Kellanova

Good morning. Welcome to the Kellogg Company's first quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. At this time, I will turn the call over to John Renwick, Vice President of Investor Relations and Corporate Planning for Kellogg Company. Mr. Renwick.

Thank you, operator. Good morning and thank you for joining us today for a review of our first quarter results and an update on 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 of particular note during the current COVID-19 pandemic and supply disruptions, when the length and severity of these issues and resultant economic and business impacts 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're pleased to be able to report another good quarter delivering solid results even ahead of plan by sustaining growth momentum across our international businesses and our North America snacks brands, realizing price and productivity amidst decades high inflation and executing with agility. After all, we are navigating through what I think you would all agree continues to be an extremely challenging operating environment. The situation in Ukraine only accelerated cost inflation and exacerbated the global economy's bottlenecks and shortages. It also prompted us to suspend all shipments and investments into Russia and to identify new sources for certain ingredients. Meanwhile, the team has done an excellent job of quickly restoring and ramping up production in our U.S. cereal plants following the fire and strike of last year's second half. Our inventory is gradually building toward normal levels as planned, enabling us to start replenishing retailer inventories earlier than expected in the first quarter. To be able to affirm our full year earnings guidance is a testament to our strategy, our brands, and our people. Our deploy for growth strategy, shown on slide number five, is working. This strategy is still as appropriate and effective as ever, even as occasions shift and the operating environment evolves. We continue to emphasize occasions and build on our world-class brands. We continue to see the benefits of our reshaped portfolio, and through extreme supply challenges, we continue to focus on service and in-store effectiveness. Behind all these growth boosters are capabilities that we have strengthened from data and analytics to e-commerce to revenue growth management to a robust innovation pipeline. You're seeing the benefits of these capabilities in our actions and results. Simply put, the strategy is working. We remain equally focused on better days, our ESG strategy. Actions are louder than words. Slide number six offers some examples of our ESG activities during the first quarter. They reflect continued action on various elements of ESG as we remain committed as ever to our values and doing what is right for the planet and for our communities. Sticking to our strategy and focusing on execution is resulting in sustained top-line momentum, as you can see on slide number seven. We had restored top-line growth in 2019, experienced a pandemic-related acceleration in 2020, and yet sustained a strong growth in 2021 despite what we were lapping. And in quarter one of this year, even with difficult comparisons, we continue to exceed our long-term target of 1% to 3% net sales growth, with organic growth of more than 4%. I'll call out two key elements that are behind this momentum. The first is our reshaped portfolio. Our largest portfolio segment, the developed market snacks, continue to generate strong growth, led by world-class brands like Pringles, Cheez-It, and others. and our emerging markets collectively sustained double-digit growth. Even in the quarter when one of our businesses, North America Cereal, was notably soft, declining 10% year-on-year because of a lack of inventory, this was more than offset by momentum in the rest of our portfolio. The second element is price realization. In an environment in which cost inflation is too high to cover with productivity alone, we have leveraged our enhanced revenue growth management capabilities to realize price effectively. We've been realizing price ever since cost inflation began to accelerate back in the second half of 2020, and we have accelerated as the market-driven cost inflation worsened. The result of all of this strategy, executional focus, and sustained momentum is another quarter of delivering results. and affirm full year outlook and increase cash to share owners as discussed on slide number 8. We grew our net sales faster than we had anticipated and we delivered more operating profit than we had projected. Our earnings per share and cash flow also came in ahead of our plan. This puts us in a good position. It allows us to affirm earnings guidance for the full year as an improved net sales outlook covers the impacts of accelerated cost inflation and supply disruptions, including Russia and Ukraine. It also enables us to increase the cash return to share owners, which we have done both in the form of accelerated share buybacks and an increased dividend. So with that introduction, let me now turn it over to Amit, who will explain our results and outlook in more detail.

Thanks, Steve, and good morning, everyone. As Steve said, we're off to a good start to 2022. We'll start with a brief summary of our quarter one financial results on slide number 10. Our net sales growth came on top of similarly good growth in the year earlier quarter and is tracking ahead of our previous full year guidance. As expected, operating profit declined against last year's double-digit gain, but it should be noted that the year-on-year decline was entirely related to the wraparound impact of the fire and strike we experienced in 2021. Earnings per share also exceeded our expectations, reflecting the better operating profit and with unfavorability in other income offset by some discrete favorable items in our tax rate. Cash flow came in ahead of plan and significantly higher than last year. Slide number 11 lays out the components of our net sales growth in quarter one. Volume was down year on year due to lapping a strong two-year CAGR of nearly 4%. but also due to lacking inventory in certain businesses going into this year, most notably in our North America cereal business. In fact, North America's cereal volume decline represented almost half of our total company's year-on-year volume decline in the quarter. We also saw price elasticity resuming in many markets, just as we have been forecasting, although still running well below historical levels. Price mix grew nearly 10% year-on-year, an acceleration from recent quarters as we continue to work to offset market-driven cost inflation. This price realization is predominantly price as we continue to implement revenue growth management actions in all four regions with a much smaller contribution coming from our mix shift towards snacks. The result was organic basis net sales growth of over 4% year-on-year, another strong quarterly performance that continues to exceed our long-term target. This was better than forecast, principally because of less price elasticity than expected, but also because of sooner-than-anticipated replenishment of trade inventories in North America and Syria, at least some of which could be considered timing-related. Foreign currency translation tripped nearly two percentage points of net sales growth in the quarter, with the U.S. dollar strengthening year-on-year against virtually all of our major currencies. Slide number 12 shows our gross profit in dollars. As anticipated, our gross profit declined year on year, principally because of supply disruption. The good news is that productivity and revenue growth management continued to mostly cover the market-driven cost inflation, despite the latter accelerating again in the quarter. This is what we can manage, and we've done a good job of it. The single largest driver of our gross profit decline was the transitory impact of the fire and strike we experienced in the second half of last year. This impact reflects not only lost sales year-on-year, but significant costs as well. On top of this are the economy-wide bottlenecks and shortages that are expected to persist at least through the first half. These two factors accounted for almost all of our year-on-year decline in gross profit dollars in quarter one and about half of the margin contraction. These are transitory factors and should diminish as the year progresses. The rest of the margin contraction was related to mix. As we've discussed, our only meaningful mix headwind is the shift towards emerging markets and particularly toward our EMEA region and its Nigerian distributor business, Multipro. In quarter one, this mix shift towards EMEA was especially pronounced. As we've often stated, this mix shift does not bother us because our growth in emerging markets and in Multipro are not cannibalizing any of our higher margin developed markets businesses. Which brings us to operating profit on slide number 13. Despite transitory supply disruptions, our operating profit remains on an upward trajectory, owing primarily to higher net sales. With our supply constrained in many of our businesses, most notably in North America's cereal, our advertising and promotion investment was much lower than usual in quarter one. As we discussed last quarter, this A&P investment is expected to be restored gradually across the year in line with our recovering supply. The result of our lower gross profit was a year-on-year decline in operating profit, which was also up against a double-digit growth comparison. Importantly, though, our quarter one operating profit was still higher than that of quarter one 2020 and even quarter one 2019, sustaining an upward trajectory. Turning now to our below-the-line items and slide number 14. Lower debt year-on-year translated into lower interest expense, though the run-up in rates during quarter one will likely create year-on-year increases in the coming quarters. Other income was negatively affected by lower pension income as expected, but also by the impact of a declining bond market on our company-owned life insurance investments. Lower net pension income will continue through the year. Our effective tax rate benefited from a couple of relatively small discrete items in quarter one. Our JV earnings and minority interest collectively improved year on year, reflecting the consolidation of certain Africa JVs at mid-year last year. And average shares outstanding decreased year on year, mainly reflecting the repurchases we made in 2021. We were active on buybacks during the quarter, and this will have an impact on average shares outstanding in quarter two. Let's look at our cash flow and balance sheet on slide number 15. Cash flow came in strongly in quarter one on the strength of higher net earnings, continued management of co-working capital, and some timing of accruals and capital investment. As you can see on the chart, we start the year well ahead of where we typically are in quarter one, aside from the unusual pandemic year of 2020. In addition, our net debt remains lower year on year. Between strong cash flow and a deleveraged balance sheet, we feel good about our financial flexibility. This financial flexibility has given us the ability to increase the cash we return to shareholders. We recently announced another increase in our dividend, and in quarter one, we repurchased some $300 million of our stock. Let's now turn to the rest of the year. Our primary planning assumptions are shown on slide number 16. We expect to deliver sustained momentum on the top line, led by our strong snacking portfolio around the world and geographically by our emerging markets price mix would continue to drive our net sales growth as we try to keep up with rising costs and as we continue to assume some combination of decelerating at home demand growth and resume price elasticity our market driven cost inflation has gotten higher worsened by the war in ukraine and it looks like it will persist longer than originally anticipated. This has been incorporated into our outlook. From a supply disruption standpoint, we are largely past the fire and strike impact, though we will still expect bottlenecks and shortages to persist, at least through the first half, with disruption related to the war in Ukraine more weighted to the second half. Meanwhile, as we mentioned, we do plan to gradually restore overhead and brand building investment across our regions as the year progresses, be it behind capabilities or resumed commercial activity behind supply-constrained brands. Slide number 17 shows how these planning assumptions translate into updated full-year guidance. We are raising our focus for organic basis net sales growth to about 4% growth versus our previous estimate of about 3%. This reflects the momentum in our business and the fact that price makes us likely to come in higher than we previously planned as we seek to cover incremental cost inflation. These higher net sales should offset the incremental pressures of accelerated cost inflation and supply disruption. As a result, we continue to forecast currency neutral adjusted basis growth of 1% to 2% in operating profit. We also continue to forecast currency-neutral adjusted basis growth of 1% to 2% in earnings per share, with a further reduction in other income partially offset by the full-year flow-through of quarter one's discrete tax benefits. From a phasing standpoint, the only new news since last quarter is that we got off to a better-than-expected start in quarter one, but that our second half will now experience more cost inflation and disruption and costs related to supply. Finally, we continue to forecast cash flow of $1.1 to $1.2 billion. This is roughly in line with our reported basis net income growth with no changes to our disciplined approach to restructuring outlays, co-working capital, and capital expenditure. So, in summary, we got off to a good start in quarter one, delivering solid financial results in the face of massive headwinds and even putting us ahead of plan. Our brands continue to perform well, and we have been effective at offsetting market-driven cost inflation with productivity and revenue growth management. Our cash flow generation remains strong, and our balance sheet remains strong. So we feel good about our financial position and the outlook. Let me now turn it back to Steve for a review of our regions.

Thanks, Ahmed. The first thing you'll note about our quarter one is the continuation of broad-based, top-line growth. Slide number 20 shows our organic net sales growth by region in the first quarter, along with the two-year tagger they had to lap. We generated organic basis net sales growth of 8% in Europe, 6% in Latin America, and 17% in EMEA. These are exceptional growth rates. In North America, where last year's fire and strike left us with low cereal inventory and therefore lost sales, our reported and organic net sales were still only down less than 1%. In fact, if you exclude cereal, the rest of our North America business grew by 3% to 4% year-on-year, even against tough comparisons. In a moment, we'll walk you through the key category groups within each region. You'll see the continued exceptional growth of a relatively new growth leg for us, and that's noodles in Africa. You'll see that cereal and frozen foods, the category groups that are the most at home in nature, have therefore seen the most deceleration as consumer mobility has increased. But outside of North America, with its supply disruption from the fire and strike, we do continue to grow in cereal internationally. But you'll also see that in all four regions, our biggest category group, snacks, continued to grow strongly, even against tough two-year comparisons. Slide number 21 offers the world-class snacks brands we've been talking to you about, and they had another quarter of excellent consumption growth. Pringles continues to gain penetration and distribution in key markets around the world, and it continued its strong consumption and net sales growth in the first quarter. Cheez-It, already a powerhouse in the US, is growing rapidly in Canada and is off to a strong start in its launch in Brazil. Pop-Tarts continues to grow in the US, but look at its growth rates in markets like the UK and Mexico as well. Rice Krispies Treats is enjoying explosive growth in several markets outside of the US as we put more focus and support behind that unique brand. Not only are these brands continuing to grow in North America, but this chart can give you a glimpse of their international potential. Aside from Pringles, these brands are in very early days of expansion, which is part of our strategy, and their growth rates speak to their long-term potential. Let's now review each region in turn, starting with North America on slide number 22. North America's net sales declined slightly on an organic basis, owing to the fire and strike-related impact on cereal. Supply constraints, most notably low inventory heading into the quarter for cereal, did pressure volume, but as we'll see in a moment, we did sustain good momentum elsewhere in the portfolio, especially in snacks. Price mix grew more than 7% year-on-year as we continued to implement revenue growth management actions. Operating profit declined year-on-year, not only because of lapping a mid-single-digit two-year TAGR, but also because of the bottlenecks and shortages that persist in the economy and the wraparound impacts from the fire and strike we experienced in the second half of 2021. Our snacks business in North America posted organic net sales growth of 5% in the quarter. As you can see on slide number 23, this sales growth lagged consumption, which remained quite strong. Pringles generated consumption growth of more than 8% year-on-year, lapping last year's double-digit gain. this brand is in very good shape. We saw strong growth in our core four flavors in standard cans, propelled by effective brand building, including our Super Bowl execution, and we saw continued rapid growth in multi-packs. And in a sign of resuming consumer mobility, we are seeing a rebound in immediate consumption offerings as well. Cheez-It also sustained its strong momentum, growing consumption in the double digits with the new Puff platform proving to be incremental to both the SNAP platform and the core cracker line. But we didn't just gain share in crackers because of Cheez-It, we also outpaced the category with the club and townhouse brands. Pop-Tarts grew consumption in the double digits, and so did Rice Krispies treats, with both brands sustaining excellent momentum through the strength of effective marketing programs and incremental innovation. And while we're at it, Nutri-Grain also grew consumption in the double digits and RX continues to re-accelerate its growth as consumers go back on the move. So our North America snacks business remains very strong. Let's turn now to North America cereal and slide number 24. Recall that 2022 is all about recovering from last year's fire and strike. As you know, we entered the quarter with very low finished goods inventory, which obviously hampered our net sales and consumption year on year. The good news is that our first order of business in quarter one was restoring production in the four affected plants, which our team achieved and ahead of schedule. With demand holding up well and retailers anxious to restore their inventories, we were able to ship out more product in the first quarter than we had anticipated. This certainly will help us improve consumption going forward. Slide number 25 offers a good way to gauge our progress on restoring supply. It measures our share against our total distribution points. You can see the sharp decline in last year's fourth quarter as retailers ran through their inventory and we were unable to replenish it. As we ramped up production during the first quarter, you can see product returning to the shelves in the form of recovering TDPs and therefore share. This reflects our improving supply and is a testament to the strength of our brands and relationships with our retail partners. This sequential improvement is what we expect to continue to realize as we get through the first half. In fact, this positive trend has continued quite clearly in April. This will put us right on track to gradually restore commercial plans, brand by brand, toward full recovery in the second half. Our frozen businesses in North America are depicted on slide number 26. Ego consumption growth remains strong with mid-single-digit growth on top of a mid-single-digit two-year CAGR. This is good performance given that we've been capacity constrained, especially on pancakes. The even better news is that we have incremental ego capacity coming online in the second quarter. In our plant-based business, Morning Star Farms' consumption was down against the mid-teens two-year CAGR comparison, and the category has paused on distribution gains and household penetration gains after surging the past couple of years. We've seen some share losses competitors have entered and expanded offerings in our segments, and in many cases competing intensely on price. So in total, North America got off to a good start in the first quarter with progress on supply recovery in cereal and in-market momentum elsewhere in the portfolio. Closing out North America, slide number 27 highlights some of the exciting innovations and commercial programs we have going into the marketplace. To remind you that even though we're in an unusual supply environment, we continue to delight consumers. On the innovation front, Cheez-It Puffed is off to an even faster start than Snapped, the platform we launched a couple of years ago. Club Crisps is also new to the market, providing a light and fresh snack that's built on the strength of our Club Crackers line. For Pop-Tarts, we've launched new flavors like Snickerdoodle, expanded on a simple ingredient line called Pop-Tart Simply, and brought back a fan favorite, Brusted Grape. And in Frozen, be on the lookout for Eggo's new Liege-style waffle for on-the-go consumption and some exciting new varieties of Morningstar Farms, including a delicious pancake wrap sausage on a stick. From a marketing standpoint, Mission Tiger is roaring back, helping kids gain better access to youth sports. These are just a few examples of why we are so confident that we can sustain our snacks momentum, recover cereal, and re-accelerate Frozen. Now let's discuss Europe, shown on slide number 28. Europe had another outstanding quarter, growing net sales 8% and operating profit by 28%, even as it lapsed strong year-ago growth for both metrics. While volume was down against the tough comparisons, Europe's RGM efforts continued to generate price mix growth, and productivity also helped to cover costs, enabling increased A&P investment. On slide number 29, you can see that we experienced organic net sales growth in both snacks and cereal in the first quarter, despite what were very tough comparisons on a two-year basis. In snacks, the growth is underpinned by fantastic momentum in consumption for Pringles, which gained share in markets like Germany, Italy, and Spain, and lagged the category's double-digit growth in the UK only because of tougher comparisons. We should also point out that in portable, wholesome snacks, where categories are rebounding on a return to consumer mobility, our efforts to revitalize brands like Rice Krispies Squares and Pop-Tarts are starting to pay off, with share gains in markets like the UK and Italy. In cereal, consumption is moderating across the region as consumer mobility and price elasticity resumes. While we have gained share in the UK and Germany, we have ceded share in other markets, in part because of lapping Tupper comparisons. Nevertheless, Some key supported brands continue to do well, as shown on this slide. A quick word about the situation in Ukraine. Russia and Ukraine represent less than 1.5% of our total company net sales and less than 10% of our sales in Europe. We have suspended shipments and investments into Russia, which will have a direct impact on our sales and profit in Europe this year. This is incorporated into our updated guidance. Overall, though, Kellogg Europe is off to a very good start to 2022, and we feel good about the business. Now let's discuss Latin America, turning to slide number 30. Latin America, too, faced notably impressive comparisons, particularly on a two-year CAGR basis and especially on operating profit. But this business got off to a good start with year-on-year net sales growth driven by price mix growth and operating profit that declined less than we had expected. Slide number 31 shows that our Latin American net sales growth was led by snacks. Here, too, Pringles is showing impressive momentum, outpacing the category's double-digit growth in Mexico and Brazil. In portable wholesome snacks, our consumption has rebounded faster than the category in our principal markets of Mexico and Puerto Rico. And cereal category consumption growth remains robust across the region, and we outpaced the category in key markets. However, tough comparisons and regulatory hurdles in Mexico negatively impacted our serial net sales in the quarter. Nonetheless, our Latin America business continues to perform well. Let's finish our business review with EMEA on slide number 32. Quarter one featured another exceptional performance by our fastest growing region. Despite lapping a strong two-year category for volume, EMEA continued to leverage RGM for exceptional price realization across the region, which helped it offset the margin impact of high costs. The result was double-digit growth in both net sales and operating profit versus the prior year. Slide number 33 shows how EMEA's net sales growth was generated across all three of our product category groups in the region. Noodles was once again the largest contributor to the growth reflecting exceptional growth by multi-pro in West Africa and our continued expansion of the Kellogg's Noodles brand in markets like Egypt and South Africa. Our strong snacks growth was led by Pringles, which sustained goods consumption growth even as it entered the quarter with low inventories coming out of last year's COVID-related production restrictions. In portable wholesome snacks, our double-digit growth was strong enough to gain share in Australia and in the rest of the region. In cereal, the overall region's category has decelerated to modest growth, but we have gained share led by Australia, Korea, and South Africa. So to close out our prepared remarks, let me briefly summarize with slide number 35. We're off to a very good start to the year. We remain right on strategy, as ever focused on dependable, balanced financial delivery. We are navigating well through unprecedented cost and supply challenges, and through it all, we have sustained top line momentum both in net sales and consumption growth. This reflects the strength of our reshaped portfolio, particularly our international markets and our North America snacks and frozen businesses. It also reflects what we have done on revenue growth management in order to help cover rising costs. Put it all together and we come out of quarter one ahead of plan, which is an important benefit as we look ahead to continued uncertain market conditions. We are affirming our guidance for the year, and we are increasing the cash we return to share owners. As always, I can't thank enough the talented, resourceful, and persevering Kellogg employees who have made this performance and our bright prospects possible. And with that, we'll open up the line for questions.

Thank you. If you would like to ask a question, please press star followed by 1 on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is from Chris Grohe from Stifle. Chris, your line is open.

Hi, good morning. Good morning, Chris. I just had a question. Hi, good morning. I had a question for you, if I could. Steve, you had mentioned about being able to rebuild inventory a little faster, and I guess I want to ask first, is that a U.S. comment, I presume it is, versus a global comment? I think it's an area where you've had a little more of a shortage. And then, just to get a sense of where you are in the recovery, you showed a chart with TPDs and kind of rebuilding distribution in cereal, but is it Q2 when that kind of starts to make a further push up. I just want to get a sense of where you are in that process.

Yeah, thanks Chris. It is a U.S. comment. I mean, inventories are down really across the globe, generally speaking, because of supply shortages, bottlenecks, and the like. But the big issue for us is in the U.S., and predominantly in cereal because of the fire and strike. And so we're ahead of where we plan to be, so that's great. I give a real tip of the cap to our four cereal plants that, you know, came back to work, came back motivated, and are, you know, building inventory ahead of plan. And we appreciate that and those efforts and the leadership and the plants and the plant workers. The second quarter, you'll see accelerated commercial activity, and really in the back half of the year is when we plan to be resuming full commercial activity against our cereal portfolio. So that's why we're encouraging looking at the sequential improvement. If you look at year-over-year performance and share in U.S. cereal, clearly still down, but that's based on low inventories and lack of commercial activity. But when you look at the sequential performance of the business, our goal is each and every week to continue to build our TDPs and each and every week to continue to accelerate our share momentum and get back to where we belong because the brands are still incredibly strong. The relationships with retailers continues to be very, very strong, and we're working together to get this business back to where it belongs.

Okay, thank you. And I had just a quick question for Amit on inflation.

it can you give the rate of inflation if you did i missed it i'm sorry for the first quarter and then how that fares versus the remainder of the year and then to what degree you may be hedged on those input costs yeah so you know on inflation i think you know we talked uh in our last call as well that we entered the year with an outlook of double digit uh inflation i think you know through the quarter we saw that inflation accelerate and i think you know when i look at the rest of the year what's incorporated in our guidance is uh continued double digit inflation, it's not stopped by two to three points. So that's kind of what's been incorporated in our guidance. I think, you know, in hedge levels, we're almost at around 80% level of hedging. So that's where we sit. But, you know, it's important to note that this is just for traded commodities, which is about, you know, a quarter of all our costs. Okay. Thank you so much for your call there.

I'm sorry.

Yeah, the only other thing I'd add is that, you know, our outlook now for inflation goes into the second half. And so, you know, it's not moderating at the level that we thought it would.

Okay. Thank you.

Our next question is from Jason English from Goldman Sachs. Jason, your line is open.

Hey, folks. Thanks for stopping me in. Goodness, I really got lots of questions left. So first, Amit or Steve, I forget who had said it, but I heard comments of price elasticity returning in some markets. Can you elaborate which markets where you've seen heightened or return to more normalized type price sensitivity from consumers?

Yeah, Jason, so I'll start and Amit can add. We're seeing clearly elasticities still well below normal levels. So I think that's the important thing to note. But we are seeing, when you look at two-year CAGRs, we're starting to see the return of elasticities, which is not surprising given the level of pricing that's in the market. You're seeing it more in some of the at-home meal occasions. So cereal and frozen, we're seeing a little bit more. Snacking, less so. And we're incorporating that into our guidance. So we're planning on elasticities. growing as pricing continues to be very elevated, but still below what you would normally see prior to all these disruptions.

The only other thing I'd add, Jason, is that the elasticity was better than what we had expected, and that's kind of one of the factors that drove the outperformance versus our plan in quarter one. So, you know, so far it's been better than what we had expected.

Yeah, got it. It's pretty consistent what we're hearing industry-wide. One more slightly more nuanced question. As I think you know, we've got these gross margin bridges where we try to tie a gross margin every quarter. And for a very long time, there's been leakage there. It's either due to inefficiencies like your single-serve pack initiative. It's due to mix like the African business may be outpacing everything else. This is one of the few quarters where On our math, there really is no leakage. You're kind of back to whole. I can plug in the math and the math works. I don't need to take out another 100 or 200 basis points. And I guess my question is, are you aware of why? Like, why make the flow through be a little more cleaner? And are we at a point where we may not be facing the same degree of maybe mixed degradation or leakage going forward?

Yeah, I think, you know, Jason, if you look at our quarter, right, quarter one, our gross margins were down, 280 basis points I think you know the biggest driver of that was the impact was the wraparound impact of the fire and strike so you know that I would say would be almost half of the of the gross margin decline in the quarter you know we continue to see bottlenecks and shortages so that continues to impact the gross margin you know our assumption is that will continue through the first half of this year and then start moderating in the second half. So I think, you know, that was the single biggest impact in the quarter. From a mix standpoint, again, you know, the mix, we did see a mix impact just given the level of growth in EMEA, which grew 17% in the quarter. So that mix shift, I would say that mix shift would continue as EMEA continues to grow faster. But, you know, it was more pronounced in quarter one. And I think when you kind of look at the outlook for the year, what's in our guidance is an improving trend. I would expect gross margins to continue to decline in the coming quarters before bouncing back in quarter four when we lapped last year's fire and strike. But definitely an improving trend because the impact of the fire and strike is now behind us. And I think when you kind of look at the outlook for gross margin for the full year, I'd say sitting here today, we'd probably say that it would be down around a percent. Really helpful. Thank you. I'll pass it on.

The next call question is from Cody Ross from UBS. Cody, your line is open.

Hey, good morning, folks. Thanks for taking our question. In the press release, we needed higher price metrics. Okay, there. In the press release, you noted higher price mix as a reason for the higher organic sales outlook for the year. Does that mean you're taking another round of price? And if so, which parts of your portfolio is that in? What's the magnitude, and when will that be effective?

Yeah, Cody, thanks for the question. So, you know, we don't comment on prospective pricing, but I think when you look at what we've done, it's a good indication of what we'll, you know, plan for in the future. So we have, you know, in terms of our revenue, our net sales growth, it's virtually all price mix, right? And that's due to obviously the incredible input cost inflation that we're seeing and the fact that productivity just simply can't cover this type of inflationary environment. We see that continuing, and so as we look forward, we're going to continue to look at productivity as the first line of defense, but we're going to be in a situation where it's not going to be enough, and we'll look at our whole revenue growth management toolkit in order to protect and preserve our margins going forward. And that's around the world, so that's not just a United States phenomenon.

Got it. And then you noted you were able to start replenishing retailer inventory levels in the U.S. cereal earlier than expected. However, your volume came in worse than we anticipated. Did it come in line with your expectations? And how much do you think inventory replenishment benefited North America?

I wouldn't say it benefited North America. I mean, the entire decline was in our tech only. And like we said in the prepared remarks, if you were to remove U.S. cereal, the North American business was actually up 3% to 4%. And so it was slightly better than we anticipated, but we anticipated it being significantly down. But we're pleased that the inventory levels are starting to replenish, and we look at the back half of the year as really being when the Artec business starts to get back on track. But if you look at the snacks business, for example, shipments actually lag consumption in that category.

Great. Thanks. I'll pass it on.

Our next question is from Robert Moscow from Credit Suisse. Robert, your line is open. Thank you.

Can I ask you to drill down a little bit more into Europe? With profits up, I think it was 28%, it just seemed a little inconsistent with the commentary about Russia and Ukraine being a headwind

and volumes being down so so why was it so good and um is it possible that the lower spending in russia is actually helping more than hurting no rob i'd say a couple things first the russia ukraine impact will be a second half impact right so we didn't we didn't feel that effect in the first quarter but we will feel that going forward and that's why we incorporated that into our outlook And the real story, to be honest with you, in the European business is this is four years on the trot that this business has been performing very, very well. It was a bit of an outsized performance, but they grew in snacks. They stabilized cereal. They grew in wholesome snacks. And when I say they grew in snacks, I mean Pringle's consumption growth has been exceptional behind gaming messaging, soccer events, incremental innovations like Rice Fusion and Sizzlin'. And, you know, the team performed extremely well when it comes to revenue growth management as well. And spending was in line with what we anticipated. So it was just an excellent quarter driven by very, very good top-line performance that flowed through to the bottom line. And, like I said, this is four years now where our European business has been performing well. And I tell the team when I visit there that there's not too many businesses like ours that talk about Europe as a growth driver to their company. But it is for us, and we're, you know, very proud of the team's performance there.

And maybe I can have a follow-up for Amit. SG&A, from a corporate standpoint, was down $50 million year-over-year in the quarter. How do you think it's going to kind of lay out for the rest of the year? Is it still down in 2Q and then ramp up in the back half when U.S. cereal spending goes higher? And then also, I think you gave guidance for 2% to 3% FX headwind for the year last quarter. What is it now?

Yeah. All right, so I'll start with SG&A. I think, you know, it was planned. Quarter one was planned. We knew that we were low on inventory in U.S. cereal, and so I think, you know, we'd adjusted our spending appropriately, and so that's kind of what's played through. I think, you know, as I mentioned, as the year goes through, we will restore our levels of advertising and commercial activity once supply picks up. So, you know, that's very much, you know, the plan, and I think From a full year standpoint, I'd say flattish SG&A is kind of our outlook, excluding currency. So that's the SG&A plan for the year. I think in terms of currency, based on where currencies are today, we'd probably be in that same 2% to 3% range. I think we saw about a 2% impact in quarter one, but 2% to 3% is kind of the outlook. Got it. Thank you.

Our next question is from Michael Lavery from Piper Sandler. Michael, your line is open.

Good morning. Thank you. Good morning. I just want to come back to Europe, following up a little bit on Rob's question. Anybody who just was on the Hain call might be panicking over the European consumer. And that was a little bit more focused on the UK. Your business, I think, may be spread out a little bit more, but you touched on how well it's doing there. We clearly see that in the numbers. Can you just maybe give us a sense of how much that's a category difference? You're gaining some shares, so clearly it's a brand difference. But maybe also just is there a watch out that it might be slowing down just broadly? You know, they've been talking about the total grocery store sales being down you know mid-high single digit percent in the UK you're up 12 percent there how do we think about what's ahead can you keep this going or is there some some slowdown we should be expecting how do you think about the rest of the year

Well, the biggest impact of the rest of the year is, as we said, the Russia Ukraine situation and the fact that, you know, we're not shipping into Russia. We have a Pringles business there that we discontinued and we're not shipping anything into Russia. But in terms of the consumer and the outlook, what I would tell you is the Artec category, we have seen it decelerating, but the salting remains extremely strong. Our portable wholesome snacks business is really coming back as the consumer is coming back. So when we look at our categories, what you saw in the first quarter was exactly that. The Artec slowing down, kind of flattish and salty being very strong, and wholesome snacks being very strong. And inside those categories, with our brands performing very well, highly differentiated, great innovations coming to market, we anticipate that continuing. And as I said to Rob, it's four years now that this business has reliably delivered on the top line and the bottom line. Clearly, it's a more challenging environment now. We're seeing inflation in continental Europe. You haven't seen that in a long time. What was typically a deflationary environment has shifted. So clearly, that'll have pressure on the consumer. But what we're seeing right now is, you know, obviously that's pervasive everywhere. And so it's not just at the grocery store, just like in, you know, all parts of the country. It's wide ranging. And the fact that we are in the types of business that we're in is a good place to be in an environment like this. And when you have strong brands inside of that, it's an even better place to be. So we're very confident in the European performance continuing to be strong.

Okay, that's helpful. And I just want to follow up on Morningstar. You touched on a little bit there with some pausing household penetration and distribution gains and some price competition, but how much is that decline, would you say, more driven by the consumer versus competition? Is there sort of a plateau in consumer interest? Is it really just more some of the competitive intensity? And Maybe one clarification, too, with that Morningstar bar chart, it's under North America frozen. Is it just a simplicity, a bit of a language where that also includes the refrigerated incognito, or is that strictly speaking just the frozen piece of that brand?

No, I'll start there. That includes the incognito, which is a small portion of the total Morningstar farms. In the broader question around what's happening in the category, I'd say, in effect, you can think about the pandemic having pulled forward trial penetration and buy rates. And you saw that in the first year because there was so much at-home consumption across the grocery store, and this was a new hot category. I think it jumped forward two years. You also saw irrational exuberance in the category and the entrant of many, many new players, which took a lot of shelf space, took a lot of trial, not always the highest quality offerings, to be honest with you. And we've seen this in many categories in the past that take off. They have a shakeout period. And I think what you're seeing now is a bit of that hangover from the pull forward of all those various components. Morningstar Farms, that's why we're looking at the two-year CAGR. It's still the original since 1975. Very, very strong consumer base. When we look at our brand equity scores, we know that it's still performing very, very well. And so we're bullish on the category and the brand. But I think what we're seeing is, again, just the pull forward from the pandemic and having to lap that rather exceptional year.

Okay, great. Thanks so much.

Our next question is from Pamela Kaufman of Morgan Stanley. Pamela, your line is open.

Thanks. Good morning. I have a follow-up question to Rob's question on SG&A. I just wanted to see if you could give details on how much brand building was down in Q1, and was this just in serial or other aspects of the portfolio? And then how should we think about your brand building investments increasing in the second half as cereal comes back to fuller inventory levels?

Yeah, I think it was predominantly North America cereal. And it was planned. And I think we knew that going into the year. We knew that going into the quarter. And I think the good news is production is ahead of plan. We are ramping up inventory. And so we'll be restoring commercial activity faster than planned. And I think, you know, the spending will follow that. And I think, as I mentioned earlier, from a full year standpoint, you know, our outlook is, you know, call it flattish without currency on a currency neutral basis. So that's on SG&A. So that's kind of, you know, the shape of how the spend will be through the course of the year.

Great. And it seems like you are making good progress on rebuilding cereal inventory, and it's coming in ahead of plan. When do you expect to see a recovery in North America cereal market share? And how do you think about balancing pricing growth in cereal with restoring market share and regaining TDPs?

Yeah, so Pamela, what I'd say is, as I said in the prepared remarks, we're looking at sequential recovery, right? And we're not going to forecast market share when we're going to be at a certain point, but we're bound and determined to continue week after week, month after month, to continue to build our TDPs, build our shelf presence, build our commercial activity, which includes displays and merchandising, so that we exit the year with great momentum, close to where perhaps we were before all this occurred. And so that's essentially the way we're thinking about it. The second half has the return to commercial activity that looks much more similar to pre-strike. And so that's how we're thinking about it. We're pleased about the progress to date, but we remain very aggressive in terms of making sure that we continue the progress that we've seen so far.

Thank you.

Our next question is from Ken Goldman of JP Morgan. Ken, your line is open.

Hey, thanks. You know, I think there was some concern among investors, I guess including me, that your Africa business might have trouble later this year maybe procuring all the wheat it needs, just given that, you know, Africa in general buys a lot from Eastern Europe. So, you know, I think you've relayed a lot of those concerns today, which is great to hear, but I think there's still a desire to hear maybe a bit more about where your business in Africa, your noodle business in particular, right, procures most of its wheat, how locked in it is, and if there is any risk you see of just not being able to get product, you know, beyond just the inflationary factor.

Yeah, Ken, so, you know, obviously we're very pleased with the African performance in general, multi-pro in particular. you're seeing their ability to take price is exceptional to cover rising input costs, currency, and so forth. And we've mentioned many times, you know, they've got, you know, four decades of experience on the African continent, and their agility and ability to overcome obstacles continues to be very, very impressive. And the moat that we've built around that country in terms of, you know, our route to market with MultiPro continues to be impressive. You know, they're adding suppliers. They're adding points of distribution on a regular basis to continue to build that business. Now, on the procurement front, there's clearly a lot of wheat that comes from Russia and Ukraine, and they've pivoted all around the world to get supplies to replace that. And they've done that very effectively. and that's really across the world. And so they've got line of sight to good production. They've got line of sight to meet our noodles forecasts for the remainder of the year and even into next year. And so I think it's down to execution, it's down to planning, and it's down to just the experience that they bring to bear in virtually everything that they do. Ahmed, I don't know if you want to add anything.

That's helpful, Steve. Thank you.

Our next question is from David Palmer of Evercore. David, your line is open.

Just one more follow-up question on the amazing quarter you guys are having in Europe and, you know, the snacks. Just judging from one of your slides, it looks like you had mid-teens organic growth there, which was very impressive. You had, I think it was 10 points of price there, which is also impressive. It's typically a market where it takes a while to get pricing in place. So You know, there's some things that are just impressive versus the peers out there, but I'm wondering if there's other insights about maybe this being more of a mobility play on your snacks business there than what we would typically see from your snacks business here in the U.S., you know, where a lot of the snacks were had more at home or at least some of the marketing was more around mobility and why that should be sustaining from here and any sort of like timing benefits that might have happened for the first quarter.

Yeah, David, so there's really no timing benefits in the first quarter. As I said, it's just a very, very good quarter that Europe delivered. Part of the mobility, return to mobility, definitely benefits our portable wholesale snacks. So that's kind of a new third leg that is performing now very well. Pringles, you know, one of the magic of Pringles is it's a very differentiated brand. It's innovation based. performance in Europe has been very strong, and its brand messaging and communication has been very strong. And that's allowed it to do a couple of things over the course of the last, you know, call it 18 to 24 months, and that's break some, you know, magic price points that had existed in the marketplace for some time. And so there's no ceiling on, there's no artificial ceiling on Pringles in terms of, call it a, you know, a one pound 99 in Europe. You know, it's burst through that. And once you do that and prove to retailers and consumers that the brand is worth that you know you start to see some you know some continuing benefits and so I'd say breaking magic price points because of the investments in innovation and brand marketing the return of wholesome snacks the stabilization of cereal it's just it's been a solidly delivered plan by Europe and that's why we have confidence you know X the Ukraine Russia terrible situation that the underlying momentum continues

That was outstanding. And I guess one follow-up to, I think it was Pamela's question about, you know, the rebuilding of market share and points of distribution for cereal. I mean, do you see any barriers or maybe if there's a friction point or two you'd call out that you have to address in getting back to those pre-strike, pre-fire levels of, you know, 28%, 29% market share, for example? what would you call out there that you're trying to perhaps overcome as you're getting back to those levels? Thanks.

Yeah, so first I'd start with saying we are not at all complacent about this, and we're not at all underestimating the challenge of rebuilding our business. But we do know a couple of things. The brands are very, very strong. So if you look at the brands that have returned to You know, I wouldn't even say yet adequate levels of inventory, but better levels of inventory like Fruit Loops and Frosted Flakes, you know, performing well, getting their shares back. And then brands like, you know, some other brands, Rice Krispies is one where obviously was very impacted by the fire. Not yet there because the inventories aren't close to where we need them to be. And so we do know that the brands remain very strong. These are iconic brands. love. They're important to our retail partners. And again, we don't take that for granted. But as we rebuild inventory and we put commercial activity behind these beloved brands and we get our TVPs back, then we're very confident that we'll continue to improve the business and get it back to where it belongs. But again, we don't take that for granted. We've got work to do. But we know what that work is. We know how to do it. And we're doing it.

Thank you.

Operator, I think we have time for one more.

Okay. Our final question is from Alexia Howard from Bernstein. Alexia, your line is open.

Thank you very much for the question, and good morning, everyone. Good morning. Could I just ask about the input cost inflation? You said double-digit for the year and that it increased 2 to 3 percent since last quarter. Are we talking about, you know, team level, high teams, low teams, low double digits, just to give us an idea of where you sit versus everybody else? And given the length of the hedges, I know you can't give us exact numbers, but would we be directionally correct in thinking that the step up in grain and oil inflation that happened as a result of Russia and Ukraine is really not likely to hit you until very late in 2022 and looking out into 2023? Thank you, and I have a follow-up.

Alexey, I think, you know, if you were to kind of look at specifics, it was in the teens when we started. It was probably in the mid-teens. It's moved up, you know, two or three points from there. So that's kind of, you know, the level of inflation that we're looking at. And I think in terms of the hedges, again, you know, it obviously covers a lot of commodities. And like I said, you know, at an overall level, we're at around 80%. You know, we have a rolling program. And so I think, you know, we keep adding on a rolling basis. So, you know, has some of the Russia, Ukraine, is it already in? Some of it is in. But, you know, it will continue to bleed through, right, as we continue to add hedges through the program. You know, we have visibility into what our 23, you know, outlook is. And so I think, you know, that's all going in, you know, to the planning as we look at our revenue growth management plans, you know, ahead of us.

Great. Thank you. And just as a follow-up, I'm curious about the U.K. as a follow-up to Michael Lavery's question. How big is the U.K. to you guys at this point? And should we be worried about the change in regulations about labeling and product positioning in stores for products that contain a fair amount of sugar? I know that there's legal action with the U.K. government going on at the moment. I'm just curious about how you see that impacting your business later in the year. Thank you, and I'll pass it on.

Yeah, Alexia, so it's about 5% of our business, and the HFSS, high-fat sodium sugar content, is what you're referring to. And we have, you know, we're building plans to overcome, you know, merchandising restrictions and so forth for all of the brands that are affected. So we're very confident we'll be able to do that. We don't see any impact for the remainder of this year. And we remain constructively engaged despite, you know, Despite the legal activity, we remain constructively engaged and hopeful that we'll be able to work something out with the UK government. But it's all incorporated in the guidance.

Great. Thank you very much.

Okay, operator, we are at 1030. Thank you, everybody, for your interest. And if you do have follow-up calls, please do not hesitate to call us.

That concludes our conference call. Thank you for your participation. You may now disconnect your line.