Steve Cahillane - Chairman, Chief Executive Officer Amit Banati - Chief Financial Officer John Renwick - Vice President of Investor Relations and Corporate Planning

Good morning! Welcome to the Kellogg Company's Third Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session with publishing analysts. At this time I will turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellogg Company.

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 number three shows our forward-looking statements disclaimer. As you are aware, certain statements made today such as projections for Kellogg Company's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation, as well as to our public SEC filings. This is a particular note amidst the current operating environment, which includes unusually high input cost inflation, global supply disruptions and uncertain global macroeconomic conditions, all of whose direction, length and severity are so difficult to predict. A recording of today's webcast and supporting documents will be archived for at least 90 days on the Investor page of kelloggcompany.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. And now, I'll turn it over to Steve.

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 continue 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, and 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. And in our North America Cereal business, we continue 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 serial company leadership team and we continue to work on organizational design and carve out financials. And 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. As you know, our momentum is not new. Our third quarter showed acceleration of a trend that has been running above our long term target for the past few years, and 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 especially 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. So 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. A few highlights from quarter three are shown on slide number seven. Let me now turn over to Amit, who will explain our financial results and outlook in more detail.

Thanks Steve and good morning everyone. Slide number 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 a 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. 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 to 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 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. Price mix accelerated again in quarter three and it accelerated in all four regions as they continue to utilize revenue growth management to help offset higher input costs. All four regions delivered double digit increases in price mix in quarter three. Both of these components, volume and price mix were relatively consistent with the year-to-date trends. Turning now to gross profits, slide number eleven 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, and keep in mind that this is net of the good work we're doing on productivity. 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 number 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. So even though our margins have been pressured by the current environment, our gross profit dollars remained 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. And 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. As expected, advertising and promotion investment increased year-on-year as our U.S. Cereal business resumes commercial activity now that it has got up on inventory. And overhead increased year-on-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-on-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-on-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. 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, and 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. 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 ’21 consolidation of Africa joint ventures, but remain fairly consistent with more recent quarters, and 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. 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% to 8%. 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% to 5%. This is despite sustained high teens cost inflation and our 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%. 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 protecting foreign exchange rates. But because of the dollar's meaningful strengthening lately and the number of investor questions we received regarding its impact, I will mention that if today's exchange rates were to hold, we would absorb a negative impact of 3% to 4% on a 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. Remember that this guidance incorporates incremental upfront cash outlays in 2022, related to the previously announced separation transactions. So 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 of what we've already delivered, and our cash flow and balance sheet are giving us good financial flexibility. And with that, I'll turn it back to Steve to discuss our individual businesses.

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. In our Frozen businesses where we've experienced pronounced supply constraints this year, we return 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 let-up in input cost inflation or bottlenecks and shortages and despite increased reinvestment. So overall, North America continues to perform well and is poised for a strong finish to a strong year. Kellogg’s Europe's results are shown on slide number 21. Ever since the war broke out in Ukraine, we've known that Kellogg’s 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. 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. And 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 quarters, enormous sales and profit growth. In snacks which represent almost half of Kellogg Europe 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 Barrette 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. The fourth quarter faces similar Russia and cost headwind 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 continue 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, Columbia and Mexico. Productivity and revenue growth management actions helped to mitigate the impact of high cost inflation, adverse transactional foreign exchange and supply disruptions, leading the 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 and 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 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. 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 an 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. As you can see, the businesses that represent 80% of our portfolios net sales today, and they will comprise global snacking company after the separations, have continued to show outstanding growth this year. In fact, this portfolios net sales have grown organically at a double digit rate so far this year. For North America Cereal Company, 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 Company, 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. 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 Pop'd 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 $0.5 billion 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, and 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 SpecialK, back to growth, aided by a new campaign and the launch of SpecialK Granola with 30% less sugar. 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 plus business annually, comprised of our distributor business in West Africa and our Kellogg's branded noodles business elsewhere in Africa and the Middle East. And 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. 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 brands overall consumption growth sequentially as shown on this slide. And another driver of this growth has been the launch of the Liege-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. 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, and while this chart focuses on our recovery in the U.S., it has been just as impressive in Canada where we return to share gains in the third quarter. And 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, the seasonal offerings like Halloween Rice Krispies and the perennial favorite Elf on the Shelf to bringing back indulgent license foods like Cinnabon and Little Debbie. We have our Mission Tiger program back in full swing and we're experimenting with an innovative just add water product called Instabowls. 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 in 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. It had already been in elevated growth with new entrants, new technologies and new space in stores, then 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 point of distribution have decreased in stores as many retailers consolidated into the frozen aisle. But 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. 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. So despite near term disruptions, this is a business that remains in good condition with excellent prospects. So 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. 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 are 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. And with that, we'll open up the line for questions. Operator.

[Operator Instructions]. Our first question comes from the line of Cody Ross with UBS. Your line is now open.

Good morning. Thank you for taking my questions. You are outpacing…

Good morning Cody.

Good morning Cody.

Hey! Good morning guys. You outpaced Nielson’s consumption by roughly four points this quarter. How much of your 14% organic growth in North America was related to the cereal inventory replenishment and do you expect to continue to ship above consumption moving forward?

Yes, thanks for the question, Cody. There’s not really any meaningful difference between shipments and consumption. 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 want to 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.

Got you, that’s helpful. And then I just want to 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? And should we look at the third quarter profit margin as the trough for North America? Thank you.

Yeah, I'll start and I can turn it to Amit. But 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. But inflation is running so very hot that you know getting pricing to cover input costs I think is an exceptional achievement and then you've got the bottlenecks and shortages, which are very difficult to price for obviously and to forecast, and so whether or not it's a trough on bottlenecks and shortages remains to be seen. It stopped getting worse, but there's not a meaningful improvement in it. But you know the price mix in North America was strong, the ability to cover costs was strong, the underlying brand performance was exceptionally strong and so the outlook for North America is strong. It's been a terrific year. Amit, do you want to…

Yeah, just a couple of other things Cody. So one was, you know we've seen input costs accelerate through the quarter, and 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, and really the primary driver for that was acceleration of input costs, so 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 and waited. We restored ANP behind cereal as we’ve built back inventory, so you've seen that come through in the quarter as well. And you know we'd expect that in quarter four as well. So you know the SG&A has been kind of back weighted this year.

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

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

Thanks. Good morning. I know there's always a lot of controversy and talk about stranded costs in 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.

Yeah David, I'll start and Amit can add any color. Starting with the stranded costs, we're not prepared to 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 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, so we – and that the plans are moving forward very nicely. So 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. This quarter was a tale of what they were lapping last year. So 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 so they are cycling that. In terms of pricing, the team has been very, very successful in executing revenue growth management in – you know in the most difficult environment in the world. They've done an exceptional job. You know we've got David who runs the business there doing a terrific job. Miranda Prins 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. So 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 elasticity would be in cereal in Europe. In the UK 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.

It'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.

Great! Thanks so much. Steven, 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. So 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. And maybe I'm making too much of this and the focus was simply on just getting product back on the shelves. But what I'm trying to do is think ahead of it from here about you know when this unit is ultimately on its own. Thanks so much.

Yes, 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. But we were confident that we could restore the business and we have been sequentially and now as we look forward, we're looking at even better year-over-year performance, and 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 strongest brands. So some of the things I mentioned you know, you know Tony the Tiger being back, you know lots of good promotional activity being back, the ROIs are 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 only six months ago. So it is about prioritized SKU's, prioritized brand investment, getting the commercial activity back there. Our fourth quarter has got really good innovation coming through that's been well accepted. So 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. And then in Canada, you know even stronger, so terrific job by the team.

Thanks so much.

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

Hi! Good morning. A - Steve Cahillane: Good morning.

Good morning.

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 and can you talk about what you are seeing in the supply chain and where you've seen slower improvement relative to inflation.

Yes, I'll start on supply chain and turn it 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. So 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 and right now that 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 going to get better any time soon or significantly better. So 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 get used to an environment with so many disruptions. And Amit, do you want to talk about inflation?

I think from an inflation standpoint, you know we did see meaningful acceleration during the quarter. So we saw input cost inflation at around the 20’s, into the 20’s, and so I think you know from a full year standpoint and we expect similar levels of inflation in quarter four as well. And 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.

Great! Thanks. And then are you expecting to or do you need to take incremental pricing to offset the inflation that you're seeing in the business, and how should we think about – and how are you thinking about kind of the balance of incremental pricings versus your commentary around increasing elasticities in certain categories?

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, and I think as you saw in our quarter three results, our price mix accelerated during the quarter. So I think you know the teams are doing a terrific job navigating through what is a high cost inflation environment by taking instrumental 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, and I think our expectation is that we will see margin improve and gross profit dollars improve in quarter four as we lapped you know the fire and strike. I think from a full year gross margin standpoint, our previous guidance was around 100 basis points declined. You know we'd expect that to be a bit more than the 100 basis points that we had guided to, but 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.

Thank you.

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

Hi! Good morning. A - Steve Cahillane: Good morning Chris!

Just had a couple of questions for you. The first one, just for you to follow-on a little bit on the questions around Europe just as we're getting a sense of the incremental elasticity in those markets and those other markets as well. Snacks was a little softer in its growth as well. Then I thought, are you seeing that in snacks or was that more of the comp of the prior year? A - Steve Cahillane: I think Chris it was more the comp of the prior year. We're really not seeing elasticities in Europe. 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 sell that volume elsewhere immediately and we're still you know somewhat capacity constrained as the business has been so strong.

It was up over 22 – it was up almost 22% in the year ago quarter Chris.

Right, I know it was a tough comp. Just have you indicated how much the volume drag in Europe there was from Russia, not shipping into Russia? A - Steve Cahillane: Virtually all of Europe's volume declined.

Yep.

Okay, and I just have 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?

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

Okay, thank you for that color. A - Steve Cahillane: You bet.

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

Hi! I think Pamela tried to get at this question, but into 2023, I would expect you'd have continued high levels of inflation to get what you're saying about the acceleration in the 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 what is your cost going higher? A - Steve Cahillane: Yeah, so Rob I would say you definitely should plan on double digit inflation going into next year and I don't think that's going to be unique to Kellogg. In fact, I know it's not going to 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 oil is up over 20%, wheat in double digits, you know diesel nearing 50%. You know price, you know this whole inflation was going to be transitory, was always obviously ridiculous, and so we continue to see strong inflation ingredients in Coleman, in packaging, across the board. So I think as a total country and globe, we need to prepare for the same type of inflation, and this is double digit inflation on top of the inflation we've seen this year. So it's a pretty significant macroeconomic event.

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.’

Yeah, I think you know we've largely been successful right in covering inflation on our input costs and our packaging costs, right, and so I think you know – I think what, from a disruption standpoint, that's probably and 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 probably have not been able to pass on.

Okay, thank you.

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

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 volume this quarter was because of the Russia situation. But 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. A - Amit Banati: So I think in the quarter right, when you were lapping, when you compare the Russia business itself right, we stopped shipments in. So yes, you know all the decline was driven by the Russia, 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 and so I think you know, we've been able to work through that, through the network.

Thank you, and then a quick follow up Amit just on the – 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 ’23. But you did mention that we should expect an incremental headwind in ‘23. So I'm just trying to give a sense for you know how big that headwind might be given that we have obviously limited information about what the stock market and interest rates will be. But are there any rough numbers we can kind of model in, just in comparison to the $38 million other income line we saw this past quarter?

Yeah. So I think you know we'd firstly say, we'd expect a similar amount for quarter four right, so I think 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 where the markets are at the end of the year. What we’ve seen this year is like I said, it's about on two of our plans. They are roughly around 50% of our value, of our pension assets, and you've seen it for about half a year. So you know we'd expect a full year impact next year. We need to re-measure all the plans, but, it really depends on where markets are at the end of the year. So it's hard to forecast and we’ll obviously talk a lot more about that when we are guiding for ‘23 in our February call. And this is not unique to us. I think it's driven by what's happening in interest rates, as well as markets, and it's of course non-operating and non-cash.

Understood. Thank you.

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

Good morning. A - Steve Cahillane: Good morning.

Good morning.

Just wanted to come back to 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 imagine 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 help us unpack some of how you're thinking about that?

Yeah, you know the guidance for the quarter four is roughly in line with the year-to-date rate at double digit levels. So it's – yeah, so it's similar to that. You would see the Russia impact as we saw in quarter three and quarter four as well. So you know as we cycled the stop shipments of Pringles into Russia. And so 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’d see how that plays out. I think also from a lab standpoint, quarter four last year was when we took the most revenue growth management actions last year. So we'd be lapping that. So I think you know there are a couple of factors there, but broadly I'd say that the quarter four guide is in line with the year-to-date rates.

Okay, that's helpful. And just on the developed 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 are trading down to something like private label or exiting the category or what's their response been when you see these elasticities growing?

It hasn't been interestingly trading down, so – and by the way, it's still low levels of price elasticity. So 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. And when you look at private label, there's a lot of variables all around the world, but 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 and where they are growing, they tend to be growing off year ago comparisons, which were challenged, and so that's really what we're seeing. The concern I think overall is just the absolute nature of household budgets and as inflation throughout the economy continues to rage, you know how that affects the absolute dollars available for households. But 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, so. But 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, but we just haven't seen the empirical evidence that private label is making meaningful inroads in any of our categories or geographies.

Okay, thanks so much.

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

Thanks operator. Good morning guys. Just two quick follow-ups.

Hi Bryan!

Yep, hi! So just two quick follow-ups. Amit, as I guess with SG&A spending coming back in the second half, is the ’23 full year SG&A base a reasonably good base to think of for next year or did you end this year still not spending at a normalized level?

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

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

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, so this is really more driven by accounting and like I said, its non-cash, non-operating, and I think the level of funding in the pension plans doesn't change meaningfully.

Okay, great. Thanks guys.

Operator, we might have time for one last question.

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

Yes, thanks. Good morning everyone. The question is just – I know obviously stranded costs or something you're still looking into, but I was curious if you had a view yet or a strategy on what you're going to do on the supply chain side in terms of which business is actually going to 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? And then 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.

If I understand the question, 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, so we'll be working through warehousing and all those types of things. But when you look at the scale of both of our businesses, you know they are pretty scaled businesses, so it's – we're not going to be running half truckloads anywhere. We'll be running full truck loads and it's the work that's being done right now. And yes, there will be TSA agreements between the businesses, mainly the snacks business providing TSA 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 and 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 get a lot of experience at it. So 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.

Excellent! Thank you, Steve.

Operator, we are at the hour here.

Thank you for your questions.

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

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