Q1 2024 Earnings Summary
- Improving volume performance and market share in North America: The company is experiencing better volume performance, driven by a return to full merchandising activity, reinvestments in brands, and share improvements in the marketplace. This gives them confidence for continued growth in the back half of the year.
- Successful international expansion of key brands: Kellogg is excited about the international prospects for Cheez-It, with launches in Canada, Mexico, Brazil, and plans for a European launch, particularly in the U.K., in 2024. Initial research on product and positioning is very strong, indicating significant growth potential.
- Strong balance sheet enabling strategic investments: With decreasing net debt and leverage ratios, the company has the capacity to pursue M&A opportunities that create shareholder value. They are also investing in high-ROI organic growth initiatives, such as expanding Pringles capacity by building two new factories in Latin America and Asia.
- Currency devaluation in Nigeria is worse than expected, negatively impacting sales growth and profitability in that region.
- Volume declines in North America remain a headwind, and profit growth in Q1 included one-time benefits that may not repeat in future quarters.
- Private label brands are gaining share in key categories like crackers and potato chips, potentially eroding Kellogg's market share.
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Consumer Outlook and Volume Trends
Q: Where will volume growth come from amid consumer pressure?
A: Despite a pressured consumer, we believe volume potential remains real as caloric consumption hasn't materially decreased. By investing in our brands and full commercial activation, we're confident in capturing volume as consumers adjust to new price points and behaviors normalize. -
Margin Improvement and Expectations
Q: How will volume leverage and pricing impact margins?
A: Improved supply chain performance and volume leverage will contribute to gross margin expansion above 35% this year, though not at Q1's rate. While price/mix moderates, operational efficiencies and better volume trends support margin growth. -
Supply Chain Performance
Q: How is supply chain performance affecting results?
A: Our supply chain is performing at pre-pandemic high levels, improving service and enabling us to return to full merchandising activities, which boosts confidence in volume recovery. -
Capital Allocation and M&A Outlook
Q: Are you pursuing M&A given low leverage?
A: With a strong balance sheet and decreasing net debt, we have capacity for acquisitions that create shareholder value. We're focused on snacks and open to opportunities both domestically and internationally, while also investing organically in brands like Pop-Tarts and expanding Pringles capacity. -
TSA Impact on Earnings
Q: What's the effect of TSA revenue on earnings?
A: TSA reimbursement was around $45 million, benefiting EBIT, with about $35 million impacting gross profit. This will start decreasing in Q2 as we transition distribution centers, and will anniversary by Q4. -
Guidance and Outlook
Q: Given strong Q1, why no guidance raise?
A: It's only the first quarter, so uncertainties remain. However, strong results allow us to reinvest more in areas like route-to-market, digital transformation, and brand building, setting up for exceptional performance without altering guidance yet. -
Volume and Pricing Balance
Q: Is volume improving at expense of pricing?
A: We're seeing better volume performance as we return to full merchandising and consumers adapt to price points. We expect a better balance between volume and pricing, leading to gradual recovery and share improvements without significant price concessions. -
Cheez-It International Expansion
Q: What's the plan for Cheez-It overseas growth?
A: We're excited about Cheez-It's prospects internationally, with launches in Canada, Mexico, and Brazil, and upcoming in the U.K. this year. We're building a market-by-market playbook to ensure successful expansion into 2025 and beyond. -
Private Label Competition
Q: How is private label impacting your categories?
A: We don't see meaningful moves in private label within our categories. While there may be some movement in portable wholesome snacks, overall there's not much impact when analyzing the full data. -
SNAP Benefits Impact
Q: Will lapping SNAP reductions aid performance?
A: Yes, lapping the worst of SNAP benefit reductions and other pressures on lower-income consumers should lead to improving trends in the back half, aiding volume recovery.