Kellanova Q1 2024 Earnings Report

Kellanova EPS Results

• Actual EPS: $1.01
• Consensus EPS: $0.85
• Beat/Miss: Beat by +$0.16
• One Year Ago EPS: $1.10

Kellanova Revenue Results

• Actual Revenue: $3.20 billion
• Expected Revenue: $3.16 billion
• Beat/Miss: Beat by +$36.82 million
• YoY Revenue Growth: -4.20%

Kellanova Announcement Details

• Quarter: Q1 2024
• Date: 5/2/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, May 2, 2024
• 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 Q1 2024 Earnings Call Transcript

Key Takeaways

• Strong Q1 with 5% organic net sales growth at the top of long-term targets, margin expansion and free cash flow above projections has enabled the company to reaffirm its 2024 guidance.
• Gross profit margin recovered more than 190 basis points from improved supply chain performance, productivity gains and prior revenue growth management, allowing accelerated brand investment while still targeting over 35% full-year gross margin.
• In North America, sequential moderation of volume declines and renewed retail merchandising led to volume stabilization and share gains across key categories, supporting an improving back-half outlook.
• Currency devaluation in Nigeria drove aggressive price increases that boosted emerging market net sales but risked rising elasticities and potential volume headwinds in Q2.
• Debt leverage fell below target levels, supported by strong free cash flow, opportunistic share repurchases and a recent dividend increase, highlighting enhanced financial flexibility for future investments.

Presentation

[Operator]

Good morning. Welcome to Kellanova's first quarter 2024 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'd like to turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellanova. Mr. Renwick, you may begin your conference call.

[John Renwick, VP of Investor Relations and Corporate Planning at Kellanova]

Thank you, operator. Good morning, everyone, and thank you for joining us today for a review of our first quarter results, as well as an update on our outlook for 2024. I'm joined this morning by Steve Cahillane, our Chairman, President, and Chief Executive Officer, and Amit Banati, our Vice Chairman and Chief Financial Officer. Slide number three shows our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for Kellanova's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation, as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the investor page of www.kellanova.com.

[John Renwick, VP of Investor Relations and Corporate Planning at Kellanova]

As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral, adjusted basis for operating profit and earnings per share. Also, remember that our 2023 results have been recast to treat the spun-off W.K. Kellogg Co as a discontinued operation in accordance with applicable accounting guidelines. Those recast statements can be found in our Q4 2023 earnings press release from February 8th of this year. And now I'll turn it over to Steve.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

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

[Amit Banati, Vice Chairman and CFO at Kellanova]

Thank you, Steve, and hello, everyone. Slide number 13 summarizes our key financial results for quarter one. As Steve said, we are pleased to report another quarter of on-algorithm results, and the fact that these results exceeded our expectations gives us even more confidence in our full-year outlook. Our organic growth in net sales was toward the top end of our long-term target range, with much of this organic growth attributable to pricing to offset currency devaluation. But even outside of that, our sales and volume came in a little better than planned. On a currency-neutral basis, our adjusted operating profit grew strongly year-on-year.

[Amit Banati, Vice Chairman and CFO at Kellanova]

If you normalize the year-ago recast base to also include the passthrough of transition services expenses, this year-on-year growth would still be in the double digits on a currency-neutral basis, and it was driven by a restoration of gross profit margin that more than covered increased brand-building investment. Our below-the-line items more or less offset each other, resulting in growth in earnings per share that was similar to the operating profit and a very good start to the year. Meanwhile, free cash flow is also off to a good start. Slide number 14 walks you through the major components of our year-on-year net sales growth.

[Amit Banati, Vice Chairman and CFO at Kellanova]

As you can see, our 5% organic growth was primarily driven by price mix, which itself was led by revenue growth management actions taken over the past 12 months to cover what had been rising input cost inflation, as well as pricing actions taken more recently in Nigeria to cover currency devaluation. As expected, our overall price mix growth decelerated sequentially again in quarter one, and it should continue to do so as the year goes on. Volume declined on elasticity impacts around the world. Sequentially, from quarter four, our overall volume decline was affected by Nigeria experiencing less accelerated orders than last quarter. However, in most of our other regions, we're encouraged by the pace of what we have always planned to be a gradual stabilization and recovery.

[Amit Banati, Vice Chairman and CFO at Kellanova]

Moving along the graph, the small impact from last year's divestiture of our Russia business will continue for one more quarter as the transaction anniversaries at the start of quarter three. Foreign currency translation clipped net sales growth by a larger-than-expected 9 percentage points in quarter one, principally reflecting the Nigerian naira. If exchange rates experienced during quarter one were to hold, the full year's currency impact would be around -7%. Now let's look at gross profit on slide number 15. As we've discussed previously, the discontinued operations accounting used to recast 2022 and the first three quarters of 2023 takes into account only the expenses associated with our Transition Services Agreement and not the passthrough of those expenses to W.K. Kellogg Co. Year-on-year, this contributed about 110 basis points of our margin expansion during quarter one.

[Amit Banati, Vice Chairman and CFO at Kellanova]

Currency devaluations affected our country mix, contributing a year-on-year margin benefit in quarter one of approximately 170 basis points. But as you can see, even without these recast and country mix impacts, we continued a multi-quarter trend of increased gross profit dollars and improvement in our gross profit margin. Driving this margin recovery have been a number of factors, including the improved supply environment, a resumed higher level of productivity, and last year's revenue growth management actions against moderating input cost inflation. The fact that this gross margin restoration has continued to run ahead of pace gives us additional confidence in our full-year outlook of more than 35%. The same holds true for operating profit, shown on slide number 16.

[Amit Banati, Vice Chairman and CFO at Kellanova]

This was driven by our top-line growth and recovering gross profit margin, which were enough to fund advertising and consumer promotion that increased faster than net sales. The absence of TSA reimbursement from the year-ago recast base was a year-on-year impact of roughly $45 million at the operating profit line, which explains a little less than 150 basis points of the margin expansion. The currency-related mix shift had the effect of adding less than 100 basis points of the margin expansion. Even if we exclude these two factors, we still continue to grow operating profit in dollars and in margin, and quite substantially. Like our gross profit, this operating profit performance was better than expected, another promising sign for the full year.

[Amit Banati, Vice Chairman and CFO at Kellanova]

This strong quarter one margin performance lends confidence to our outlook for an operating profit margin of over 14% for the full year. Moving down the P&L, we come to our earnings per share walk on slide number 17. As you can see, all of our EPS growth in quarter one was attributable to our growth in operating profit, as below-the-line items offset each other. Interest expense increased meaningfully year-on-year, reflecting higher interest rates. This was offset by a similar increase in other income, reflecting currency translation gains. As expected, our effective tax rate came in at about 22.6%, and joint venture earnings and minority interests were collectively about a penny drag on EPS. Our average shares outstanding decreased modestly year-on-year, reflecting share buybacks that we accelerated into the previous quarter....Let's turn to slide number 18 and look at our free cash flow and net debt.

[Amit Banati, Vice Chairman and CFO at Kellanova]

We're off to a good start on free cash flow, even in what is normally a small quarter for this metric, though some of this is timing related, specifically the timing of a planned distribution from a post-retirement fund, which is expected to be offset later in the year. Meantime, we've continued to pay down debt even as we return sizable cash to shareowners, mostly through our dividend. Our debt leverage remains well below our targeted ratio of net debt to trailing EBITDA of 3x. On slide number 19, you can see that we're making no changes to our 2024 financial guidance. For net sales, we continue to expect organic growth within our long-term targeted range, specifically calling for 3% growth or better in 2024.

[Amit Banati, Vice Chairman and CFO at Kellanova]

Outside of Nigeria, we still assume that price mix growth will moderate as we continue to lap prior actions, that industry-wide elasticities will fade gradually during the year, and that our return to full commercial activity will result in volume stabilization and improvement as the year progresses. The exception is Nigeria, where currency influence pricing actions have continued, and where we assume we will start to see meaningful elasticity impact on volume. Organic growth, of course, excludes currency translation, which, based on exchange rates we saw during quarter one, would be a headwind of about 7% for the full year. For adjusted basis operating profit, we again reaffirm the range of $1.85 billion-$1.9 billion.

[Amit Banati, Vice Chairman and CFO at Kellanova]

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

[Amit Banati, Vice Chairman and CFO at Kellanova]

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

[Amit Banati, Vice Chairman and CFO at Kellanova]

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

[Amit Banati, Vice Chairman and CFO at Kellanova]

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Thanks, Amit. We'll start with Kellanova North America in slide number 22. Our organic net sales were flat in the quarter against our toughest comparison of the year. As expected, price mix growth is moderating as we lap last year's revenue growth management actions and last year's relative lack of merchandising activity. Industry-wide elasticities continued to pressure volume in the quarter, but it is important to note that we again realized sequential moderation in these volume declines, and we expect this to continue as our increased commercial activity combines with expected diminishing of elasticities in our categories. North America's operating profit increased substantially as margins continued to be restored. Half of this year-on-year profit growth can be explained by the year earlier recast figures, not incorporating the pass-through of transition service expenses.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

The other half of this growth was driven by productivity initiatives and year-on-year improvements in service levels and logistics. So in spite of soft category demand, North America again delivered financially. Slide number 23 shows how both our snacks and our frozen businesses lap strong year earlier growth through the first half, before beginning to lap the category level rise in elasticities that became more pronounced in the second half last year. Hence, being flattish in quarter one was expected for both businesses. Encouragingly, our U.S. categories in market in quarter one showed moderating volume declines as elasticities began to moderate. Meanwhile, our ramped-up commercial activity is starting to improve our share performance as we had planned.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

While we returned to merchandising in the second half last year, quality display activity requires lead time, and we are now starting to realize this quality activity with increasing retailer acceptance as we have refined our price points, pack sizes, and merchandising periods and events. Slide number 24 shows this improvement in two of our most important categories. In both crackers and salty snacks, you can see our upward trajectory in consumption, sales, and volume, particularly when compared to their respective categories. In salty snacks, Pringles picked up share in March, and in crackers, our declines are narrowing rapidly, thanks to increasing merchandising for Cheez-It and share gains by Club and Toasteds. The same is true in our other categories. We gained share in Portable Wholesome Snacks in the first quarter, led by Pop-Tarts.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Eggo started to narrow its share losses in March on meaningful gains in distribution, and MorningStar Farms continues to pick up share. We are gaining traction, and we have more building blocks taking shape in the second quarter when we pick up distribution on shelf resets and innovation launches, all supported by increased brand investment and merchandising activity. That's on top of likely easing of elasticities as last year's SNAP and other government allotments anniversary. We fully expect to sustain this improvement in consumption volume and share performance in the second quarter and through the second half. As indicated on slide number 25, there is no change in our expectations for North America, only increased confidence. Our increased innovation is beginning to hit the shelves now, and our brand building and merchandising have increased and are of higher quality.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Best of all, we're already seeing this activity start to bear fruit in the marketplace. We expect our volume performance in this region will continue to improve as a result. Meantime, our margins continue to recover ahead of pace, and we are seeing early evidence of the post-spin-off benefits of a more focused and agile organization. And I'm just back from the Los Angeles premiere of Jerry Seinfeld's new Netflix movie, Unfrosted, which I can tell you is absolutely hilarious. It's a farcical take on the launch of our beloved Pop-Tarts. Only the most iconic brands merit a star-studded movie, so be sure to watch its release tomorrow night on Netflix. Now, let's turn to Kellanova Europe and slide number 26. This region sustained good net sales growth, growing organically by 3% in the first quarter, even as it lapped prior-year revenue growth management actions.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Importantly, we realized a modest sequential improvement in volume performance. Even excluding favorable currency translation, Europe's adjusted operating profit grew by 4% year-on-year, despite last year's midyear divestiture of Russia. Profit margins continue to recover nicely in this business, even with significant boosts in brand building investment. On slide number 27, you can see that snacks, which represent over half of our sales in Kellanova Europe, continued to lead our growth in this region during the first quarter. Our snacks net sales grew organically by 4% as they lapped double-digit growth and as we experienced trade inventory timing in certain markets, as well as softened demand in Israel, which is the lone Middle East market serviced out of Kellanova Europe. In-market, we saw continued deceleration in retail sales growth for our primary categories on moderating price increases and sustained elasticities.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

The salty snacks category is growing at low- to mid-single-digit growth rates in developed markets, while sustaining mid-teens growth in emerging markets like Poland and Romania. Impressively, Pringles has gained share across most markets in the first quarter. In cereal, we remained on a trend of 1% organic net sales growth. We gained share in the growing U.K. cereal market, but did see continued category slowing and shifts to private label in many markets in the region. Slide number 28 reviews the elements to watch for in Europe in 2024. Pringles is poised to sustain momentum as we execute our biggest ever campaigns around football, launch a set of limited edition flavors, and continue our paper can partnership with a major UK retailer, all while we prepare for the launch of Cheez-It, starting in the U.K. in the third quarter.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

In cereal, we're excited about the launch of Kellogg's sponsored football camps across the U.K., affiliated with prestigious professional clubs. We're also enthusiastic about building momentum behind innovations like new Choco Corn Flakes and Trésor Brownie. The result will be a seventh consecutive year of organic net sales growth for this region, even as we progress on plans for an optimization of our cereal portfolio and, pending consultation, our manufacturing network. Now let's look at our emerging markets regions, starting with Latin America on slide number 29. In the first quarter, Latin America's net sales increased by 5% organically. Price mix growth is moderating as expected, as we lap prior year actions to offset high cost inflation. The good news is that volume declines continue to moderate, even in spite of the impact of our SKU rationalization and price pack architecture initiatives.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Operating profit declined in the first quarter against strong 20%+ year-earlier growth. Slide number 30 shows our Latin American net sales growth by category group. Organic net sales for our snacks business dipped year-on-year due to elasticities in Central America and the lapping of a strong year-ago quarter. However, in-market data indicate that category growth rates for salty snacks generally remain strong, and both Pringles and Cheez-It outpaced the category with double-digit consumption growth in Mexico and Brazil. Our cereal net sales increased by a better-than-expected 10%, in spite of lapping a similarly strong year-ago performance. In-market, the cereal category remains particularly robust in Mexico and Brazil, and we gained share in both of those markets. In fact, in Mexico, we recorded our highest share in the past decade through commercial activation of our core brands and expanded distribution.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Slide number 31 reminds you of what to watch for in our Latin America business this year. We expect a 7th straight year of organic net sales growth, with growth in both snacks and cereal. Pringles growth should be sustained by innovation and distribution expansion, and we also expect good growth in cereal. Margins should improve, reflecting price pack architecture and other RGM initiatives, operating efficiencies, and the potential for moderating input cost pressures later this year. We'll finish with our EMEA region, starting with slide number 32. Currency influence price increases drove substantially all of the region's 19% organic net sales growth in the quarter, and this organic growth was more than offset by adverse currency translation. Nevertheless, our business in Nigeria continues to execute well through this challenging currency environment. It is priced to keep up with parallel market currency rates and has operated very effectively.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Up to now, elasticities have remained manageable, though they are now on the rise, given the significant pricing we have had to execute. Stepping back, these short-term challenges are dramatically outweighed by the long-term growth opportunity that this growing market and our advantage assets provide us. Outside of Nigeria and our joint ventures with Tolaram, our organic net sales declined slightly year-on-year, as it lapped double-digit growth in the year-ago quarter and as demand has been impacted by the heightened tensions in the Middle East. On a currency-neutral basis, EMEA's operating profit grew by 29%, though the extremely adverse currency translation brings this growth down to 2% in U.S. dollars. Excluding our joint ventures with Tolaram, EMEA's operating profit still grew in the double digits year-on-year, both with and without currency translation, as margin recovery continues.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

On slide number 33, the magnitude of the currency-driven pricing in Nigeria is reflected in the accelerated organic net sales growth for Noodles and Other. Pricing has had to continue, and while volume has held up well, some of this is related to timing of advanced orders in recent quarters that will likely negatively impact the second quarter, and we also are prudently projecting elasticities to finally rise in this business. Meanwhile, our Kellogg's noodles in South Africa and Egypt continue to grow rapidly, gaining distribution and share. In snacks, we lapped a notably strong year-earlier quarter, and Pringles is feeling the impact of the conflict in the Middle East. Outside of that subregion, however, our snack sales remained in solid growth, led by Pringles. In cereal, our organic net sales slipped by less than 1%, despite lapping notably strong growth in the prior year-ago quarter.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Category elasticities persist, though we are encouraged by our sales in Australia. So for EMEA in 2024, we continue to watch for the elements listed on slide number 34. This region looks to extend its enviable track record of consistently delivering organic growth. Noodles remains a growth business for us, even as we contend with increased pricing and elasticities. We expect to sustain momentum in snacks, led by Pringles, though the Middle East situation may slow its overall growth in the region. We expect to sustain growth in cereal, led by emerging markets. EMEA's restoration of profit margins should continue. So let me summarize with slide number 36. We're two quarters past the spin-off, and already the benefits of a more focused, more growth-oriented, and more profitable portfolio are on display. We again delivered continued on-algorithm financial performance that tracked ahead of expectations.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Our stronger commercial plans are taking hold, with improving in-market performance that is leading to improving volume performance, and this improvement will continue. We continue to progress ahead of schedule in the restoration of profit margins. All of this enables us to reaffirm our 2024 guidance with an increased level of confidence. Meanwhile, we continue to take value-creating actions for the future, including, for example, adding much-needed emerging market capacity for Pringles, expanding Cheez-It internationally, and optimizing our global manufacturing network. Simply put, we have the strategy, the portfolio, the footprint, and the financial flexibility to deliver results consistently quarter after quarter and create long-term value for our shareowners. And as always, the biggest reason for our confidence is the talent and energy of our Kellanova team, who are working hard every day to deliver value for you, our shareowners. With that, we'd be happy to take your questions.

[Operator]

We will now begin the question-and-answer session with participating 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 today is from the line of Ken Goldman of JPMorgan. Please go ahead.

[Ken Goldman, Analyst at JPMorgan]

Hi, good morning, everybody. I wanted to ask-

[Operator]

Good morning, Ken.

[Ken Goldman, Analyst at JPMorgan]

-in North... Hi. Just in scanner data, I know it doesn't cover everything, but, and clearly you're able to perform quite well anyway lately, but just noticing that, you know, as we've seen for a little while now, private label continues to gain share in both crackers and potato chips, you know, maybe at a little faster rate than they are in most food categories. So I'm just curious, as we maybe think about 2Q and 3Q, with some of the maybe elasticity fading, trends, as you mentioned, maybe some-

[Ken Goldman, Analyst at JPMorgan]

... lapping of last year's SNAP reductions. How do we think about you, as a category and private label in the context of that, and maybe some of the competitive trends within there?

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, thanks for the question, Ken. You know, we don't, we don't really see the same thing that you're talking about in terms of private label. It's been a little bumpy, to be honest with you, and if you look back to, say, 2019 all the way through this year, there's no meaningful moves in private label in the categories that you mentioned. And if you look at PWS, you know, Portable Wholesome Snacks, there might be a little bit more movement there. But I think it's really a story of not much to see there when you take all the noise out, because you do have private label last year, spring a little bit more due to supply disruptions, bottleneck shortages. So there's some of it's just coming back to where it was.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

I think equally there is in the non-measured channels, as you say, growing faster, and so you can't always look at the syndicated data as a complete proxy for our own top-line performance because of that growth. And the growth in the away-from-home channels as well, which has been very good. So I think, not to be... I hope you don't take that as a dismissive comment, but I think it's not as much to see as you might, you know, really think as you really analyze the fullness of the data.

[Ken Goldman, Analyst at JPMorgan]

No, it's dismissive of Nielsen, not me. I'll take it that way. But I'm just curious if we can maybe broaden it out a little bit, and thank you for that. You know, just as you think about lapping the SNAP reductions, you know, what are your estimates? Maybe forgetting, you know, what we're seeing in private label, just thinking about it more broadly in terms of maybe the lower income or, you know, some of the consumers that are struggling a little bit. Do you expect maybe to see a little bit of improvement, just more on a macro basis, you know, as we lap some of last year's trends?

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, we do, Ken. And you hit it right on the head. The lower income consumers, as you know, and have seen, are under a lot more pressure than the balance of the consumers, and that continues. We're probably, as we get in the back half of the year, gonna be past the worst of that because of the SNAP benefits, because of the restoration of having to pay, you know, student loans, because of the improving economic environment overall from an employment standpoint and from a wage standpoint. I think we've seen the last of it. So we always forecasted elasticities to be the most challenging the first half of the year and to improve in the back half of the year. For us, we're actually seeing a better performance than that.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

So if you look at the syndicated data, again, I dismissed it in one hand, but not entirely. You can see that our performance is improving. We're getting back to full merchandising activity, which we had, you know, said. So we're moving from really, you know, telling everybody what we're gonna do, to showing what we're doing, and you actually see that in our improvement. So we feel much more confident in our volume performance. I'm speaking about North America now, even into the second quarter. And certainly that, you know, we see that continuing in the back half of the year. So overall category, I think, back half of the year improvement for us, even sooner than that.

[Ken Goldman, Analyst at JPMorgan]

Helpful. Thank you.

[Operator]

Our next question today is from the line of Max Gumport of BNP Paribas. Please go ahead, your line is open.

[Max Gumport, Director of Equity Research at BNP Paribas]

Hey, thanks for the question. First, just on the TSA impact, I think we've got the moving pieces now, but it sounds like maybe it was a $45 million-$50 million benefit on EBIT, and then maybe 35 of that was on the gross profit line. Do I have that right in terms of the size of the TSA, the reimbursement piece?

[Amit Banati, Vice Chairman and CFO at Kellanova]

Yeah. Yeah, I think you've got that right. You know, I think, you know, the TSA reimbursement was around $45 million, and, you know, that split between gross profit and SG&A is about right.

[Max Gumport, Director of Equity Research at BNP Paribas]

And then how should we-

[Amit Banati, Vice Chairman and CFO at Kellanova]

I think nevertheless, even if you exclude that-

[Max Gumport, Director of Equity Research at BNP Paribas]

Yeah.

[Amit Banati, Vice Chairman and CFO at Kellanova]

I think, you know, even if you exclude that, we saw strong double-digit growth in our operating profit. You saw a gross margin, even if you exclude, you know, the TSA as well as the Forex impact, our gross margins were up 190 basis points in the quarter. I think, you know, from a go-forward standpoint, we'd expect TSAs to continue to be in that range, but starting to ratchet down in quarter two. You know, as I've mentioned previously, we are transitioning the distribution centers into WKKC, so that process is underway. It's going really well. So it's levels are high as we are doing the transition.

[Amit Banati, Vice Chairman and CFO at Kellanova]

So as that transition happens through the course of 2024, you'll see some of the TSA costs move directly to WKKC, and so that'll start ratcheting down through the year. And of course, you know, in quarter four, you'll anniversary that, so that's what's built into the guidance.

[Max Gumport, Director of Equity Research at BNP Paribas]

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

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

[Max Gumport, Director of Equity Research at BNP Paribas]

Great. Thanks very much.

[Operator]

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

[Alexia Howard, Senior Analyst at Bernstein]

Good morning, everyone.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Morning, Alexia.

[Amit Banati, Vice Chairman and CFO at Kellanova]

Good morning, Alexia.

[Alexia Howard, Senior Analyst at Bernstein]

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, I think, Alexia, you know, it really comes down to the, the simple fact, it's only the first quarter, so there's always uncertainty with three quarters to remain. But it really gives us the, you know, very strong confidence that we're gonna deliver a very good year. And what I mean by that is it allows us to really think about the best levels of reinvestment that we can do. And I'll give you some examples of that. Route to market in Latin America and EMEA continues to be really exciting for us. We're gonna invest a little bit more in route to market. Everything around digital transformation and artificial intelligence allows us to lean in more than we had planned. We were already leaning in this year in our plans. We can lean in even more on that. And then brand building, especially brand building.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

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

[Alexia Howard, Senior Analyst at Bernstein]

Great. And could I just follow up? Your leverage is obviously low at the moment. You've got this Transition Services Agreement that's gonna be fading down. What's your appetite for doing a deal? I know there's a lot of moving pieces right now. Is it too soon to try to replace the sales and EBIT that were lost with the spinoff of W.K. Kellogg Co? Or are you actively looking at the moment? And if so, I presume it would be in snacking, but would it be domestically or internationally? Just curious.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, so, you know, we like the, the health of our balance sheet, without a doubt. You know, our net debt continues to go down, our leverage ratios continue to go down. So we have the capacity to do something if it creates shareowner value. And we're always on the lookout for anything that does create shareowner value. So you're right, snacks is... You know, we talk about being a snacking-led powerhouse. 50% of our business is outside the U.S., so we could do something domestically or outside. We're not really looking to change, to, to proactively change to be more international or more domestic. We would look at the absolute best deal out there, and we have the capacity to do it.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Equally, we're very excited about our organic opportunities, which, you know, I just mentioned Pop-Tarts, but Cheez-It internationally continues to be a priority for us. Adding Pringles capacity is very much a part of our capital plan this year, building two new factories, one in Latin America and in Asia. So we've got good uses for our capital with high ROIs, but M&A could factor into that as well.

[Alexia Howard, Senior Analyst at Bernstein]

Great. Thank you very much. I'll pass it on.

[Operator]

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

[Tom Palmer, Senior Analyst at Citi]

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

[Amit Banati, Vice Chairman and CFO at Kellanova]

Yeah, I think, you know, very strong performance in our North America business this quarter, so very pleased with that. I think, you know, it's all the factors that you mentioned. You know, so it's the benefit of the revenue, you know, growth or of actions that we took last year. You know, it's a moderating cost environment, so we're seeing that play out. I think this quarter, the supply chain performed well, and, you know, from a lapping standpoint, you know, this was the biggest lap from the shortages and bottlenecks. So, you know, those were kind of some of the drivers. We continue to expect to see, you know, strong profit performance, both gross and operating, through the year.

[Amit Banati, Vice Chairman and CFO at Kellanova]

Probably not at the pace in we saw in quarter one, because, you know, with lapping, you know, bulk of the shortages and bottlenecks, we lapped. That was predominantly in quarter one. And then, you know, some of the mechanical elements, like the currency impact, was most pronounced in quarter one. That'll probably moderate in the rest of the year. I mentioned earlier that, you know, we lapped the COVID anniversary, the TSA reimbursements in quarter four. So, you know, we'd expect continued good performance through the year, but not as pronounced as we saw in quarter one.

[Tom Palmer, Senior Analyst at Citi]

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

[Amit Banati, Vice Chairman and CFO at Kellanova]

I'd say broadly in line with what we thought, so no, no major changes. I think, you know, it's coming slightly better than expected. You know, currency in Nigeria is obviously devalued more than we thought, and, you know, the teams there are pricing to recover that. So, you know, some changes, but, you know, overall, broadly, I'd say in line with, you know, in line with the long-term algo that we had guided to.

[Tom Palmer, Senior Analyst at Citi]

Thank you.

[Operator]

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

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

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

[Amit Banati, Vice Chairman and CFO at Kellanova]

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

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

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, yeah, Andrew, I think you—I think that's exactly right. You know, we talked, I think, in the last quarter and probably the last two quarters about those very reference price points and talking about, you know, the consumer will walk by four or five trips and not just be able to accept that new reference price point. So I think we're there or thereabouts, you know, probably in the seventh or eighth inning, if you like. At the same time, you know, companies like ours continue to also, you know, work RGM initiatives and, you know, it's not shrinkflation, it's, you know, making sure that you can hold your margin and hit a price point, and sometimes that means a smaller size.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

And so I think the combination of all of those things working together leads us to believe that the second half of the year is gonna be the inflection point for the consumer and for us. As I said, I think we get there even faster than that because of what we're lapping, because, you know, we admittedly came back to merchandising activity perhaps later than we otherwise would have, knowing what we know today. But the fact of the matter is, you know, we are there now. We are merchandising more effectively. We've got more quality displays. We like our price points. We do like our price points and where they are with consumers, and so we see all that leading to a better back half of the year, although still, you know, not without pressure.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

You know, so I don't want to be Pollyannish about it. The consumer is still under a good, good bit of pressure, but I, but I do think that there is, you know, there is brightness on the horizon.

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

Thank you.

[Operator]

The next question today is from the line of Michael Lavery of Piper Sandler. Please go ahead.

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

Thank you. Good morning.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Good morning.

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

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

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

... Yeah, so I think if you step back and, and really look at everything, I don't think that there has been volume destruction, right? If there is a caloric reduction in the population, it is quite minimal. And, you know, a couple of quarters ago, everybody wanted to talk about the GLP-1 drugs. I think, you know, that's faded as well. So if you start with the premise that more or less, the caloric state remains the same, then the volume goes somewhere. And I think those with the best full commercial activation, with brands that matter to consumers, are gonna be the ultimate winners.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

That's why, you know, we're excited about where we are in terms of our ability to reinvest, and continue to step up our investment against the consumer, and against, you know, household penetration, and making sure that we're delighting our consumers all along the way. Because we think the volume potential is still very real and hasn't had any, you know, any, you know, full diminishment, if you like.

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

And you've touched in the past on potential consumer adjustments in terms of things like waste reduction, you know, just using more leftovers. Is that some of the behavior that might revert to prior norms, or that, you know, could be some of the things you're counting on as part of the change?

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, I think, you know, it's, it's interesting because you all on this call, and we and all of our peers have been in search of where that volume is, right? And there's been a lot of hypotheses. And I think the fact is, it's probably a lot of things that are hard to measure. One is, you know, managing the household pantry, less leftovers, more creativity. I think all those things have been coming into play, but they're now, if you think about it, they're in the base, right? You can only work that pantry so, so long. The pantry is not an infinite supply of, you know, stuff in the, in the corners, and so that's been worked.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

But I think this new consumer behavior around, you know, less food waste and more, making sure that leftovers are really used, is probably consumer behavior, as far as we can tell, that will remain. But again, it's in the base, and so I think there's a new normal, if you like. Now, as the economy improves, if it does improve, if discretionary income keeps growing faster than inflation, you'll likely see a return to, you know, kind of the pre-inflationary times as people become a little bit more comfortable. I think that would be a natural outcome. But right now, I think we see the continuation of that, of that behavior, recognizing that it's in the base.

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

Just a quick follow-up on LatAm. You called out the performance there of being what it was, despite the SKU rationalizations that you've had. Can you just give a sense of maybe the magnitude of what that was? And are there incrementally new ones we should be mindful of modeling ahead, or is this closer to winding down?

[Amit Banati, Vice Chairman and CFO at Kellanova]

I think it's largely behind us, and so, yeah. But overall, you know, we're seeing good momentum in our LatAm business, both in Mexico as well as in Brazil.

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

Okay, thanks so much.

[Operator]

Our next question today is from the line of David Palmer of Evercore ISI. Please go ahead.

[David Palmer, Restaraunt and Food Analyst at Evercore ISI]

Thanks. Good morning. Last quarter, I think you guided to-

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Hey

[David Palmer, Restaraunt and Food Analyst at Evercore ISI]

... 2024 for the year, North America snacks organic sales growth, low single digits. Is that still the thinking? And if so, how do you envision price versus volume this year for North America? You know, just looking at the last four weeks, and I know you highlighted the last four weeks, I don't know if that composition is how you're thinking things will play out. But it does look like price per unit is down low single digits, with volume offsetting that. And not sure how indicative that will be.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, David, I think if you look at what's happened the last, you know, 18 months, two years, been too much price and not enough volume, for obvious reasons. Now we're starting to see the reversal of that in North America, and as I mentioned several times on the call, now we're seeing a better volume performance. You can see that in the latest published data. We're seeing a gradual recovery in that, and we are very confident in the back half of the year based on what we see in, you know, right now, in terms of our volume performance. We like the balance that we see returning to our business, and we have a lot of optimism that that's gonna continue.

[David Palmer, Restaraunt and Food Analyst at Evercore ISI]

So do you think this is gonna be one where we maybe see volume even stronger than net sales in that division? Is that the kind of year because you're leaning in with high-quality merchandising, that's gonna lead to some net pricing per unit offset to the volume that you're going to get? Is that fair?

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, I would just—I don't want to go too deep into individual regions and volume, price mix beyond what we've said, and that is, it's getting a lot better. The volume performance continues to get a lot better. For us, you know, the return to full merchandising activity, which we mentioned several times, is the real driver of that volume recovery, and we like what we see in terms of that balance. We like what we're seeing with the reinvestments in our brands. We like what we're seeing in terms of our share improvements in the marketplace. All those things combining to give us, you know, the confidence that we've been talking about.

[David Palmer, Restaraunt and Food Analyst at Evercore ISI]

Just a follow-up on supply chain was a constraint for the old Kellogg's and Kellanova, perhaps more than most companies last year. And I know it helped keep you from doing some of the things you're doing now, that you know, the growth spending and... but also maybe on productivity initiatives. Are there certain metrics you could just talk about, just year-over-year, where you were? It can be the shipped on time and in full, but other metrics, including productivity quarter-over-year in the quarter, that can give us a sense of how much the supply chain is a big helper. Thanks.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yeah, David, I would just say I wouldn't say that our supply chain was disadvantaged in the past. What we did say is we were perhaps more conservative than others in wanting to keep our supply fill rates at a very high level, and therefore did not return to full merchandising commercial activation as some of our peers did. Our supply chain right now is performing at a very high, high level, like, think about pre-pandemic, you know, high watermarks in terms of on time, in full. So that's where we are, and that's why we have the confidence. In terms of productivity, we're back to the type of productivity initiatives that we were pre-pandemic as well, so that's been very, very positive.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

We announced worldwide a couple of productivity initiatives that we talked about last quarter that are, you know, proceeding very, very well. So we like where our supply chain is in North America, and we like where our supply chain is globally.

[David Palmer, Restaraunt and Food Analyst at Evercore ISI]

Thank you.

[Operator]

Our next question is from the line of Steve Powers of Deutsche Bank. Steve, your line is open. Please go ahead.

[Steve Powers, Analyst at Deutsche Bank]

Yes. Hey, good morning, guys. Just quickly, I guess a follow-up on that prior line of questioning on North American pricing, kind of in combination with Andrew Lazar's question on volume leverage. As we think about the benefits of volume leverage throughout the year, you know, offset by the price investments that we're seeing, yeah, how does that play out on net impact on margins? Is that a net positive, a net drag, just as we think about the sequential progression?

[Amit Banati, Vice Chairman and CFO at Kellanova]

Yeah, I think, Steve, there are a number of things playing through in the margin, right? You know, like I mentioned earlier, right, we're confident that our gross margins will be more than 35%. Within that, there are a number of moving parts, obviously, inflation, which we said, and continue, you know, the guide continues to be neutral-ish across a number of cost elements, so that's playing through. The improved performance of the supply chain is a tailwind this year. I think, you know, from a price standpoint, the price mix is obviously moderating. So I think, you know, it's a combination of those factors. We should start seeing some volume leverage as the volume trends improve.

[Amit Banati, Vice Chairman and CFO at Kellanova]

But, you know, all of that, you know, kind of factors into our expectation that, you know, we'd continue to see gross margin expansion, not at the rate we saw in quarter one, but, you know, we'd expect that the gross margins would continue to be, continue to improve, and be north of 35% for the year.

[Steve Powers, Analyst at Deutsche Bank]

Okay, very good. And Steve, you know, I was hoping you could talk a little bit more about the Cheez-It expansion overseas. You gave some snippets, you know, as you went region by region, you gave some snippets about kind of what to watch for, but maybe you could just pull it all together in aggregate and just talk about that initiative and kind of what to watch for in aggregate as you progress through 2024, and we start thinking about further progression to 2025. Thanks.

[Steve Cahillane, Chairman, President, and CEO at Kellanova]

Yes. So we are excited about the Cheez-It and their international prospects. We've got Cheez-It now in Canada, Mexico, Brazil. We're applying those learnings to the launch in Europe later this year, particularly in the U.K., and, you know, the U.K. team is very excited about it. The initial research on product and on positioning is very strong. And so this is not anything that's gonna really affect your models per se, because we're taking it in a very pragmatic way, market by market, continuing to build the playbook, so each next market is more successful than the one that came before it. And so 2024 will be the European launch, and then later in 2024, we'll talk about additional markets for 2025 and beyond.

[Operator]

Thank you. I'm afraid we have run out of time for any further questions today, so I'd like to hand back to Mr. John Renwick for any closing remarks.

[John Renwick, VP of Investor Relations and Corporate Planning at Kellanova]

Well, thank you, everyone, for your time and your interest, and if you do have follow-up calls, please do not hesitate to call us. Have a great day.

[Operator]

This concludes today's conference call. Thank you all for joining. You may now disconnect your lines.

Participants

Executives

• Amit Banati, Vice Chairman and CFO
• John Renwick, VP of Investor Relations and Corporate Planning
• Steve Cahillane, Chairman, President, and CEO

Analysts

• Alexia Howard, Senior Analyst at Bernstein
• Andrew Lazar, Managing Director and Senior Equity Research Analyst at Barclays
• David Palmer, Restaraunt and Food Analyst at Evercore ISI
• Ken Goldman, Analyst at JPMorgan
• Max Gumport, Director of Equity Research at BNP Paribas
• Michael Lavery, Managing Director and Senior Research Analyst at Piper Sandler
• Steve Powers, Analyst at Deutsche Bank
• Tom Palmer, Senior Analyst at Citi