a noncash, non-operating item, and it was driven by what was a rare steep decline in the financial markets in 2022. Without that item, our EPS would be up 3% to 5%, even despite the higher interest expense and tax rate.

Cash flow is expected to come in somewhere between $1 billion and $1.1 billion. Our underlying base business cash flow will continue to grow year-on-year, reaching $1.3 billion to $1.4 billion, but there will be roughly $300 million plus of cash outlays related to the pending spin-off. This is a combination of cash costs and capital expenditure, all onetime in nature and all related to executing the transaction and setting up the stand-alone business. So to summarize on Slide Number 19, we continue to feel very good about how we are performing and about our financial condition. Across our regions and category groups, we sustained solid momentum in 2022, and we expect that momentum to continue in 2023. Amidst high cost inflation across inputs and energy, we were able to protect profit dollars through productivity and revenue growth management in 2022, and we will do so again in 2023.

In an environment of disruptions up and down the supply chain, we have executed well and steadily improved service levels in 2022 and will continue to do so in 2023. In 2022, we delivered above-target growth in currency-neutral, net sales and operating profit, and we plan on doing that again in 2023. We have increased our cash flow and further deleveraged our balance sheet, giving us excellent financial flexibility going into 2023. And we remain as confident as ever in the value that can be created by spinning off North America Cereal Co. Not only will that business thrive amidst increased focus, but the strength of the remaining global snacking co. will be significantly more visible. So we are looking forward to another good year in 2023. And with that, I’ll turn it back to Steve to discuss our individual businesses.

Steven Cahillane: Thanks, Amit. Let’s start with Kellogg North America on Slide Number 21. As you can see, our largest region performed very well in 2022, straight through the fourth quarter. We started the year with a lingering inventory impact and costs arising from the second half 2021 fire and strike as well as other supply disruptions. And quarter-by-quarter, we executed well, both from a supply chain perspective and a commercial perspective, finishing the year with very strong net sales and operating profit growth. Within North America, our largest segment is snacks, representing over half of our sales in the region. And this segment led the way in 2022, as shown on Slide Number 22. There was some timing of shipments, particularly year-over-year within the quarters, but North America Snacks finished the year in double-digit growth.

In fact, North America Snacks has accelerated its organic net sales growth in each of the past four years. Leading the way were world-class brands like Pringles and Cheez-It, both of which generated double-digit consumption growth in 2022, and Pop-Tarts and Rice Krispies Treats, both of which sustained their multiyear momentum as well. Our North America Cereal business, as depicted on Slide Number 23. This business overcame enormous obstacles on its way to delivering very strong net sales growth. We entered the year depleted on finished goods inventories. As we rebuild those inventories, SKU by SKU, we were able to replenish retailer shelves more quickly than we anticipated. And during the second half, we were able to ramp up our commercial programs, and we’ve entered the new year with real momentum.

Slide Number 24 shows the end market progress we have made since restoring inventories and commercial activity. As you can see, our performance has continued to improve sequentially, accelerating both our consumption growth and our share recovery. This business is back on track and is poised to sustain growth in 2023 when we will have a full year of commercial activity. In addition, with supply back in place, this business has begun to restore its profit margins. North America Frozen Foods is shown on Slide Number 25. This was another business that ran into capacity and supply challenges in 2022. For Eggo, it was simply a matter of strong demand over the last couple of years, putting us up against capacity. We put in capacity in midyear and since that time, Eggo’s consumption growth has accelerated.

And for Morningstar Farms, we experienced significant production issues at a co-manufacturer. During the fourth quarter, supply came back online and almost immediately, we saw signs of improvement in market. So moving to Slide Number 26, Kellogg North America has all the pieces in place for another good year in 2023. Our snacks brands are demonstrating undeniable momentum, and they represent more than half of our North America regions net sales. Our cereal business continues to outpace what has been very strong category sales growth as we continue to ramp up commercial activity. And our frozen businesses are getting past some severe supply constraints. Meanwhile, our productivity and revenue growth management actions are catching up to what has been steadily rising input cost inflation just as we are starting to see signs of bottlenecks and shortages receding.

The result should be margin improvement for North America this year. And of course, North America will be moving full speed ahead with the carving out and spinning off of North America Cereal Company. We’re making good progress with detailed implementation plans, all while remaining focused on delivering good financial results and executing in the marketplace. Now let’s turn to Europe and Slide Number 27. Cost inflation accelerated faster in this region than others, particularly when energy prices and other costs soared after the outbreak of war in Ukraine. Our revenue growth management actions have yet to catch up to the accelerated cost pressures, pulling down profit in the last couple of quarters and will likely remain a pressure on profits into the first half of 2023.

The fourth quarter also featured a meaningful year-on-year increase in brand investment. Nevertheless, Kellogg Europe had another good year, posting its fifth straight year of growth in both organic net sales and operating profit. Leading the way were snacks, which now represent more than half of our Europe region’s net sales, as shown on Slide Number 28. And aside from the Russia impact and year-ago comparisons in quarter three, this segment drove strong double-digit net sales growth all year. This momentum is not new. This was our fifth straight year of organic net sales growth for Europe snacks. End market, Pringles generated strong consumption growth across key markets in the quarter and the full year. And in the UK, we also delivered rapid growth for Pop-Tarts and Rice Krispies Squares.

Turning to our European cereal business and Slide Number 29, you can see that this business continues to deliver steady growth. On the strength of commercial activities and revenue growth management needed to cover rising costs, this business showed sequential acceleration in its organic net sales growth in each quarter. End market, category growth rates in markets across the region picked up in the fourth quarter, and we have been particularly pleased with accelerated growth and share gains for brands like Rice Krispies in the UK, Tresor in France, and Special K in several markets. So you can see that Kellogg Europe remains in very good condition as we head into 2023. As indicated on Slide Number 30, we expect to sustain momentum in snacks led by Pringles, but also increasingly accompanied by portable wholesome snacks like Pop-Tarts and Rice Krispies Squares.

In cereal, we have strong brand plans, including renovation and innovation and a campaign celebrating our 25th year of our Better Days social program in the UK. We will continue to manage through cost and supply pressures, which are particularly heavy in the first half. And we have an agreement to divest our Russia business, though the deal’s timing, approvals and final details are still pending. This business represents a little more than 5% of Kellogg Europe’s total sales. So the impact of this divestiture should not be meaningful to adjusted basis results. Now let’s turn to Latin America on Slide Number 31. As the chart shows, Kellogg Latin America grew net sales and operating profit strongly, both in the fourth quarter and full year. In fact, this region posted strong and accelerating organic net sales growth all year attributed to its brands, its commercial execution, and its expansion of route-to-market capabilities as well as its revenue growth management actions and its agility in managing through supply challenges.

Our snacks business in Latin America is shown on Slide Number 32. This business has grown consistently over the years. In 2022, it led the organic net sales growth for the region with year-on-year growth of more than 20% in both the fourth quarter and the full year. The growth was broad-based, finishing the year with the fourth quarter that featured strong double-digit net sales gains across all of our sub regions, Mexico, Brazil, Pacific and the Caribbean and Central America region. The strong growth in the quarter and year was driven by price/mix needed to cover soaring cost inflation and adverse transactional currency impact. And while volume did decline, the elasticity was below historical levels. End market data shows sustained double-digit category growth in the quarter and the full year for our major salty snacks markets, with Pringles gaining share in both of its biggest Latin America markets, which are Mexico and Brazil.

Our cereal business in Latin America also grew net sales organically in the fourth quarter and full year, as indicated on Slide Number 33. Early in the year, this business felt the impact of supply disruption coming out of North America’s fire and strike, particularly in our Caribbean business. But as you can see, once that was behind us, our cereal net sales reaccelerated strongly. In market, our consumption growth was robust across the region in the quarter and the full year, led by key brands like Frosted Flakes in Mexico and Brazil, Corn Flakes in Brazil and Puerto Rico, and Froot Loops in Colombia. So moving on to Slide Number 34, Latin America, too, is poised for another good year in 2023. We expect to sustain momentum in snacks, led by Pringles, and we expect to continue to grow in cereal.

We expect to improve profit margins this year, and work is well under towards carving out our Caribbean cereal business into the North American Cereal Company spin-off. We’ll finish up our regional review with EMEA, shown on Slide Number 35. This region continues to deliver exceptional top line and bottom line growth. Net sales grew organically in the high teens or better all year long. In the fourth quarter, as for the full year, this growth was broad-based with growth across all of our sub regions, Africa, Asia, Australia, New Zealand and the Middle East and North Africa. The growth was also strong across all of our category groups: cereal, snacks and noodles and other. Despite enormous cost pressures, the region also delivered double-digit profit growth on a currency-neutral adjusted basis both in the fourth quarter and the full year.

Snacks in EMEA posted outstanding organic net sales growth all year, as shown on Slide Number 36. This growth was led by emerging markets ranging from Asia, Africa to the Middle East. And it was led by Pringles, which sustained strong consumption and share growth across key markets, both in the quarter and for the full year. In Australia, we also realized good consumption growth in Pop-Tarts and Rice Krispies Treats both for the quarter and the full year. This bodes well for further international expansion of those brands. Cereal also posted strong organic net sales growth all year, as shown on Slide Number 37. As with snacks, the growth was led by price mix, with elasticity impact on volume being lower than usual. And we saw growth across all sub regions, both in the fourth quarter and the full year.

Growth was most pronounced in Africa and the Middle East, but it also remained solid in Asia and Australia. Overall, for the measured markets of this region, we grew consumption and share in the fourth quarter and the full year. Our most developed market, Australia, posted strong consumption growth in the quarter and year, led by many of our biggest brands, including double-digit gains for corn pops, corn flakes and Sultana Bran. We also sustained good consumption growth in emerging markets with particular strength in India. And then we come to the largest segment of EMEA, noodles and other, which is shown on Slide Number 38. In every quarter this year, our EMEA noodles and other business recorded organic net sales growth of well over 20%. In fact, it has delivered double-digit organic growth every year since we consolidated the distributor portion of our West African business in 2018.

Turning to Slide Number 39, we expect another year of strong top and bottom line growth for EMEA in 2023. Macro conditions can be challenging in Africa, and we have an experienced management team and joint venture partner to execute through them, which should enable us to sustain momentum in noodles and other. We should continue to see growth in cereal, led by our markets in Asia and we believe there is plenty of runway for Pringles to continue its strong growth. Meanwhile, EMEA will be looking to improve its profit margins as well. So with that, allow me to briefly summarize with Slide Number 41. From our results and our outlook, it should be very clear that our Deploy for Growth strategy has us focused on the right priorities and building the right capabilities and that our portfolio has been shaped decidedly towards growth.

And following our planned separation later this year, visibility into the strength and performance of this portfolio will be even clearer. In fact, the vast majority of our portfolio is enjoying very strong momentum right now, as shown on Slide Number 41, and this is expected to drive above-target growth in net sales and operating profit in 2023. I want to thank our talented and dedicated Kellogg employees for making sure that nothing, not unusual economic conditions, not declining financial markets and pension accounting, not the preparation of a historical spin-off will distract us from continuing to deliver for our stakeholders. And with that, we’ll open up the line for your questions.

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Q&A Session

Operator: Thank you. . Our first question for today comes from Jason English of Goldman Sachs. Jason, your line is now open. Please go ahead.

Jason English: Hey, good morning folks. Thanks for sliding me in. Lots of questions still on the table. Amit, maybe we can start real quick with you, housekeeping. We all have restaurants out here but based on current spot rates, where do you see FX coming in, in terms of impact to top and bottom line?

Amit Banati: Yes. I think, Jason, just looking at the current rates, we’d say probably 1% to 2% impact on EPS and OP, maybe on sales around 3%. So that’s kind of the outlook if you look at where the rates are today.

Jason English: Okay. That’s helpful. And then Steve, you mentioned that Europe is finishing strong and carrying good momentum in the year, but it sure doesn’t look like that from a bottom line perspective. I mean the margins are kind of falling off, and falling off fast, as we exit the year. And I think you mentioned where the pressure is going to carry into next year. I missed part of it, though. I heard you say like higher marketing. Can you unpack that a little bit more for us, what’s driving the substantial step down in profitability, and also touch on — I mean we know you were probably through price negotiation periods right now, can you give us an update on where status sits on negotiating price in that market? Thank you.

Steven Cahillane: Yes. Sure, Jason. In Europe, it’s essentially, we’re catching up, right? The inflation came fast and furious, and our ability to catch up to it was impacted in the third and fourth quarter. We also had, obviously, the Russia impact primarily, in the third quarter. Higher A&P continued to bolster our top line, which we’re committed to doing. And so we’re catching up. It’s still going to be a bit of a pressure in the first half, as we mentioned, but our underlying business is very, very solid. And our ability to get price — earned price has also been solid. It’s never easy anywhere, but the European dynamics can be challenging, but we’ve been making our way through it. And so we have good confidence in the underlying momentum of the business. It’s really just — took a little time to catch up.

Jason English: Okay. And the status on the price negotiations?

Steven Cahillane: Yes, we’re in reasonable shape right now, Jason. We don’t like to talk too much about individual negotiations with our customers. They’re doing everything that they always do, which is protect the consumer. We want to protect the consumer as well, be as affordable as possible, but we need to maintain our margins. And we’re having those adult conversations, and they’re proceeding constructively.

Jason English: Okay, thank you.

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

Alexia Howard: Hey, can you hear me. Good morning everyone.

Steven Cahillane: Good morning.

Alexia Howard: Great, can I ask about the volume situation in the U.S., particularly as we rolled into 2023. I’m looking at the Nielsen data that came out yesterday, and it looked as though, frankly, that a lot of companies that was a bit of a step back. So two questions; one, is there anything you’re seeing from the consumer that’s shifting or is it just tough compares from Omicron last year? And then secondly, as I look at the U.S. cereal business on a two-year basis, looks like the volumes are still down mid-teens. So are we — I know that right now, it’s looking good year-on-year, but what does that imply for the ongoing price elasticity in that business as we lap the fire and strike from last year? Thanks, and I will pass it on.

Steven Cahillane: Yes, Alexia. So for us in North America in the fourth quarter, volume was up. And obviously, overall revenue was up nicely. We did have a fairly easy comparison, particularly in North American cereal because of the fire and strike. On a two-year basis, though, we — well, first of all, the trajectory of our North American cereal business is very, very solid, and we’re very, very pleased with it. On a two-year basis, NSV is also up. I’m not sure what you’re looking at, but it is up. Volume is down slightly as the category is. But our NSV on a two-year basis and a one-year basis is up in cereal. And we’re very confident about the plans in 2023 that we have in place. We’re confident about the distribution that we’ve been able to gain.

We’re confident about our shelf sets. Our consumer promotions are, as I said, really back on track. You can see Jalen Hurts and Tony the Tiger on television right now as a matter of fact, which is lucky for us that Jalen is in the Super Bowl. So feeling very good about our North American cereal recovery on a one year and two-year basis.

Amit Banati: And then I think just to build on that from a guidance standpoint, we have incorporated rising elasticity. So that’s built into our guidance for 2023.

Alexia Howard: Thank you very much. I will pass it on.

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

Michael Lavery: Thank you, good morning. Just wanted to follow up on the volume piece at a little bit higher level. Contrasting the declines you’ve had globally throughout the year with the relatively stronger performance in North America, excluding the 1Q hit from cereal obviously, but can you just unpack a little bit of what you’re seeing differently and is it stimulus and sort of savings drawdown that supported volumes in the U.S. that now maybe is rolling over, just maybe inform how you think about the differences in the U.S. consumer versus what you’re seeing around the world?

Steven Cahillane: Yes. So it’s different everywhere around the world. The U.S. has been strong. It’s been relatively inelastic, particularly in our categories. So we’ve definitely benefited from that. There’s no question that the U.S. balance sheet, consumer balance sheet still remains stronger than it was pre-pandemic, although continues to erode over time. The employment situation, as you know, in the U.S. is still very strong. So overall, the consumer in the U.S. is in a good place. And when you look at the categories that we play in, it remains very strong, right. So they are cutting out discretionary items, which, we all know, high-ticket items are under a lot of pressure. Our categories are doing very well. And if you look at the emerging markets, the same could be said, the consumer is very strong, surprisingly resilient in virtually all of our emerging markets, which has been very positive for our results from a category standpoint.

And then we’re doing well inside those categories. Europe is where you see — if you go back a couple of quarters ago, we did indicate that we were seeing the beginning of elasticities returning, particularly in the cereal business, and we’re seeing a little bit more of that. So the European consumer, I would say, is probably under more pressure than just about anywhere else in the world. And you see that, obviously, in the discretionary categories, and you’re starting to see a little bit more of a normal return to elasticities in the European consumer. Still not back to pre-pandemic levels or what we describe as normal levels, but higher than it is in the rest of the world.