Q2 2024 Earnings Summary
- Improving volume growth across regions, with North America and Latin America returning to positive volume growth in the second quarter. The company expects this trend to continue, driven by innovation launches and increased brand investment.
- Strong performance in emerging markets, particularly in Mexico, where the company achieved record cereal shares and Pringles is performing extremely well despite being capacity constrained. Local sourcing in Mexico next year is expected to alleviate capacity constraints and drive further growth.
- Rational pricing environment enabling focus on innovation and brand building. The company reports that promotional investments are starting to yield better returns, and expects a good balance between price, mix, and volume in the second half. This strategic focus is anticipated to drive growth and margin expansion.
- Heightened price sensitivity among consumers, especially households under $100,000 income with kids, is leading to consumers exiting categories when price points exceed certain levels, potentially impacting sales .
- Competitors are increasing their investments and promotional activities in the back half of the year, which may pressure Kellanova's returns on investments and market share .
- Retailers are increasingly aware of vendors' gross margin growth amid constrained volumes, which could lead to pressure on Kellanova to lower prices or increase promotions, potentially impacting profitability .
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Volume performance improvements across regions | Q1: Improving volumes in NA, Europe, LATAM, EMEA <br> Q4: Notable gains in EMEA noodles, cautious in NA, modest declines in Europe | Sequential improvements in most regions; NA turned positive, LATAM returned to growth, Europe moderating declines, Nigeria remains a drag | Continued recovery with Nigeria an outlier. |
Strong performance in emerging markets | Q1: Cited strong emerging markets growth and Pringles capacity investments <br> Q4: High growth in EMEA (22%) and LATAM (8%) | Emphasized growth in LATAM (MX, Brazil) and EMEA ex-Nigeria; Pringles doing well despite capacity constraints | Key driver of long-term growth, stable momentum. |
Brand building and promotional investments | Q1: Increased brand investments (e.g., Pop-Tarts tie-in), fueled by margin recovery <br> Q4: Front-loaded investments, returning to stronger innovation and merchandising | Double-digit increase in H1 brand-building; improving promotional effectiveness, returning to normal levels post-pandemic | Remains a focus, spending more in H1 to drive volumes. |
Innovation pipeline (Pringles Harvest Blends, Cheez-It Crunchy, Pop-Tarts Crunchy Poppers, Rice Krispies Treats with peanut butter) | Q1: No mention of these. <br> Q4: Highlighted them as part of the 2024 pipeline. | No mention of these specific items. | Mentioned only in Q4; no further discussion observed. |
Expansion of Cheez-It brand internationally (Europe, Canada, Mexico, Brazil) | Q1: Cheez-It in Canada, Mexico, Brazil, preparing U.K. launch <br> Q4: Plans for Europe after successes in Americas | Set to launch in the U.K. in late Q3 2024; no announcements about Canada, Mexico, Brazil expansions | Continues gradually, major U.K. push upcoming. |
Rational pricing environment | Q1: Price/mix decelerating, focus on balanced approach <br> Q4: Stable pricing, normalizing promotions | Pricing remains rational, returning to pre-pandemic promo levels; balancing price and volume | Stays rational, stable promotion depth. |
Promotional effectiveness at higher price points | Q1: Improved volume with refined merchandising, better retailer acceptance <br> Q4: Consistent effectiveness at higher price points | Promotional lifts improved sequentially, indicating better returns | Steady rebound in promo impact post-COVID. |
Currency devaluation and volume declines in Nigeria | Q1: Pricing actions led to higher elasticity, significant devaluation impact <br> Q4: Successive price hikes, some ordering shifts, volume still grew in double digits earlier in the year | High-teens volume decline, but elasticities better than expected; remains cautious | Persistent challenges, but Q2 showed less-severe impact. |
Capacity constraints in Mexico and local sourcing for Pringles | Q1: No mention <br> Q4: No mention | Local sourcing in Mexico to begin next year, expected to unlock more growth | New detail introduced in Q2. |
External disruptions (floods) in Brazil | Q1: No mention <br> Q4: No mention | Devastating floods cited but strong underlying business continued | New external factor noted this quarter. |
Cautious or unchanged guidance outlook | Q1: Reaffirmed existing guidance despite strong Q1 <br> Q4: Maintained FY 2024 guidance (margins, on-algorithm growth) | Raised FY guidance but kept H2 assumptions unchanged, remaining prudent | Still cautious, even with better H1 results. |
Private label competition in crackers and potato chips | Q1: No meaningful private label share changes, some reversion post-supply disruptions <br> Q4: Not discussed | No mention in current period. | Briefly addressed in Q1, silent in Q2. |
Weak retail tracking data in North America (Q4 2023 only) | Q1: No mention <br> Q4: Attributed to pullback on innovation and rising elasticities, but confident in 2024 recovery | No mention in current period. | Specific to Q4, not revisited. |
Pop-Tarts movie synergy with Jerry Seinfeld (Q1 2024 only) | Q1: Major synergy campaign, unplanned but funded by strong margins <br> Q4: No mention | No mention. | Discussed only in Q1, not repeated. |
-
North America Volume Growth
Q: What's driving North America's sustained volume improvement?
A: The volume growth in North America is driven by the return to full commercial activation, led by Pringles, with increased distribution and innovation back to pre-pandemic levels. The company is also engaging in rational price promotion, similar to pre-pandemic activity. -
European Outlook and Growth
Q: How is Europe performing amidst volume pressures?
A: Despite a tough environment, Kellogg expects continued growth in Europe, led by snacks like Pringles and the upcoming Cheez-It launch in the UK. Back-half plans include football sponsorships and activations that will accelerate growth in the third and fourth quarters. -
Latin America Performance
Q: How did Mexico and Brazil perform this quarter?
A: Latin America had a good quarter with growth in cereals and snacks. Mexico achieved record cereal market shares, and Pringles performed well despite capacity constraints. In Brazil, despite devastating floods, the underlying business remains strong, driven by Pringles. -
Nigeria Volume Decline
Q: What's the situation with Nigeria's volume declines?
A: In Nigeria, volumes declined in the high teens while price/mix increased over 40% year-on-year due to price increases and currency devaluation. The consumer is under strain, and elasticities are impacting volumes, but this is factored into forecasts with potential upside. -
Gross Margins and Retailer Relations
Q: How do you balance margin growth with retailer concerns?
A: Kellogg is improving gross margins through productivity and resolving prior bottlenecks. They are increasing brand-building investments, which help retailers drive volume, aiming for mutual growth rather than focusing on margin share. -
North America Pricing Strategy
Q: Is price sensitivity affecting your North America portfolio?
A: Absolute price points are crucial as consumers face pressure. Kellogg focuses on entry price points and price-pack architecture to meet consumer needs, especially for households under $100,000 with kids. -
Innovation Pipeline
Q: Are you back to pre-pandemic innovation levels?
A: Innovation levels have returned to pre-pandemic levels and are expected to improve. This includes launches like Cheez-It and Pringles Mingles, with more innovations planned for next year. -
Competitive Investments
Q: Do you expect returns amidst competitors' increased investments?
A: Kellogg sees the environment as rational and is confident in achieving returns similar to pre-pandemic levels. They focus on brand building and innovation to meet consumer needs, maintaining confidence despite competitors' actions. -
Inflation Outlook
Q: Is inflation still neutral for the year?
A: There is no change in outlook; costs are neutral to slightly inflationary as expected. Inflation is being managed, and costs are in line with projections. -
Second Half Operating Profit
Q: Any pressures affecting second-half operating profit?
A: Gross margin progression will moderate due to lapping prior benefits. Bottlenecks and shortages are resolved, and brand-building investments will moderate compared to last year's ramp-up in the second half. -
Promotional Activity Returns
Q: How are promotional lifts trending?
A: Promotional lifts are improving as price discovery settles. Investments are yielding better returns, and Kellogg expects returns similar to pre-pandemic levels in the back half and into next year. -
Need for Price Investment
Q: Why don't you need more price investment?
A: Kellogg feels confident in their current strategy, having raised guidance following a strong second quarter. They believe they don't need additional pricing actions beyond what is already in place. -
Measuring Consumption Growth
Q: Will North America consumption return to growth?
A: Growth is expected in measured channels as investments in brands like Cheez-It, Rice Krispies Treats, Pop-Tarts, and Eggo roll out. Non-measured channels like Canada and away-from-home are already showing strong growth. -
Excluding Nigeria, Volume Growth
Q: Do you expect volume growth excluding Nigeria?
A: Excluding Nigeria, Kellogg expects volume growth in most regions in the second half. Nigeria is impacting volumes due to planned price increases and elasticities. -
Pringles Mingles Launch
Q: How meaningful is the Pringles Mingles launch?
A: Pringles Mingles is not expected to significantly impact this year's sales but is more focused on activation in the first quarter of next year. The product tests extremely well, extending the Pringles brand outside the can. -
Guidance Timing
Q: Will you provide 2025 guidance next quarter?
A: Kellogg typically releases guidance during their February earnings report. They will discuss innovations and plans for 2025 at that time.