Kellanova Q3 2022 Earnings Report

Kellanova EPS Results

• Actual EPS: $1.01
• Consensus EPS: $0.97
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: N/A

Kellanova Revenue Results

• Actual Revenue: $3.95 billion
• Expected Revenue: $3.78 billion
• Beat/Miss: Beat by +$170.63 million
• YoY Revenue Growth: N/A

Kellanova Announcement Details

• Quarter: Q3 2022
• Date: 11/3/2022
• Time: N/A
• Conference Call Date: Thursday, November 3, 2022
• Conference Call Time: 9:30AM ET

Kellanova (NYSE:K) (NYSE: K) is a global consumer foods company formed from the reorganization of the historic Kellogg business. The company focuses on the manufacture, marketing and distribution of packaged food products across several categories, with an emphasis on snacks, ready-to-eat cereals, frozen breakfast and other convenience foods. Kellanova’s operations draw on a long consumer-brands heritage and a portfolio designed to reach everyday retail and snack occasions around the world.

Kellanova’s activities include product development, manufacturing, marketing and global supply-chain management for branded food products. Its portfolio spans mainstream and specialty offerings aimed at grocery, mass-market, convenience and e-commerce channels, and the company invests in brand innovation, packaging and promotional programs to support shelf visibility and consumer loyalty. In addition to product sales, Kellanova supports customers with merchandising and category-management services intended to drive in-store and online performance.

The company serves markets across North America, Europe, Latin America and the Asia-Pacific region and operates a network of manufacturing, distribution and regional marketing organizations to support global reach. Headquartered in Battle Creek, Michigan, Kellanova retains the industrial and brand legacy of its predecessor while pursuing a more focused operating model following the corporate separation. Executive leadership has guided the company through the transition and into its standalone status.

Kellanova’s strategic priorities include portfolio optimization, expanding snack and convenience businesses, accelerating innovation in core brands, and improving operational efficiency and sustainability across its supply chain. The company positions itself to capitalize on shifting consumer preferences for on-the-go, convenient and value-added food options while managing costs and investing in growth initiatives in developed and emerging markets.

Kellanova Q3 2022 Earnings Call Transcript

Key Takeaways

• We raised our full year outlook for organic net sales growth to ~10% (up from 7–8%), operating profit growth to ~6% (up from 4–5%), and EPS growth to ~3% (up from 2%).
• Third quarter results exceeded expectations with 13% organic net sales growth, 4% currency-neutral operating profit growth, and strong cash flow despite high inflation and supply chain disruptions.
• Input cost inflation accelerated into the 20% range with ongoing bottlenecks and shortages persisting into Q4, leading to a larger-than-projected full-year gross margin decline.
• North America Cereal has fully recovered inventory and returned to pre-strike share levels, with consumption growth accelerating and commercial activity resumed.
• Morningstar Farms plant-based foods were severely constrained by co-manufacturer supply disruptions, limiting SKU availability and pausing category growth.

Presentation

[Operator]

Good morning. Welcome to the Kelloggs's Third 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'll turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellogg.

[John Renwick, VP of Investor Relations and Corporate Planning at Kellogg's]

Thank you, operator. Good morning, and thank you for joining us today for a review of our third quarter results and an update regarding our outlook for 2022. I'm joined this morning by Steve Cahillane, our Chairman and CEO, and Amit Banati, our Chief Financial Officer. Slide three shows our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for Kellog'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 of particular note amidst the current operating environment, which includes unusually high input cost inflation, global supply disruptions, and uncertain global macroeconomic conditions, all of whose direction, length, and severity are so difficult to predict.

[John Renwick, VP of Investor Relations and Corporate Planning at Kellogg's]

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. Now I'll turn it over to Steve.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Thanks, John, and good morning, everyone. We are delighted to be able to report yet another quarter of momentum, progress, better than expected results, and an improved full-year outlook. Our organization once again exhibited grit and creativity in navigating and executing through a global operating environment that showed little to no signs of easing. We continued to improve our service levels in spite of persistent bottlenecks and shortages of everything from materials and equipment to trucks and containers. We also continued to mitigate the profit impact of exceptionally high cost inflation with good execution of productivity initiatives and revenue growth management actions. Even in this unusual operating environment, we again saw the strength of our portfolio play out. We sustained our strong growth momentum in snacks around the world, and our emerging markets saw strong growth in all key category groups.

[Steve Cahillane, Chairman and CEO at Kellogg's]

In our North America Cereal business, we continued to recover inventory and share more quickly than expected from enormous disruptions late last year. At the same time, work continues on the planned separations, which we announced in June. A recent milestone was the announcement of our North America Cereal Co. leadership team, and we continue to work on organizational design and carve out financials. Through all this, we delivered a financial performance for quarter three that exceeded our expectations and enables us to raise our guidance for the full year. In short, another good quarter, adding to a track record of dependable delivery and with plenty of reasons to be confident that this kind of delivery can continue. You can tell our Deploy for Growth strategy is working from the quality of our results. Slide number six shows one key metric, our net sales growth.

[Steve Cahillane, Chairman and CEO at Kellogg's]

As you know, our momentum is not new. Our third quarter showed acceleration of a trend that has been running above our long-term targets for the past few years. While this third quarter acceleration was led by price realization necessary to keep up with soaring costs, the elasticity impact on volume has been less than expected, and our world-class brands continue to perform well in the market. We are seeing this momentum across markets and category groups. We grew net sales organically in all four regions and in all four category groups within those regions, from snacks to cereal to frozen foods to noodles and other. This momentum is broad-based and long-running, and another reason to believe in our strategy, portfolio, and people. As a key element of our Deploy for Growth strategy, our ESG strategy is also working.

[Steve Cahillane, Chairman and CEO at Kellogg's]

A few highlights from quarter three are shown on slide number seven. Let me now turn it over to Amit, who will explain our financial results and outlook in more detail.

[Amit Banati, CFO at Kellogg's]

Thanks, Steve, and good morning, everyone. Slide nine provides a summary of our third quarter and year-to-date financial results. Our net sales in quarter three grew more than 13% year-on-year on an organic basis, coming in higher than expected and bringing year-to-date organic growth to 10%. Our adjusted basis operating profit grew 4% on a currency neutral basis in quarter three, overcoming the impact of high costs, bottlenecks and shortages and increased investment. This too was better than expected, and it puts our year-to-date growth at a similar 4%. Our adjusted basis earnings per share declined 3% on a currency neutral basis in quarter three due to the as anticipated reduction in pension income related to remeasuring the pension assets and interest rates.

[Amit Banati, CFO at Kellogg's]

Nevertheless, through the end of the third quarter, our EPS was up 3% on this currency neutral adjusted basis. Cash flow through the first three quarters remained well ahead of last year. Excluded from our currency neutral results, of course, is foreign currency translation, which reduced our net sales, operating profit and earnings per share by 4-5 percentage points each as the dollar strengthened meaningfully further during the quarter. Now let's look at each metric in a little more detail. Slide number 10 lays out the components of our strong net sales growth this year. Despite supply challenges and our suspension of Pringles shipments to Russia, volume only declined relatively modestly, suggesting that price elasticity has not moved up as much or as soon as we had expected.

[Amit Banati, CFO at Kellogg's]

Price mix accelerated again in quarter 3, and it accelerated in all four regions as they continued to utilize revenue growth management to help offset higher input costs. All four regions delivered double-digit increases in price mix in quarter 3. Both of these components, volume and price mix, were relatively consistent with their year-to-date trends. Turning now to gross profit, slide number 11 illustrates how each region is facing enormously high cost pressure. Year to date, our COGS per kilo inflation has run in the high teens or worse in each region, driven by both input cost inflation and costs and inefficiencies arising from global bottlenecks and shortages, not to mention adverse transactional foreign exchange. Keep in mind that this is net of the good work we are doing on productivity.

[Amit Banati, CFO at Kellogg's]

Our net sales per kilo, which is how we measure price mix, is up in the mid-teens, covering a sizable portion of our input cost inflation. However, it is not able to cover the unpredictable impacts of supply disruptions and the first quarter impacts related to last year's second half fire and strike. Our net sales per kilo accelerated sequentially in quarter three, in part reflecting revenue growth management actions taken during the quarter. However, our COGS per kilo accelerated, too, indicating that these pressures are not behind us. Slide 12 shows that our gross profit dollars increased year-on-year, both in quarter three and on a year-to-date basis. During quarter three, our margin decline narrowed as we had indicated it would, and our net sales grew enough that gross profit dollars increased at a mid-single-digit rate year-on-year.

[Amit Banati, CFO at Kellogg's]

Even though our margins have been pressured by the current environment, our gross profit dollars remain on an upward trajectory. As we look to quarter four, we expect both margins and dollars to increase year-on-year as we lap last year's fire and strike impact. However, based on the current economic conditions, we no longer anticipate bottlenecks and shortages to diminish in quarter four. As a result, while we still expect gross profit margin to increase year-on-year in the quarter, it won't be as much as previously projected. This will mean finishing the full year with a gross margin that is down a bit more than the 100 basis points previously mentioned, but still growing in dollars. Moving down the income statement on slide number 13, we see how our SG&A accelerated its year-on-year increase just as we said it would.

[Amit Banati, CFO at Kellogg's]

As expected, advertising and promotion investment increased year-over-year as our U.S. cereal business resumes commercial activity now that it has caught up on inventory. Overhead increased year-over-year, reflecting higher incentive compensation and a resumption of travel and meetings. As we enter quarter four, we expect to see an even larger year-over-year increase in SG&A as North America Cereal restores more of its commercial activity. Slide number 14 shows that in spite of these extreme operating conditions, not to mention this year's meaningfully adverse currency translation, we remain on an upward trajectory on operating profit. Operating profit in the third quarter was up 4% year-over-year on a currency-neutral basis and flat after the adverse currency translation. Year to date, it was up both on currency-neutral basis and after adverse foreign exchange. We expect to see that continue in quarter four.

[Amit Banati, CFO at Kellogg's]

Slide number 15 shows our below-the-line items, which were again collectively negative to EPS growth in the quarter. Interest expense was up modestly year-on-year in quarter three, as lower debt balances were offset by higher interest rates. As we mentioned last quarter, rising interest rates will affect the roughly 20% of our debt that is floating, and this will become much more acute in quarter four. As expected, other income decreased significantly year-on-year due to the mid-year remeasurement of two of our U.S. pension plans, which adjust for currently lower asset values and higher interest rates. This will similarly affect other income in quarter four. As mentioned previously, depending on how financial markets finish this year, this will be an even more significant headwind in 2023 as we'll have a full year impact across all of our post-retirement plans. Of course, this is a non-cash, non-operating item.

[Amit Banati, CFO at Kellogg's]

Our effective tax rate in quarter three was relatively flat year-on-year after benefiting from country mix and discrete benefits. We now look for our full year effective tax rate to be somewhere above 21.5%. Our JV earnings and minority interests were collectively down against an unusually high year-on-year period following our mid-year 2021 consolidation of Africa joint ventures, but remained fairly consistent with more recent quarters. Average shares outstanding were relatively flat year-on-year as the impact of our share buybacks early in the year was offset by increased options exercises by employees. As a result, we now think average shares outstanding will be flattish for the full year. Our cash flow and balance sheet also remain in very good shape, as shown on slide number 16.

[Amit Banati, CFO at Kellogg's]

Our absolute cash flow has remained on an upward trajectory right through quarter three, and this cash flow has enabled us to reduce our net debt over the past few years, leading to lower leverage ratios. This has given us enhanced financial flexibility even as we have continued to increase our cash return to shareowners in the form of an increased dividend and buybacks this year. Let's now turn to slide number 17 and discuss where we think we'll finish the year. As Steve mentioned, we are raising our guidance today based on our strong quarter three delivery and good top line momentum going into quarter four. We are raising our full year outlook for organic net sales growth to approximately 10%, a sizable increase from our previous guidance of 7%-8%.

[Amit Banati, CFO at Kellogg's]

This reflects our better than expected performance in quarter three, and it implies continued double-digit growth in the fourth quarter, led by price mix and sustained momentum in our business, partially offset by rising price elasticity and Russia impact. This improved sales outlook is prompting us to raise our full year outlook for adjusted basis, currency neutral operating profit growth to approximately 6%, up from our previous guidance of 4%-5%. This is despite sustained high teens cost inflation and a revised assumption around bottlenecks and shortages, which we now expect to persist through the fourth quarter. We are also raising our full year outlook for adjusted basis earnings per share growth to approximately 3% growth on a currency neutral basis, up from our previous guidance of 2%.

[Amit Banati, CFO at Kellogg's]

This reflects the higher operating profit outlook, partially offset by a worsened outlook for below-the-line items. This includes our remeasured pension income and higher interest expense due to the rise in rates, only partially offset by an effective tax rate that comes down slightly because of Q3's favorability. We deliberately stick to currency-neutral guidance because of the difficulty in predicting foreign exchange rates. Because of the dollar's meaningful strengthening lately and the number of investor questions we've received regarding its impact, I will mention that if today's exchange rates were to hold, we would absorb a negative impact of 3%-4% on full-year net sales, operating profit, and EPS growth, and a higher negative impact in quarter four. Our full-year outlook for cash flow remains approximately $1.2 billion.

[Amit Banati, CFO at Kellogg's]

Remember that this guidance incorporates incremental upfront cash outlays in 2022 related to the previously announced separation transactions. To summarize our financial position on slide number 18, we feel very good about how we are performing and our financial condition. Our business is showing strong underlying momentum. Our efforts around productivity and revenue growth management are helping to mitigate unusually high cost pressures. We are raising our outlook for the full year largely on the strength on what we've already delivered, and our cash flow and balance sheet are giving us good financial flexibility. With that, I'll turn it back to Steve to discuss our individual businesses.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Thanks, Amit. I'll start with a review of each of our regions, beginning with Kellogg North America on slide number 20. This region had another good quarter, delivering notably strong net sales growth with organic growth in both volume and price mix. Our sales growth was led by what is by far our largest business in North America, and that's snacks. This business had another quarter of strong organic volume growth and price realization, and its net sales growth acceleration was accompanied by a similar acceleration in consumption. We'll talk more about these brands in a moment. Cereal in North America also recorded another quarter of accelerated net sales growth, reaching double digits year-on-year, roughly in line with its consumption growth. We'll talk more about this business's rapid recovery also in a minute.

[Steve Cahillane, Chairman and CEO at Kellogg's]

In our frozen businesses, where we've experienced pronounced supply constraints this year, we returned to organic net sales growth in the quarter. This was aided by newly installed waffle capacity. Kellogg North America in the third quarter delivered sequentially better operating profit growth as well, despite no letup in input cost inflation or bottlenecks and shortages, and despite increased reinvestment. Overall, North America continues to perform well and is poised for a strong finish to a strong year. Kellogg Europe's results are shown on slide number 21. Ever since the war broke out in Ukraine, we've known that Kellogg Europe would have two very different halves of the year. Because as we suspended Pringles shipments into Russia right away during the first quarter, it took some time to work through inventories. Now in the second half, we feel the brunt of this lost revenue and profit.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Meanwhile, the war in Ukraine has contributed to a surge in energy costs and bottlenecks and shortages, as well as devaluations in currencies against the U.S. dollar and a pinched consumer that is contributing to increasing elasticities, at least on cereal. Yet, Kellogg Europe in the third quarter still managed to sustain top line growth and mitigate the profit pressure, even as it lapped the year earlier quarter's enormous sales and profit growth. In snacks, which represent almost half of Kellogg Europe's sales, the lost sales in Russia were more than offset by double-digit organic growth elsewhere. Pringles maintained its double-digit consumption growth momentum, and portable wholesome snacks are generating strong consumption growth on the strength of Pop-Tarts, Rice Krispies Squares, and BEAR nut bars. Cereal net sales also grew organically, reflecting revenue growth management and broad-based consumption growth, even as price elasticity continued to move toward historical levels.

[Steve Cahillane, Chairman and CEO at Kellogg's]

The fourth quarter faces similar Russia and cost headwinds as quarter three, as well as increased reinvestment, but the underlying momentum in the business will be sustained. Let's turn to Kellogg Latin America, as shown on slide number 22. Strong organic net sales growth was broad-based across the region, with double-digit growth in both snacks and cereal, and driven by revenue growth management actions. In snacks, which represent more than a third of our annual net sales in Latin America, we continued to drive very strong consumption growth in key markets, including double-digit growth and share gains for Pringles in the key markets of Mexico and Brazil. In cereal, the net sales and consumption growth was led by Brazil, Colombia, and Mexico.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Productivity and revenue growth management actions helped to mitigate the impact of high cost inflation, adverse transactional foreign exchange, and supply disruptions, leading to solid growth in Latin America's operating profit. In the remaining quarter this year, Latin America should sustain sales and profit growth even as we expect price elasticities to rise gradually as we work to offset continued cost inflation and supply challenges. We'll finish our regional review with Kellogg AMEA in slide number 23. In the third quarter, our AMEA region sustained its exceptional momentum, accelerating its organic net sales growth for a third consecutive quarter. From a category perspective, noodles and other is our biggest segment in AMEA, representing almost half of the region's sales and led by our West African distributor business, Multipro. In the third quarter, it sustained organic net sales growth of more than 20%, just as it has all year.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Snacks accelerated its organic net sales growth in the quarter, led by Pringles, which sustained its broad-based momentum in consumption growth with notable outperformance in emerging markets. Cereal also sustained good broad-based net sales growth, with particular strength in the Middle East and India. Despite facing the high cost pressures in the region, a function of input costs, ocean freight costs, and adverse transactional foreign exchange, AMEA still managed to grow its currency neutral adjusted basis operating profit in the double digits in the third quarter. We expect similar dynamics and momentum to play out in the fourth quarter, making this a very strong year for our AMEA region. Now let's dig into each of our category groups and brands in a little more detail, shaping our discussion in terms of the businesses that comprise the planned post-separation companies. A breakout of these businesses is shown on slide number 24.

[Steve Cahillane, Chairman and CEO at Kellogg's]

As you can see, the businesses that represent 80% of our portfolio's net sales today, and that will comprise Global Snacking Co. after the separations, have continued to show outstanding growth this year. In fact, this portfolio's net sales have grown organically at a double-digit rate so far this year. For North America Cereal Co., you can see that our net sales are up organically in the low single digits this year. The only business where there has been softness is Plant Co., which has continued to experience supply disruption, as we'll discuss in a moment. Let's look at each of these businesses and their key brands. Slide number 25 shows how our world-class snacks brands sustained their in-market momentum in the third quarter around the world.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Pringles, with $2.5 billion in annual net sales globally, once again generated double-digit consumption growth in virtually every one of our major markets around the world. Cheez-It, with over $1 billion of annual net sales, sustained its double-digit growth in quarter three, both in Canada and the U.S., where our new puff platform has been incremental to the franchise. Pop-Tarts, closing in on $1 billion of annual net sales, continued to post good growth in the third quarter in its primary market, the U.S., while continuing to show why we believe it has so much promise internationally. Rice Krispies Treats, with half a billion dollars of annual net sales, was supply constrained in the U.S. during the third quarter and still grew consumption in the mid-single digits, with its new Homestyle sub line proving to be incremental to the franchise.

[Steve Cahillane, Chairman and CEO at Kellogg's]

The brand is showing good growth in international markets as well. These are important brands. The four brands collectively represent more than 40% of the total net sales of what will be Global Snacking Company. Slide number 26 provides a glimpse of our international cereal businesses. As you can see, good consumption growth continued in the third quarter, with the growth led by world-class brands and by emerging markets. In more developed cereal markets like those in Europe, Australia, Japan, and Korea, we are starting to see price elasticity move higher. Nevertheless, we grew consumption across key European markets in the third quarter, with Special K back to growth, aided by a new campaign and the launch of Special K Granola with 30% less sugar.

[Steve Cahillane, Chairman and CEO at Kellogg's]

We also grew consumption in Australia, and our consumption is beginning to improve in Japan and Korea on the relaunch and expansion of granola offerings. In emerging markets, which represent about half of our international cereal sales annually, consumption growth remains robust, both for us and the category. On the slide, note the solid consumption growth rates in key Latin America markets and in India. Slide number 27 shows the sustained double-digit organic net sales growth of our noodles and other category group. This is a $1 billion+ business annually comprised of our distributor business in West Africa and our Kellogg's branded noodles business elsewhere in Africa and the Middle East. As we've already discussed, this business again sustained exceptional growth in the third quarter, adding to a track record of consistent double-digit or high single-digit growth.

[Steve Cahillane, Chairman and CEO at Kellogg's]

As we've said before, this reflects the competitive advantage Multipro offers, as well as the value of offering a Kellogg's product line at the lower end of the price pyramid. Now let's look at frozen breakfast and slide number 28. Eggo is another world-class brand in our portfolio with about $750 million in annual net sales globally. In the U.S., the brand has sustained steady consumption growth this year, despite being very constrained on capacity for both waffles and pancakes. But while we remain constrained on pancakes, we did add internal waffle capacity during the second quarter. This enabled our waffles to accelerate consumption gradually during the third quarter, even returning to volume growth, and this has lifted the brand's overall consumption growth sequentially, as shown on the slide.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Another driver of this growth has been the launch of Liège-style waffles, an on-the-go offering that is proving to be incremental to the franchise. Now let's look at North America Cereal. Slide number 29 shows how our consumption and share are recovering in the U.S. following our unfortunate fire and labor strike in late 2021. Recall that we rebuilt inventory, both our own and that of our retailers, faster than anticipated during the first half. In quarter three, we have seen our share continue to recover across key brands, and this has continued into October. This reflects not only increased on-shelf availability, but also our gradual resumption of commercial activity behind these brands. The good news is that the category is showing robust growth right now, accelerating to the double digits in quarter three on the strength of increased prices and below average elasticity.

[Steve Cahillane, Chairman and CEO at Kellogg's]

The even better news is that our consumption growth has accelerated even faster than the category, as you can see in the chart on the left, and our share is already back to its pre-strike level, as you can see on the chart on the right. Clearly, we are building momentum as we return to commercial activity. While this chart focuses on our recovery in the U.S., it has been just as impressive in Canada, where we returned to share gains in the third quarter. In both markets, we have a strong lineup of commercial activity continuing in the fourth quarter. Just a few of these are shown on slide number 30, ranging from innovation like Strawberry Frosted Flakes to seasonal offerings like Halloween Rice Krispies and the perennial favorite Elf on the Shelf, to bringing back indulgent licensed foods like Cinnabon and Little Debbie.

[Steve Cahillane, Chairman and CEO at Kellogg's]

We have our Mission Tiger program back in full swing, and we're experimenting with an innovative just add water product called Insta-Bowls. In short, we feel good about where we are in this business. We've restored inventory levels, we're back on shelf, and we are rapidly recovering share. In addition, we've turned back on our commercial programs, and equally importantly, we are making good early progress toward restoring profit margins in this business. We'll now turn to plant-based foods and slide number 31. For context, this business represents only about 2% of our total net sales, but it gets a lot of attention because of its promising long-term prospects and because of the recent slowdown of its category. This is a category that experienced the equivalent of a few years' worth of acceleration in a single year, 2020.

[Steve Cahillane, Chairman and CEO at Kellogg's]

It had already been in elevated growth with new entrants, new technologies, and new space in stores. COVID hit, and product proliferation was soaked up by the surge in at-home demand, bringing penetration and buy rates up with it. The category lapped that surge in 2021, and in 2022, it has experienced a pause in growth, and points of distribution have decreased in stores as many retailers consolidated into the frozen aisle. Household penetration remains above pre-COVID levels, with ample opportunities to return to consistent growth behind underlying consumer focus on health and environmental concerns. These are demand fundamentals that remain firmly in place for a long runway of growth. As you know, our MorningStar Farms brand has been severely impacted by supply disruptions at a key co-manufacturer this year, and this disruption has not yet been fully resolved in quarter three.

[Steve Cahillane, Chairman and CEO at Kellogg's]

It has also forced us to prioritize SKUs. While we have not yet been able to fully resume commercial activity, we have been able to support products that are not capacity constrained. A good example is sausage links, and we are generating double-digit consumption and good share growth in that segment. This supply disruption is a temporary issue, and we continue to work through it. The brand remains a leader in plant-based foods with strong plans and a new media campaign once it restores full supply. Despite near-term disruptions, this is a business that remains in good condition with excellent prospects. With that, allow me to briefly summarize with slide number 33. I could not be prouder of our organization for how it has navigated through an incredibly volatile environment, identifying issues, resolving them, and executing.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Our people and culture truly are a competitive advantage for Kellogg. Our strategy is working, and our portfolio is showing its strength. We continue to deliver solid results, and we are again raising our outlook. Yet we're anything but complacent. We are working hard on a set of plans that will navigate through the current macro headwinds and enable us to drive balanced financial delivery again in 2023 and thereafter. With that, we'll open up the line for questions. Operator? Operator?

[Operator]

We will now begin the question and answer session with public analysts. Analysts may enter the queue by pressing the star key and the number one on their telephone keypad. As a courtesy to your colleagues, please limit yourself to one question. Our first question comes from the line of Cody Ross with UBS. Your line is now open.

[Cody Ross, Lead U.S. Packaged Food Analyst at UBS]

Good morning. Thank you for taking my question. You outpaced Nielsen.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Good morning, Cody.

[Cody Ross, Lead U.S. Packaged Food Analyst at UBS]

Hey, good morning, guys. You outpaced Nielsen consumption by roughly 4 points this quarter. How much of your 14% organic growth in North America was related to the cereal inventory replenishment? Do you expect to continue to ship above consumption moving forward?

[Steve Cahillane, Chairman and CEO at Kellogg's]

Yeah, thanks for the question, Cody. There's not really any meaningful difference between shipments and consumption. You know, it's moved around a lot, obviously, because we had to rebuild inventory on cereal in quarter one, quarter two. But we're pretty much right in balance right now. We may actually see some shipments come out in the fourth quarter, because we're kind of back to where we wanna be. But there's not really a meaningful thing to talk about when it comes to differences between shipments and consumption in North America or anywhere around the world for that matter.

[Cody Ross, Lead U.S. Packaged Food Analyst at UBS]

Gotcha. That's helpful. Then I just wanna talk about the North American profit margin a little bit. The decline accelerated in the quarter. How did that compare to your expectations, and what were the key drivers in the quarter? Should we look at the third quarter profit margin as the trough for North America? Thank you.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Yeah, I'll start and I can turn it to Amit. You know, North America, if you look at the way they performed in the third quarter and year to date, it's pretty exceptional. You know, I didn't really think we'd be talking about 14% organic net sales growth in North America, which is really outstanding. Inflation is running so very hot that, you know, getting pricing to cover input costs, I think is an exceptional achievement. You've got the bottlenecks and shortages, which are very difficult to, you know, to price for, obviously, and to forecast. Whether or not it's a trough on bottlenecks and shortages remains to be seen. It's stopped getting worse, but there's not a meaningful improvement in it.

[Steve Cahillane, Chairman and CEO at Kellogg's]

You know, the price mix in North America was strong. Ability to cover costs was strong. The underlying brand performance was exceptionally strong. The outlook for North America is strong. It's been a terrific year. Amit, you wanna?

[Amit Banati, CFO at Kellogg's]

Yeah, just a couple of other things, Cody. One was, you know, we've seen input costs accelerate through the quarter. I think, you know, we had talked previously of sequential improvement. We did see the sequential improvement in gross margins, but it was not as much as we expected. Really, the primary driver for that was acceleration of input costs. We saw that happen. We've taken incremental action from a revenue growth management. I think within the quarter, there was probably a bit of a lag, so you're seeing the impact of that on margins. I think as Steve mentioned, bottlenecks and shortages persisted. I think the other factor as well is we resumed, as we had said, that SG&A would be back-end weighted. We restored A&P behind cereal as we've built back inventory.

[Amit Banati, CFO at Kellogg's]

You've seen that come through in the quarter as well. you know, we'd expect that, you know, in quarter four as well. you know, the SG&A has been kind of back weighted this year.

[Cody Ross, Lead U.S. Packaged Food Analyst at UBS]

Thank you for the color. I'll pass it on.

[Operator]

Thank you for your question. The next question is from the line of David Palmer with Evercore ISI. Your line is now open.

[David Palmer, Senior Managing Director at Evercore ISI]

Thanks. Good morning. I know there's always a lot of controversy and talk about stranded costs and the separation. If there's any sort of increased visibility on that, love to hear that. But also a question on Europe. The sales trends are positive, but I'm wondering how you're seeing price elasticity there. I see that volumes are down 8%, so any thoughts about not just the price elasticity, but the ability to get through pricing going forward in Europe would be helpful. Thanks so much.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Yeah, David, I'll start and Amit can add any color. Starting with the stranded costs, we're not prepared to, you know, talk about that today. We will be, as we get into next year, but we continue to make very solid progress. I would remind you that we've got a lot of experience around this. When we divested the, you know, portions of the Keebler business, we were very successful at extracting stranded costs. We will have the opportunity to have TSAs as well, and the business is growing very, very strongly. The plans are moving forward very nicely. When we get to the point where we can do that, we'll of course provide that visibility. In terms of Kellogg Europe, you know, they continue to perform very, very well.

[Steve Cahillane, Chairman and CEO at Kellogg's]

This quarter was a tale of what they were lapping last year. If you look at the operating profit being down on a two-year CAGR, it's actually up over 20% because of that lap. You also have the most impact coming from the stoppage in Russia, obviously, what's happening there, and they're cycling that. In terms of pricing, the team has been very, very successful in executing revenue growth management and in the most difficult environment in the world, they've done an exceptional job. You know, we've got David Lawlor, who runs the business, they're doing a terrific job. Miranda Prince, who runs Continental Europe, has done an exceptional job with our customers, really putting together joint business plans with them into next year that help us cover, you know, cover the high inflation that exists there.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Lots of good work happening in Europe. Continued strong momentum despite exceptional headwinds. In terms of elasticity, the one area where we're starting to see a little bit of return to normal and elasticity would be in cereal, in Europe, in the U.K. Actually, it looked like it was starting in continental Europe, but there's a lot of noise, so I wouldn't point to that as anything significant right now. There's a lot of variables in it, but it's the one area where elasticity is probably emerging faster than anywhere else in the world.

[Operator]

That's helpful. Thank you. Thank you for your question. The next question is from the line of Andrew Lazar with Barclays. Your line is now open.

[Andrew Lazar, Managing Director, Senior Equity Research Analyst at Barclays]

Great. Thanks so much. Steve, in North America cereal, obviously, the fire and the strike were certainly disruptive, but I guess I'm curious if there was an opportunity to make any structural changes to how you compete as you return product to the shelf. Like, in other words, was there an opportunity to come back with an even more optimized SKU assortment than before? Or, you know, as you return to commercial activity, what are you seeing in terms of ROIs on those activities, again, versus, like, before the strike? Or maybe there are other structural elements that you're working on there that I may not be thinking of. Maybe I'm making too much of this and the focus was simply on just getting product back on the shelf.

[Andrew Lazar, Managing Director, Senior Equity Research Analyst at Barclays]

What I'm trying to do is think ahead a bit from here, about, you know, when this unit is ultimately on its own. Thanks so much.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Yeah. Thanks, Andrew. I'd say we actually are emerging stronger from what was an incredibly trying time. Obviously, you have a major fire, and then you have a strike that lasts a full quarter, an exceptionally difficult environment. We were confident that we could restore the business, and we have been sequentially. Now as we look forward, we're looking at even better year-over-year performance. That's coming from some of the things that you mentioned. We did prioritize SKUs. We cut out a number of tails, which allows us to consolidate some of our investment around our strong, you know, our strongest brands. Some of the things I mentioned, you know, you know, Tony the Tiger being back, you know, lots of good promotional activity being back.

[Steve Cahillane, Chairman and CEO at Kellogg's]

The ROIs are, you know, rising for us, and you can see that in some of the shares of our leading brands. The pricing we've been and the revenue growth management has been exceptional, behind, you know, those programs and those ROIs. Our shelf sets, if you walk the stores, look very, very good, you know, compared to where they looked, you know, only six months ago. It is about prioritized SKUs, prioritized brand investment, getting the commercial activity back there. Our fourth quarter's got really good innovation coming through, that's been well accepted. I'd say the cereal business has emerged as a stronger business, and that's why you heard the optimism when we talk about the business going forward. It's been very strong. In Canada, you know, even stronger.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Terrific job by the team.

[Andrew Lazar, Managing Director, Senior Equity Research Analyst at Barclays]

Got it. All right. Thanks so much.

[Operator]

Thank you for your question. Next question is from the line of Pamela Kaufman with Morgan Stanley. Your line is now open.

[Pamela Kaufman, Executive Director, Equity Analyst, Packaged Food & Tobacco at Morgan Stanley]

Hi. Good morning.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Good morning.

[Pamela Kaufman, Executive Director, Equity Analyst, Packaged Food & Tobacco at Morgan Stanley]

You pointed to continued challenges on the supply chain and are seeing continued acceleration in inflation. So just wondering what your updated inflation expectation is for this year. Can you talk about what you're seeing in the supply chain and where you've seen slower improvement relative to expectations?

[Steve Cahillane, Chairman and CEO at Kellogg's]

Yeah. I'll start on supply chain and turn over to Amit on inflation, the first part of your question. On supply chain, as we mentioned in the prepared remarks, it has not gotten any worse, right? It's you know, we were in a position where each quarter continued to accelerate in terms of disruptions, what we call things that get to the attention of our control tower. Right now that's stopped getting worse. I would say there's not, as we look out on the horizon, there's not a lot of signals that it's gonna get better anytime soon or significantly better.

[Steve Cahillane, Chairman and CEO at Kellogg's]

We're operating in an environment that continues to be somewhat tumultuous, but the execution that we're able to bring forward has gotten better and better as we continue to, you know, get used to an environment with so many disruptions. Amit, you wanna talk about inflation?

[Amit Banati, CFO at Kellogg's]

I think from an inflation standpoint, you know, we did see meaningful acceleration during the quarter. We saw input cost inflation at around the 20s, into the 20s. I think, you know, from a full-year standpoint we expect similar levels of inflation in quarter four as well. I think, you know, given the acceleration we've seen in quarter three into quarter four, I think our full-year inflation, you know, from the high teens is now kind of pushing close to the 20% level from an inflation standpoint.

[Pamela Kaufman, Executive Director, Equity Analyst, Packaged Food & Tobacco at Morgan Stanley]

Great. Thanks. Are you expecting to or do you need to take incremental pricing to offset the inflation that you're seeing in the business? How are you thinking about kind of the balance of incremental pricing versus your commentary around increasing elasticities in certain categories?

[Amit Banati, CFO at Kellogg's]

I think as always, and as you've seen in our results, right, it's a combination of productivity, it's a combination of revenue growth management. I think as you saw in our quarter three results, our price mix accelerated during the quarter. I think, you know, the teams are doing a terrific job navigating through what is a high cost inflation environment by taking incremental actions, as needed. I would say that, on gross margins, we saw sequential improvement. Despite all the inflation, we saw sequential improvement in quarter three. I think, our expectation is that we will see margin improve and gross profit dollars improve in quarter four as we lap, you know, the fire and strike. I think from a full year gross margin standpoint, our previous guidance was around 100 basis points decline.

[Amit Banati, CFO at Kellogg's]

You know, we'd expect that to be a bit more than the 100 basis points that we had guided to. I think, you know, that gives you an indication that despite the higher inflation, you know, the amount of incremental actions that the teams have taken, and just the strength of our brands.

[Pamela Kaufman, Executive Director, Equity Analyst, Packaged Food & Tobacco at Morgan Stanley]

Thank you.

[Operator]

Thank you for your question. The next question is from the line of Chris Growe with Stifel. Your line is now open.

[Chris Growe, Managing Director at Stifel]

Hi, good morning.

[Amit Banati, CFO at Kellogg's]

Good morning, Chris.

[Chris Growe, Managing Director at Stifel]

I just had a couple questions for you. The first one would just be to follow a little bit on the questions around Europe, just as we're getting a sense of the incremental elasticity in those markets. I know there's been other markets as well. Snacks was a little softer in its growth as well than I thought. Are you seeing that in snacks or was that more the comp of the prior year?

[Steve Cahillane, Chairman and CEO at Kellogg's]

I think, Chris, it was more the comp the prior year. We're really not seeing elasticities in Europe. Our, you know, our snacks business led by Pringles is very, very strong. In fact, if you look at, you know, we stopped all shipments into Russia, as you know, and we quickly diverted all that. You know, we were able to, you know, sell that volume elsewhere immediately, and we're still, you know, somewhat capacity constrained as the business has been so strong.

[Amit Banati, CFO at Kellogg's]

It was up over 22%. It was up almost 22% the year-ago quarter, Chris.

[Chris Growe, Managing Director at Stifel]

Right. I know it was a tough comp. Have you indicated how much the volume drag in Europe there was from Russia, not shipping into Russia?

[Steve Cahillane, Chairman and CEO at Kellogg's]

It's virtually all of Europe's volume decline.

[Amit Banati, CFO at Kellogg's]

Yep.

[Chris Growe, Managing Director at Stifel]

Okay. I had just one follow on, which is in the AMEA division and the noodles and other business continues to grow very strongly, along with the other businesses there. Is that a business that's growing volume as well as pricing? I know it's been a very inflationary environment. Are you seeing volume growth in that business as well?

[Steve Cahillane, Chairman and CEO at Kellogg's]

It's a pricing story there, Chris. It's almost all price. In fact, it is all price. Our ability to take that level of price has been obviously impressive, but it's a pricing story.

[Chris Growe, Managing Director at Stifel]

Okay. Thank you for that color.

[Steve Cahillane, Chairman and CEO at Kellogg's]

You bet.

[Operator]

Thank you for your question. The next question is from the line of Robert Moskow with Credit Suisse. Your line is now open.

[Robert Moskow, Senior Equity Analyst, Food and Food Retail at Credit Suisse]

Hi. I think Pamela tried to get at this question. But going into 2023, I would expect you'd have continued high levels of inflation, given what you're saying about the acceleration in third quarter. Would it be fair to assume, you know, double-digit inflation in 2023? And then maybe can you give us a little more color as to why it accelerated in 3Q? I mean, we're looking at spot values for commodities, and they don't seem to be going up higher sequentially. You know, why is your cost going higher?

[Steve Cahillane, Chairman and CEO at Kellogg's]

Yeah. Rob, I would say you definitely should plan on double-digit inflation going into next year, and I don't think that's gonna be, you know, unique to Kellogg. In fact, I know it's not gonna be unique to Kellogg. If you look at spot prices, you know, it doesn't always tell the full story. Year-over-year price changes, even in spot, are still up double digits. You know, corn up over 20%, cooking oils up over 20%, wheat in double digits, you know, diesel, you know, nearing 50%. You know, price, you know, the whole this inflation was gonna be transitory was always, you know, obviously ridiculous. We continue to see strong inflation in ingredients, in co-man, in packaging across the board.

[Steve Cahillane, Chairman and CEO at Kellogg's]

I think as a total country and globe, we need to prepare for the same type of inflation. This is double-digit inflation on top of the inflation we've seen this year. It's a pretty significant macroeconomic event.

[Robert Moskow, Senior Equity Analyst, Food and Food Retail at Credit Suisse]

Okay. Maybe a follow-up. It seems like there's more kind of knock on costs like labor, energy, co-packing. Is it more difficult to pass along those costs to retailers, or is there a good understanding that, hey, that's just the rising cost of business?

[Amit Banati, CFO at Kellogg's]

Yeah, I think you know we've largely been successful right in covering inflation on our input costs and our packaging costs right? I think you know from a disruption standpoint that's probably you know some of the unplanned because of supply chain bottlenecks and some of those inefficiencies are probably the ones that you know it's hard to forecast and hard to plan around that we've probably not been able to pass on.

[Robert Moskow, Senior Equity Analyst, Food and Food Retail at Credit Suisse]

Okay. Thank you.

[Amit Banati, CFO at Kellogg's]

Okay. Thank you.

[Operator]

Thank you for your question. The next question is from the line of Ken Goldman with JPMorgan. Your line is now open.

[Ken Goldman, Head of U.S. Equity Research at JPMorgan]

Hi, thank you. I just wanted to clarify and make sure I heard correctly what you were saying about the European volumes. I think you said that almost all of the downturn in European volumes this quarter was because of the Russia situation. I also maybe heard you say that that volume was sold elsewhere, so I may have just heard that wrong. I was just trying to get a sense of, you know, how to think about that as a put and take, maybe.

[Amit Banati, CFO at Kellogg's]

I think in the quarter, right, when you are lapping, when you compare, you know, the Russia business itself, right, we stopped shipments in. Yes, you know, all the decline was driven by the Russia stop shipments. I think, you know, the teams have done a remarkable job, right, in terms of finding alternative users of that volume, not just in Europe, but around the world into AMEA as well. I think, you know, we've been able to work through that, through the network.

[Ken Goldman, Head of U.S. Equity Research at JPMorgan]

Thank you. Quick follow-up. Amit, just on, and thank you for the guidance regarding pension income into the fourth quarter. You know, I understand a lot can change between now and next year, and you're not guiding to 2023 yet, but you did mention that we should expect an incremental headwind in 2023. I'm just trying to get a sense for, you know, how big that headwind might be given that, you know, we have obviously limited information about where the stock market and interest rates will be. Are there any rough numbers we can kind of, you know, model in just in comparison to the $38 million other income line we saw this past quarter?

[Amit Banati, CFO at Kellogg's]

Yeah. I think, you know, we'd firstly say, we'd expect a similar amount for quarter four, right? I think, you know, that's the first thing. Obviously, it depends really on what happens on markets because the remeasurement would really be at the year-end, and you know, where the markets are at the end of the year. You know, what we've seen this year is, like I said, it's about on two of our plans. They're roughly around 50% of our value of our pension assets, and you've seen it for about half a year. You know, we'd expect a full year impact next year.

[Amit Banati, CFO at Kellogg's]

You know, we'd need to remeasure all the plans, but it really depends on where markets are at the end of the year. It's hard to forecast, and we'll obviously talk a lot more about that when we are guiding for 2023 in our February call. You know, this is not unique to us. I think, you know, it's driven by what's happening in interest rates as well as markets, and it's of course non-operating and non-cash.

[Ken Goldman, Head of U.S. Equity Research at JPMorgan]

Understood. Thank you.

[Operator]

Thank you for your question. The next question is from the line of Michael Lavery with Piper Sandler. Your line is now open.

[Michael Lavery, Managing Director and Senior Research Analyst at Piper Sandler]

Good morning.

[Amit Banati, CFO at Kellogg's]

Good morning.

[Michael Lavery, Managing Director and Senior Research Analyst at Piper Sandler]

Just wanted to come back to the revenue guidance, and it just looks like the 10% or so on the full year would suggest something around a 7% organic growth in the fourth quarter. I'm imagining certainly there's some conservatism, but what would drive a deceleration like that? Is there stepped up promotional spending? Is it just your assumptions around elasticities? Can you just help us unpack some of how you're thinking about that?

[Amit Banati, CFO at Kellogg's]

You know, the guidance for quarter four is roughly in line with the year-to-date rate at double-digit levels. It's similar to that. You would see the Russia impact that we saw in quarter three, in quarter four as well. You know, as we cycle the stopped shipments of Pringles into Russia. You know, directionally, it's in line with the year-to-date. As always, you know, we made some assumptions around rising pricing elasticity, so we'll see how that plays out. I think, you know, also from a macro standpoint, quarter four last year was when we took the most revenue growth management actions last year, so we'd be lapping that.

[Amit Banati, CFO at Kellogg's]

I think, you know, there are a couple of factors there, but broadly, I'd say that, you know, the quarter four guide is in line with the year-to-date rates.

[Michael Lavery, Managing Director and Senior Research Analyst at Piper Sandler]

Okay, that's helpful. Just on the developing markets outside the U.S., you touched on the increases in the cereal elasticities. Just as far as how the consumer behavior is evolving, do you have a sense how much they're trading down to something like private label or exiting the category? Or what's their response been when you see these elasticities growing?

[Steve Cahillane, Chairman and CEO at Kellogg's]

Yeah, it hasn't been interesting trading down. By the way, it's still low levels of price elasticity. We're just saying this is the first maybe early indicators that it's returning in some of those regions, but still low, still not back to historical levels. When you look at private label, there's a lot of variables all around the world. By and large, we see no empirical evidence of private label growing in any of our markets, really in any of our categories in a meaningful way. We see, in fact, quite the opposite in some markets. Where they are growing, they tend to be growing off year-ago comparisons which were challenged. That's really what we're seeing.

[Steve Cahillane, Chairman and CEO at Kellogg's]

The concern, I think, overall, is just the absolute nature of household budgets, and as you know, inflation throughout the economy continues to rage, you know, how that affects the absolute dollars available for households. What you see in our categories is we tend to be affected less than discretionary consumer goods and travel and dining out and things of that nature. It's one to watch. We do not take it for granted. We watch our price gaps very much. We continue to invest in our brands. We're not complacent by any means. We just haven't seen the empirical evidence that private label is making meaningful inroads in any of our categories or geographies.

[Michael Lavery, Managing Director and Senior Research Analyst at Piper Sandler]

Okay, thanks so much.

[Operator]

Thank you for your question. The next question is from the line of Bryan Spillane with Bank of America. Your line is now open.

[Bryan Spillane, Managing Director, Equity Research at Bank of America]

Thanks, operator. Good morning, guys. Just two quick follow-ups. Amit, I guess, with SG&A, you know, spending coming back in the second half, is the 2023 full year SG&A base a reasonably good base to think of for next year? Or, you know, did you end this year still not spending at a normalized level?

[Amit Banati, CFO at Kellogg's]

I think, you know, we are pleased with the level of spending. I think, you know, the phasing and, you know, we think we are spending competitively in the marketplace, you know, to drive the brands. I think, you know, there was some phasing obviously between the first half and the second half. Overall, from a full year standpoint, right, you know, we're pleased with where we are.

[Bryan Spillane, Managing Director, Equity Research at Bank of America]

Okay. Just second one, last one is just related to the discussion about the pension remeasurement and the effect on the P&L. Are there any cash consequences, you know, just given where markets have moved? Are you fully funded? Will you need to put cash in? Just trying to understand if there's gonna be any cash consequences related to that.

[Amit Banati, CFO at Kellogg's]

No, no cash consequences, really. I mean, you know, I think the level of funding, because both your assets and your liabilities go down, so your level of funding is, you know, it moves a little bit, but not meaningfully. You know, this is really more driven by accounting. Like I said, it's non-cash, non-operating, and I think, you know, the level of funding in the pension plans doesn't change meaningfully.

[Bryan Spillane, Managing Director, Equity Research at Bank of America]

Okay, great. Thanks, guys.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Operator, we might have time for one last question.

[Operator]

Thank you. The final question is from the line of Nik Modi with RBC Capital. Your line is now open.

[Nik Modi, Managing Director at RBC Capital Markets]

Yeah, thanks. Good morning, everyone. The question is just, I know obviously stranded costs are something you're still looking into, but I was curious if you had a view yet or a strategy on what you're gonna do on the supply chain side in terms of, you know, which business is actually gonna own the trucks, you know, just some of that stuff. Will you have a TSA agreement? Just was curious if you had any developments on that front. From a consumer insight standpoint, will the cereal business have to develop its own system, or will you be able to leverage existing insight from the snacking company? Thank you.

[Steve Cahillane, Chairman and CEO at Kellogg's]

If I understand the question, Nick, again, next year we'll be providing much more transparent information on it. In terms of things like who owns the trucks, we outsource the vast majority of our logistics right now. We'll be working through warehousing and all those types of things. When you look at the scale of both of our businesses, you know, they're pretty scaled businesses, so it's, we're not gonna be running half truckloads anywhere. We'll be running full truckloads, and it's the work that's being done right now. Yes, there will be TSA agreements between the businesses, mainly the snacks business providing TSAs to the Cereal Co. In terms of things like IT, you know, the classic way to do this is you typically clone systems and then separate.

[Steve Cahillane, Chairman and CEO at Kellogg's]

You know, we've got a lot of experts helping us with that. A number of us have been through these things before and are, you know, you got a lot of experience at it. A lot of work going on right now, but what you should hear from us is a very, very high degree of confidence that the work is progressing exactly as we expected, and that we have a high degree of confidence in the value creation opportunity that exists, and that's exactly why we're doing it.

[Nik Modi, Managing Director at RBC Capital Markets]

Excellent. Thank you, Steve.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Operator, we are at the hour here.

[Operator]

Thank you for your question.

[Steve Cahillane, Chairman and CEO at Kellogg's]

Everybody, thank you for your interest, and if you do have follow-ups, please feel free to call.

[Operator]

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.

Participants

Executives

• Amit Banati, CFO

Analysts

• Andrew Lazar, Managing Director, Senior Equity Research Analyst at Barclays
• Bryan Spillane, Managing Director, Equity Research at Bank of America
• Chris Growe, Managing Director at Stifel
• Cody Ross, Lead U.S. Packaged Food Analyst at UBS
• David Palmer, Senior Managing Director at Evercore ISI
• John Renwick, VP of Investor Relations and Corporate Planning at Kellogg's
• Ken Goldman, Head of U.S. Equity Research at JPMorgan
• Michael Lavery, Managing Director and Senior Research Analyst at Piper Sandler
• Nik Modi, Managing Director at RBC Capital Markets
• Pamela Kaufman, Executive Director, Equity Analyst, Packaged Food & Tobacco at Morgan Stanley
• Robert Moskow, Senior Equity Analyst, Food and Food Retail at Credit Suisse
• Steve Cahillane, Chairman and CEO at Kellogg's