Good morning. Welcome to the Kellogg Company's Second Quarter 2022 Earnings Call. [Operator Instructions]. Please note, this event is being recorded. 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, you may begin your conference call..

Thank you, operator. Good morning, and thank you for joining us today for a review of our second 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 3 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 during the current COVID-19 pandemic, volatile input costs 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 are obviously pleased to be able to report yet another quarter of strong performance, one that puts us in a position to raise our outlook for the full year.

Before we get into the specific results and guidance, let me emphasize how we are navigating so well through what is undoubtedly a challenging business environment. First, we continue to execute our Deploy for Balanced Growth strategy depicted on Slide 5. As you'll see in the coming slides, it is clearly working.

We remain equally committed to our planet and community as evidenced by our strong push in various areas of ESG. Some of our quarter two actions, achievements and recognitions are shown on Slide 6. For a more in-depth look at our ESG work, be on the lookout for our latest annual global ESG report, which will be published next week.

The result of this continued focus on execution is another quarter of strong results, as indicated on Slide 7. As you'll see in a moment, our momentum in snacks remains impressive around the world and led by world-class brands.

Our international regions collectively posted yet another quarter of strong growth in sales and profit, a performance that is driven not only by snacks but also Cereal and Noodles & Other in emerging markets. We also had an exceptional quarter for North America. This was driven not only by snacks but also by cereal.

Our North America Cereal business continues to replenish inventory, both ours and net of our customers, leading to gradual resumption of commercial activity and recovery of share. We continue to mitigate the margin pressure created by decades-high cost inflation and bottlenecks and shortages evident across the entire economy.

Our productivity initiatives continue to work and our revenue growth management actions continue to be effective. As a result, we remain on an upward trajectory for operating profit.

We're generating strong cash flow, which is providing enhanced financial flexibility, contributing to an increase this year in our dividend and in our share buybacks, all while reducing our net debt year-on-year as well. So we're executing well and delivering ahead of our own financial expectations.

And as a result, today, we are raising our full year guidance. Meanwhile, with June's public kickoff announcement, we continue to progress towards separating our company to 3 stronger, more focused companies as shown on Slide 8. We strongly believe that North America Cereal Co. and Plant Co.

will be stronger as separate companies, able to focus on their specific strategies, priorities and resource needs. Another key precept of our decision was the strength of our remaining Global Snacking Co. business. And our quarter two results only reemphasize that strength.

As with any spinoff, this will require organizational design work and carving out the financials of the to-be-separated businesses, which in our structure today are integrated across business units. Work is well underway and we'll keep you apprised of our progress over the next several months.

We will also remain laser-focused on delivering on our strategy and financial objectives in the meantime. So we feel good about our first half of 2022. We feel confident about our second half, and we are excited about our separation plans. Let me now turn it over to Amit, who will explain our financial results and outlook in more detail..

Thanks, Steve, and good morning, everyone. We'll start with a brief summary of our quarter two financial results on Slide 10. Our net sales growth in quarter two again came in better than projected.

This was a result of good momentum, particularly in snacks and Noodles & Other as well as price elasticity not returning as quickly to historical levels as we had assumed. It was also driven by North America Cereals recovery happening faster than planned. Our adjusted basis operating profit grew 10% on a currency-neutral basis in quarter two.

This was better than expected and it brings our first half into year-on-year growth. This growth comes despite high cost inflation, industry-wide supply disruptions and incremental costs and lost sales stemming from a fire and strike in our North America Cereal business in the second half of 2021.

Our adjusted basis earnings per share grew a better-than-expected 8% on a currency-neutral basis, bringing our year-to-date growth up to 5%. Cash flow through the first two quarters was ahead of our projections and significantly higher than last year.

So clearly, it was a strong quarter, and we entered the second half ahead of where we thought we'd be at this juncture. Now let's look into each of these metrics in closer detail. Slide 11 lays out the components of our net sales growth this year. On an organic basis, we recorded 12% net sales growth in quarter two.

Volume remained pressured in quarter two by bottlenecks and shortages, but the decline was more moderate than expected. Price elasticity did not increase as much as we had anticipated. And our North America Cereal business recovered inventory and shipments faster than expected.

Price/mix remained elevated in quarter two, even accelerating as all 4 regions utilized all levers of revenue growth management in order to complement productivity initiatives. This is all in an effort to protect gross profit dollars amidst enormously high input cost inflation.

Through the first half, our net sales grew organically by 8%, with price/mix growth more than offsetting the negative volume impacts of supply disruptions, most notably in North America Cereal and price elasticity.

Foreign currency translation negatively impacted net sales growth by more than 3 percentage points in quarter two as currencies around the globe weakened further against the U.S. dollar. Slide 12 shows the organic basis net sales growth rates of each region during the first 2 quarters of this year.

We have generated solid growth in all 4 regions year-to-date, even despite unusual supply disruptions principally in North America. For our international regions, quarter two strong growth was a continuation of a multi-quarter and multi-year trend.

And for our North America region, the quarter two growth reflected continued strength in snacks, complemented by better-than-expected recovery in cereal, including trade inventory replenishment.

Overall, for the second half, we expect to see price/mix continue to drive our sales growth, reflecting revenue growth management actions already executed as well as further RGM activity to be taken in the second half.

On volume, we are taking the planning stance of assuming a gradual return to normal levels of price elasticity, and additionally, we face a larger impact from lost Russia volume. Turning now to gross profit.

Slide 13 offers a glimpse at just how impactful input cost inflation and supply disruptions have been as well as how each region has utilized revenue growth management to help protect the dollar profit impact.

COGS per kilo is a metric that captures the rate of cost across all factors from input cost inflation to adverse transactional foreign exchange to supply disruptions, which create lost absorption and the need to utilize more expensive spot markets. These metrics also captures productivity savings and changes in mix.

As you can see on the chart, this comprehensive cost per kilo was up in the high teens year-on-year in the first half, even after productivity savings. The good news is that our net sales per kilo, which is how we measure price/mix, is up in the low teens, covering a sizable portion of our input cost inflation.

However, it's not able to cover the unpredictable impacts of supply disruptions and impacts related to last year's second half fire and strike. Our objective during this unusually high cost environment is to protect gross profit dollars as much as we can.

Slide 14 shows that our gross profit through the first half is down year-on-year, but it wouldn't have been were it not for the fire and strike's residual impact in quarter 1. Moreover, it remains higher than our pre-COVID first half 2019 level with or without the businesses we divested later that year.

So even though our margins have been pressured by the current environment, our gross profit dollars remain on an upward trajectory. As we get into the second half, we no longer have fire and strike impact. In fact, we lap it in quarter 4.

Input cost inflation is likely to remain ahead of our productivity and RGM offsets, and we now assume no moderation in bottlenecks and shortages until quarter 4.

As a result, we believe we will see gross profit dollars narrow the year-on-year deficit in quarter 3 and then swing to year-on-year growth in quarter 4 when we lap the worst of the fire and strike. SG&A expense, meanwhile, will work in the opposite direction in the second half.

Slide 15 shows how our SG&A began to decline in the second half of 2021 when supply disruptions, starting with bottlenecks and shortages and then worsening with fire and strike forced us to pull back on A&P investment.

This was mainly the case in North America Cereal, which continue to refrain from this investment during quarter 1 and only started to resume investment in a relatively small way during quarter two. But you can see how SG&A returned to year-on-year growth in quarter two and should continue to do so in the second half.

This will be driven by increased A&P as we restore commercial activity as well as by higher incentive compensation related to our improved outlook and a return to travel and meetings. Putting it all together, we see on Slide 16 our quarter two and first half operating profit performance in the context of prior years.

Leaving aside 2020, which stood out for its pandemic-related lift from shoppers stocking up, our operating profit remains on an upward trajectory. And we grew operating profit year-on-year in quarter two and the first half with and without currency translation.

We expect to sustain this upward dollar profit trajectory in the second half as well in spite of cost and supply pressures and increased investment. Turning now to our below-the-line items on Slide 17. These items were collectively negative to EPS growth in the quarter and only slightly positive for the first half.

Interest expense was again down year-on-year in quarter two, owing to lower average debt. However, rising interest rates on the roughly 20% of our debt that is floating will swing interest expense into a year-on-year headwind in the second half.

Other income, which is predominantly the nonoperating portion of pension expense, decreased meaningfully year-on-year in quarter two and the first half, attributable to lower asset values at the beginning of the year.

In the second half, an update of higher interest rates and lower pension asset values, reflecting this year's sharply lower fixed income and equity markets will pull down other income in the second half by more than previously forecast.

And barring a significant comeback in the financial markets over the remainder of the year, this will be a sizable headwind in 2023 as well. Our effective tax rate in quarter two was up year-on-year. But through the first half, it was right in line with the approximately 22% rate we expect for the full year.

Our JV earnings and minority interest were collectively less negative to net income, thanks to consolidating some of our Africa joint ventures at midyear in 2021. We have now lapped that consolidation so it is no longer a tailwind for this line item.

And average shares outstanding decreased slightly year-on-year, a reflection of our share buybacks during quarter 1. Based on accelerated options exercises and higher stock price, we now expect shares outstanding to decrease less than 0.5% for the full year.

Let's now look at our cash flow, starting with our cash flow conversion ratio shown on Slide 18. In recent years, we've made it a priority to improve our conversion of earnings into cash flow.

And while 2020 was distorted by the various effects of the pandemic, you can see that our ratio of cash flow to adjusted basis net income has been on an upward trajectory. Slide 19 shows what this focus and discipline has done for us.

On the left side, you can see that our absolute cash flow has remained on an upward trajectory, and this continued in quarter two. And on the right-hand side, you can see that this cash flow, along with proceeds from our 2019 divestiture, has enabled us to reduce our net debt, leading to lower leverage ratios.

This has given us enhanced financial flexibility, even as we have continued to increase our dividend and buy back shares. Let's now turn to Slide 20 and a discussion about our guidance for the full year. As Steve mentioned, our first half was strong enough and our momentum durable enough that we feel comfortable raising our guidance on all 4 metrics.

We are raising our full year outlook for net sales to organic growth of 7% to 8%, a sizable increase from our previous guidance of approximately 4% growth. We are raising our full year outlook for adjusted basis operating profit to 4% to 5% growth on a currency-neutral basis, up significantly from our previous guidance of 1% to 2% growth.

We are raising our full year outlook for adjusted basis earnings per share to approximately 2% growth on a currency-neutral basis, up from our previous guidance of 1% to 2% growth. This is held back only by the pension remeasurement we discussed earlier. This is a nonoperating noncash item.

We are raising our full year outlook for cash flow to approximately $1.2 billion, up from our previous guidance of $1.1 billion to $1.2 billion. This reflects not only a higher cash earnings, but it also incorporates incremental upfront cash outlays in 2022 related to the upcoming separation transactions.

So to summarize on Slide 21, we feel very good about our financial condition as we enter the second half. As Steve mentioned, the work continues towards the separations. As of now, we estimate that we'll incur between $70 million to $80 million in upfront costs in 2022 related to readying for the transactions.

To ensure visibility into the ongoing results of the businesses, the company will disclose these upfront costs and exclude them from its adjusted basis operating profit and earnings per share in its external reporting.

However, the cash portion of these costs, which we estimate could be about half of these upfront expenses, are incorporated into our cash flow guidance as always. Meanwhile, we're going to great lengths to ensure no disruption to our business while this work is going on. And we are pleased with the financial health of our businesses.

We feel good enough about our business that we can today raise our full year guidance on all key metrics while using our strong cash flow to both return more cash to shareowners and preserve a strong balance sheet. Let me now turn it back to Steve for a review of our regions..

Thanks, Amit. I'll start with a review of each of our regions, beginning with Kellogg North America on Slide 23. This region had an exceptionally good quarter, posting notably strong net sales growth with growth in both volume and price/mix. And this top line performance drove good growth in operating profit as well.

Our sales growth was led by our largest business, snacks, which accelerated because of end market momentum, revenue growth management and replenishment of trade inventory. We obviously feel very good about our snacks business going into the second half.

Cereal also posted strong net sales growth in the second quarter, driven both by volume as we replenished both our and retailers' inventories and by price/mix as we executed revenue growth management actions. We feel that our recovery is on firm footing as we enter the second half.

And as we get past the fire and strike impact, we are in the early stages of recovering our profit margins in this business as well. In Frozen, net sales growth in our From the Griddle Eggo business was offset by the decline in our plant-based business, with the latter experiencing supply disruptions at a co-manufacturer.

Both businesses are expected to have a better second half, aided by improved capacity and supply. Overall, North America turned in a very good first half, considering its enormous supply obstacles and is poised to sustain top line growth while improving bottom line performance in the second half even as we restore investment.

Kellogg Europe's results are shown on Slide 24. The second quarter was another good one for this region. Revenue growth management actions have sustained good price/mix growth with an extra boost from country and category mix with elasticity impact on volume returning, particularly in cereal but not as quickly as we had anticipated.

snacks, which represent almost half of our annual Kellogg Europe net sales, continued to deliver strong growth, both in net sales and in consumption.

This has been led by sustained momentum in Pringles but also our portable wholesome snacks brands, which are benefiting from both a resumption in consumer mobility but also from our increased focus on revitalizing these brands.

In cereal, our net sales growth was fairly broad-based across the region, led by effective revenue growth management actions, though with signs of increasing price elasticity in Continental Europe.

Going into the second half, we expect to sustain momentum in snacks even as we absorb a larger impact of halting shipments into Russia and working through general supply tightness. And across the business, we'll continue to leverage revenue growth management and productivity to help mitigate the impact of what will be accelerating cost pressures.

Kellogg Latin America, shown on Slide 25, also had a solid quarter two. Its high single-digit net sales growth was driven by price mix and in-market momentum even if we did start to see the rising price elasticity, particularly in cereal.

In snacks, which represent more than 1/3 of our annual net sales in Latin America, we continued to drive very strong growth across the region, including share gains in our key markets. In cereal, net sales grew in most markets and we continued to gain share overall, led by Mexico, Colombia and Brazil.

Cost inflation has been higher in our emerging markets than in our developed markets and further exacerbated by adverse transactional foreign exchange. And while this led to margin pressure in Kellogg Latin America, we did see sequential moderation in the second quarter, and this helped drive year-on-year growth in operating profit.

In the second half, we expect to sustain sales and profit growth even as we work to offset accelerated cost inflation. We'll finish our regional review with Kellogg EMEA in Slide 26. During the second quarter, our high teens net organic sales growth was very similar to that of quarter 1 and even the full year of 2021.

The growth reflects primarily our revenue growth management actions as we work to protect dollar profit from the highest cost inflation of any region in our company, with ocean freight being a particular driver of this higher cost pressure.

This enabled us to continue to post solid operating profit growth in quarter two despite the pressure on margins. Leading EMEA's growth in quarter two and the first half were Noodles & Other, which make up almost half of the region's annual net sales and which sustained its strong momentum in Africa.

Snacks, representing about 1/5 of EMEA's annual net sales, also sustained organic net sales growth of more than 20% with gains across Asia, Africa, the Middle East and Australia driven by momentum in Pringles.

In cereal, which generates about 1/3 of our EMEA annual net sales, also posted good broad-based net sales growth with notable strength in Australia, India and the Middle East. For the second half, strong top line and profit growth are expected for this region.

Now let's take a step back and look at Slide 27, which groups our portfolio into the businesses that will comprise each of the 3 post-separation companies. We continue to see strong momentum in the businesses that represent 80% of our portfolio today and that will comprise Global Snacking Co. after the separations.

Our snacks businesses around the world continue to show good momentum with organic net sales growth in the double digits during the first half. This double-digit growth is coming from all 4 regions, and it was faster in quarter two than it was in quarter 1. And as we'll see in a moment, this growth is being led by world-class brands.

Noodles & Other, which is predominantly in Africa and the Middle East, continues to post double-digit growth, both in the quarter and the half, aided by higher prices and expanded distribution.

International cereal posted low single-digit growth in the first half, led by emerging markets, which make up almost half of our international cereal sales and continue to post good growth in growing categories. And in frozen breakfast, we delivered low single-digit growth despite being constrained on capacity during the quarter.

Putting them all together, the Global Snacking Co. businesses collectively have generated double-digit organic basis net sales growth so far this year. For North America Cereal Co., 2022 is all about recovery of supply, and as we'll discuss in a moment, this recovery is off to a faster-than-expected start.

Its lack of inventory pulled down sales sharply in the first quarter but it grew substantially year-on-year in quarter two, bringing its first half net sales performance to a very low single-digit decline.

The only post-spin business where there was softness in quarter two was in Plant Co., which has experienced some supply disruption which we'll discuss in a moment. Let's look at each of these businesses and their key brands.

When we turn to Slide 28, we can see that our world-class snacks brands have continued to perform well in market this year around the world. Pringles with $2.5 billion in annual net sales globally remains in an impressive form. It has generated double-digit consumption growth in most of our biggest markets around the world.

Cheez-It with over $1 billion of annual net sales has continued to drive share gains in the cracker category, both in the U.S. and in Canada with our new Pop'd platform off to a strong start and incremental to the core line. Pop-Tarts closing in on $1 billion of annual net sales continues to post good growth in its core U.S.

market while showing excellent promise in international markets. The same goes for Rice Krispies Treats with $0.5 billion of annual net sales and double-digit consumption growth in key markets this year. These 4 brands collectively represented more than 40% of the total 2021 net sales of what will be Global Snacking Co.

On Slide 29, we see continued strong retail sales growth across key international cereal markets also led by world-class brands. In Europe, the cereal category has slowed, resuming more price elasticity than other regions, and our consumption is lapping a notably strong 2-year period, but we continue to drive good growth in key brands.

In emerging markets, which represent about half of our international cereal sales annually, consumption growth remains robust, both for us and the category. We're seeing strong high single-digit consumption growth in Latin America with share gains in key markets like Mexico, Colombia and Brazil.

And in EMEA, we're seeing mid-single-digit consumption growth across the region and share gains in markets ranging from Australia to Korea to Saudi Arabia to South Africa. Slide 30 shows another growth business for us, Noodles & Other.

This is comprised of our distributor business in West Africa and our Kellogg's branded noodle business elsewhere in Africa and the Middle East. This is a $1 billion-plus business that has consistently posted double-digit or high single-digit growth quarter after quarter after quarter.

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. Turning to frozen breakfast on Slide 31. Our Eggo brand continues to perform well even despite being constrained on capacity, particularly in waffles and pancakes.

The good news is that additional waffles capacity came on stream late in quarter two, and innovation like the more portable style waffle is off to a good start. With about $750 million in annual net sales globally, this is yet another world-class brand and reliable grower that continues to show momentum. Now let's turn to our U.S.

cereal business on Slide 32. As we've discussed, 2022 is all about recovering supply after severe disruptions in late 2021. And as we mentioned earlier, we are ahead of plan in terms of rebuilding inventory, both our own and net of our retail partners. As supply has improved, so have our total distribution points and so has our share.

In fact, we've now recovered more than 4 share points since the start of the year. And we have only recently resumed commercial activity and even then, only on certain brands. And this improving trend has continued into July.

On Slide 33, the chart on the left shows how the overall category has accelerated growth lately on the strength of our increased prices and below-average elasticity. It also shows our supply-driven turnaround quite clearly and how we have already begun to catch up on the category. And this trend continued into July.

The chart on the right offers a view of how our 5 largest brands are recovering share after hitting lows in the fourth quarter and the aftermath of our fire and strike. These brands have started to resume commercial activity and they are responding immediately.

So we feel good about how our supply is recovering, how we are getting back on shelf and how we are recovering share. We are also poised to begin recovering profit margin. This business is clearly on the rebound. Moving now to plant-based foods on Slide 34.

Our Morningstar Farms is uncharacteristically down in net sales and consumption through the first half. Much of this has to do with supply chain challenges, principally with a co-manufacturer, which led us to reducing our commercial activities. This is a short-term issue and we're working through it.

And we have strong plans for the second half as we resume commercial activity. Nevertheless, this is a leader in plant-based foods, a category with tremendous growth prospects. This is a business that remains in good condition from the standpoint of brand equity, marketing and innovation pipeline as well as profitability.

So to close out our prepared remarks, let me briefly summarize with Slide 36. Through the second quarter and the first half, we're very pleased at how the business is performing, particularly given the challenging business environment. We have sustained momentum in the majority of our portfolio.

In North America cereal, our recovery is progressing well. We continue to mitigate the pressure on our profit margins. Our cash flow and balance sheet are strong, giving us strong financial flexibility. We have kicked off the process of separating into 3 companies, and we will not let this distract us from delivering results.

And with all this going on, we are raising our outlook for the year. This gives you an idea of just how strong the first half we've had and the kind of confidence we have in our business and all our Kellogg employees that bring their skill and grit to work each and every day. And with that, we'll open up the line for questions..

[Operator Instructions]. Our first question is from Andrew Lazar with Barclays..

Steve, with the announced spin of North America cereal, one of -- the biggest pushback I think we've continued to hear is really more about the longer-term sustainability of the business as sort of a stand-alone beyond the recovery expected to occur in '22, which is clearly taking shape nicely as you just talked about.

So I mean, taking a more forward-looking stance, like on the top line, the question is more about share longer term as I think Kellogg was losing share fairly consistently prior to sort of all of this and prior to the pandemic.

And then on profitability, how do you balance the margin opportunity that you've talked about with the potential need to reinvest more to at least get to a point where you can at least hold share again over the longer term?.

Yes. Thanks, Andrew. So let me start by just framing the cereal business a little bit in our business for you. We have 5 of the top 11 brands. They are strong brands. All the information, research and data that we have suggests or reinforces how strong these brands are, how relevant they are. The category, as you know right now, is very healthy.

It's showing incredible pricing power. Even the last 4 weeks is better than the last 13 weeks. The category is quite healthy. It's versatile. It's showing, especially in challenging times, that it is a very affordable meal for people. A bowl of cereal with a glass of milk is $1, and that's really helping the category.

Our recovery, which you already mentioned, is happening faster than planned. We're up 400 basis points year-to-date so the business has good momentum. But your question is, so how do we think about it in the future? And why is it going to be a strong business going forward? And we were losing share prior to the pandemic, and that's well documented.

Some of the reasons for that, we went through a pack size harmonization which was necessary, but we did that. The pandemic obviously had supply-related constraints for everybody. That was a real issue for us. Then we had a fire and strike, and you see the real results of that, and it was very, very difficult but we came through that.

This is not a business that has been underinvested, right? But this is a business that will benefit from a focused management team. 1 focus will be -- the only focus will be how to drive these great brands in a category that is showing good recovery. The 1 focus of a new sales force will be these brands with the customers.

There are opportunities for productivity, for sure, for supply chain automation that we're already undergoing right now. And perhaps the best example I can give you, and there's many examples because we've studied these types of spins, where you talk about focus and taking a great collection of brands and focusing them with the management team.

And look at what we've done with Pringles. Pringles, when we took it over was not a brand that was growing. It was not a brand that was able to break through price points.

And today, Pringles, you see in virtually all the big markets around the world, is growing double digits, right? So we are very confident in the cereal business going forward for all of these reasons, good category, great brands, focused management team and good examples of where it's worked in the past..

The next question is from Nik Modi with RBC Capital Markets..

So I guess, Steve, the question is most of us listening on the call have seen a lot of these spins over the last 10, 15, 20 years covering the space.

And I think it's pretty safe to say that when these situations are occurring, it's tough, or at least what we've witnessed, it's tough for companies that are going through this process to kind of adjust to a changing environment, whether it be competitive, macro, et cetera.

And we're kind of in this environment now where I would say the volatility, as we can all agree, is probably higher than it's ever been. So I'm just curious.

What have you guys observed or learned from prior spins at other companies? What frameworks are you putting in place to make sure that you're able to adjust and adapt to the environment as you go through this process?.

Yes. Thanks, Nik. So we have studied, as I just mentioned, quite a number of spins. We've got an excellent set of outside advisers that have great experience in this that are working with us.

And a number of things I'd say is it's very important to understand who has accountability for what and have the right project teams in place and the right work streams in place to really diligently work through all the work that has to happen.

And perhaps the most important -- it is the most important thing while you're going through this is to keep the focus on the business and the business momentum, and we have great business momentum.

And with another thing we've learned is the most successful spins happen from a position of strength, not from a position where you're desperate or things have to happen to fix the business, but when they happen from a real position of strength because then you can unlock the underlying potential of those businesses.

And I think we've got great momentum, obviously a terrific quarter across the board. And so we're doing this from a position of strength. And we've got good accountabilities across the patch.

You'll see us making announcements in the coming months about various things related to the spins and keeping that momentum on the existing business and having momentum towards the back half of next year when we'll execute the spins is very important, and we're entirely focused on it..

And how close is the organization on figuring out divisional level executives, the C-suites for the independent company?.

So we'll be ready to make those announcements, we said, at the latest in the first quarter of 2023. We might be sooner than that. But when we're ready, we'll make those announcements. We'll make them internally first and then we'll share them with the outside world..

The next question is from Ken Goldman with JPMorgan..

First, thank you for the additional detail on the slides on segment-by-segment category growth. That's very helpful. I may have just missed it.

Did you guys provide the expected FX impact on the top and bottom lines for the year? Did you update that at all?.

Yes. So Ken, this is Amit here. So I think during the quarter, we saw strengthening in the dollar against most currencies, particularly the pound and the euro. So in the quarter, in quarter two, we saw an impact of about 3% to 4% across net sales, OP and EPS.

Though you've got to remember, this was the toughest comp from -- our toughest quarter from a comp standpoint. I think for the full year, based on exchange rates today, I'd estimate it at around a 3% impact..

And that's both top and bottom line?.

Yes..

Okay. And then my follow-up, I wanted to get a better sense, and I know it's hard just to know these things for sure, but you did guide understandably to other income being less than what you thought previously. I don't think I also heard a specific number there.

Do you have any kind of more precise guidance quantitatively that you can provide on that other income line? And then I'm curious why now for the revaluation when we've already seen asset values fall by the first quarter? Why in the second quarter? Why didn't we see it in the first quarter? Maybe I'm just missing something obvious, but pensions aren't exactly my specialty..

Yes. So I think the remeasurement, that was triggered. It was technically triggered because of a number of retirees opting for a lump-sum pension payment. It increased to a point that triggered a remeasurement. So that's the reason why you're seeing why that remeasurement happened. And so I think -- so that's the reason why that happened.

I think from a full year standpoint, I think you should see similar year-on-year decline, dollar declines as in the first half despite the comps are easier because we started seeing this trend in the second half of last year.

So despite the easier comps, right, you're going to see a similar dollar and dollar declines in the second half as we saw in the first half.

And I think as I mentioned in my prepared remarks, this will continue to be a headwind into 2023 where if markets stay where they are right now, obviously, we're going to see significantly lower asset values as we head into '23. So at current market levels, this would be a headwind that would continue into '23..

The next question is from Pamela Kaufman with Morgan Stanley..

How much of a benefit did you see in the second quarter from inventory replenishment? And where are retailer inventory levels today? Do you expect to ship ahead of consumption in the third and fourth quarters?.

Yes. So in terms of inventory, we did see replenishment of inventory in North America in cereal faster than we anticipated and somewhat in snacks as well, catching up to what had happened last quarter where consumption was ahead of shipments.

And so on balance, when you put it all together, there's really kind of nothing to see here, except for the fact that retailer inventories are close to back to where they were in kind of pre-pandemic levels. Service levels are starting to get back to where we want them to be.

Still work to be done, but broadly speaking, there's really not much of a story in shipments versus inventory on a year-to-date basis..

Got it, okay. And maybe if I could sneak 1 more in.

Can you provide an updated input cost inflation outlook for the year? Is the recent moderation in commodity prices expected to translate into more moderate inflation next year? Or are there offsets like higher labor cost, supply chain issues that you would expect to keep inflation higher?.

So we continue to look for gross inflation on input costs to be in the high teens for the full year. In fact, if anything, it's now towards the absolute top end of that range. So incorporated in our guidance is an acceleration -- a continued acceleration in inflation.

I think while the spot rates have moved down in some commodities, we are largely hedged for 2022 so we're not going to see any benefit in 2022. It's important also to note that while they move down, the spot rates have moved down, they're significantly higher. They continue to be higher than our averages for this year.

And so we'll continue to see and plan for inflation into '23..

The next question is from Steve Powers with Deutsche Bank..

Maybe just back to the U.S. cereal recovery. Clearly, as you've pointed out, you're ahead of schedule, which is great. I guess what I'm trying to figure out is how far ahead of schedule. I guess, maybe in time in terms of like when did you originally expect to be where you are now, if that's an answerable question.

And then secondly, as you leverage that momentum, I guess, have your end state objectives or ambitions also changed for the better versus where you were when you started the year?.

Yes. Thanks, Steve. I guess it's hard to quantify exactly, but I'd say we're about 1/4, so say, 3 months ahead of schedule based on getting inventories where we want them to be and reinstating commercial activity.

So as we look at the back half of the year, particularly in quarter 4, we'll be really back to normal in terms of through-the-line execution against all of our brands. And what you see now, if you look at the syndicated data is the brands that got back to high levels of inventory first are doing the best and are driving the share recovery.

And so we don't have a share forecast that -- we don't have 1 for the end of the year but we see good sequential recovery continuing, 400 basis points. So far, we see that continuing and we plan on exiting the year with very, very good momentum..

Okay. Maybe less from share perspective, just from what you're seeing in the category. Is the overall category ahead of where you expected it to be, such that, that gives you optimism in terms of where you might end up? Or just anything you can -- any further color and then I'll pass it on..

Yes. Steve, just from a category perspective, the category is doing very, very well. I talked about the affordability of cereal and that's -- and the versatility of it. That's clearly been a driver. If you look at just syndicated data on a year-to-date basis, year-to-date basis, the category is up almost 7%. In the quarter, it was up 9%.

The last 4 weeks, it's up double digits. It's up like 15%, I think. And so you're seeing real strength in the category that is above what we expected. And so obviously, we're playing catch-up already based on what happened with the fire and strike, and we're playing catch-up in a category that's accelerating. So it's really -- it's in a great place.

It's better than we expected to be. And clearly, consumers are relying on cereal as their budgets are strapped..

The next question is from Robert Moskow with Credit Suisse..

A couple of questions. One was on modeling. Amit, I thought I heard you say that gross margin dollars would be down year-over-year in third quarter. I think they're up in second quarter. So why would they take a step down in third? And then a follow-up on Morningstar.

I thought I also saw an article about a possible labor strike or unionization at one of the plants.

Is that at all related to the co-packer problems that you're having? And also, are there any ramifications for the plan to spin off as a stand-alone business?.

Yes, Rob. So I'll take the second question and then let Amit talk about the margins. So it had nothing to do with the labor negotiation that we're talking through right now, has nothing to do with the co-manufacturer. It has nothing to do with the spin or our strategic look at the business.

It's entirely what happens often many times, there's a union that has been talking to our workers about a possible unionization effort at our owned Morningstar Farms plant. And obviously, we have a lot of unions in the United States, and we successfully negotiate and renegotiate contracts all the time.

The outlier was the cereal strike last year, obviously well documented. We believe that despite having great relations with our unions, we still believe that the best way forward for this particular plant is to remain a nonunion plant and not have somebody in between us and them. It's been a very successful plant.

Great wages at the plant, great benefits at the plant. But we'll continue talking and we'll see where we get to.

Do you want to take the margin?.

Yes, I think from a gross margin standpoint, I think maybe I'll start with the full year and then we can get into the quarters. So I think in our last call, we had talked of a projection of a 100 basis point decline year-on-year in gross profit margin.

I think sitting here today, we continue to see that range as being where we are from a full year standpoint. I think in quarter 3, we will see incremental pressure year-on-year. And I think really what's changed is the supply chain bottlenecks, we are continuing to see that.

And while it's improved in a couple of areas, broadly, I would say that we continue to see widespread bottlenecks and disruptions. Our previous assumption was that would diminish in quarter 3. I think now, our current planning assumption is that's going to diminish in quarter 4.

So quarter 3 would continue to see incremental pressure year-on-year but it will moderate. And I think our trend from a margin standpoint, the year-on-year decrease in quarter 3 will still continue a trend of sequential moderation in declines, just less than what we had previously expected.

And then I think obviously, in quarter four, we start lapping the fire and strike. So we expect our margins -- gross margins to be up year-on-year in quarter four. And overall, for the year, still at that 100 basis point decline that we had talked in our last call..

Okay.

So does that mean that gross profit dollars in third quarter, they could still be above year-ago levels even though the percentage is down?.

Yes, yes. And I think there's a little bit of ForEx impact in that so -- but yes..

The next question is from Michael Lavery with Piper Sandler..

I just wanted to come back to the spin and maybe just see if you could touch on the dis-synergies and just give a sense of how much, as you're starting to plan it out, you're able to quantify those and what that looks like.

And maybe related to that, for the margin upside you called out as like it was kind of the headline for North America cereal, certainly against current levels that are a little bit depressed, that would make sense.

But over time, especially against historical sort of benchmarks with its own stand-alone company costs, how should we expect that to really move the needle?.

Yes. So Michael, we're not prepared to talk in detail about models around the 3 different businesses going forward. Suffice it to say though, we are laser-focused on dis-synergies. We're laser-focused on setting up these businesses for success. We understand where businesses have suffered from dis-synergies.

And we also understand where businesses have benefited from doing the work required to set these businesses up for success and having the right scale and having the right level of executional focus for the different things that they need to do.

So when we're further on in the process, we'll be releasing a lot more information about exactly what the stand-alone businesses will look like on a go-forward basis..

The next question is from Cody Ross with UBS..

Your snacks momentum across the globe is impressive.

Can you update us on the progress of expanding some of your brands internationally and how consumers are responding so far? And ultimately, how much room for global expansion do you think there is?.

Yes. So thanks, Cody. I think we've got a number of initiatives in place. We've got Cheez-It, which is now in Brazil and Canada and we're looking into Europe as well.

We've got plans that we haven't talked about yet, but for some of our other brands like Rice Krispies Treats is an obvious one, and following in the Pringles path, which is obviously all around the world right now. So we see great opportunity. It's one of the core elements of what we talk about in the Global Snacking business going forward.

One of the big opportunities is global expansion of brands like Cheez-It and Pop-Tarts and Rice Krispies Treats. And so we don't have a lot of detail to share with you yet, but where we have it in Canada and Brazil, it has done very -- I'm talking about Cheez-It, has done exceptionally well ahead of our plan.

And so it gives us good confidence that there is great potential there. In many markets, you'll already find Pop-Tarts, for example, in many markets where it just -- it finds its way there and does very well. So as we build out those plans, it will be part of what [Technical Difficulty]..

So I'd say most of it was price. And I think without getting into the specifics of prospective pricing, like I said, we continue to plan for an inflationary environment and protect our margins in that environment through a whole suite of revenue growth management actions..

Yes. And Cody, I would just add, always working on productivity as our first line of defense.

But obviously, in an environment like this, productivity, it's very difficult to approach the type of inflationary levels we're seeing but always working with our retail partners as constructively, as collaboratively as we can to keep prices affordable and keep the consumer at the heart and soul of everything that we do..

And just remind us, how much productivity typically are you planning for this year?.

It's in the -- it's -- normally, we'd operate at around 4% range, 3% to 4% range. But I mean, this year with the bottlenecks, it's probably a little lower than the -- than what's normal, but in that ballpark..

The next question is from Jason English with Goldman Sachs..

One quick question back on the pension. I think you mentioned that the negative revision to the other income was due predominantly to returns, with what's happened in fixed income and equity markets.

When you went through and did the remeasurement, did you also address discount rates or is that something you're going to do at your end based on where we sit today? What do you expect impact to have?.

We did, Jason. So I think it's both. I think there are two impacts that come through, right? One is a low asset base creates a lower expected return on assets, right? So the rate on -- the expected return on assets is unchanged but it's just on a lower asset base, so that generates a lower pension income.

I think the other thing that we've done is we've updated the interest charge that flows through the P&L on your liabilities. So while your liabilities have gone down with a higher discount rate, the charge that you take for the year has gone up because of the higher interest cost. So we've done both, and both of those are reflected in our outlook..

Got it. Good to hear. And I'm going to come back and probably bang my head into the wall with limited success on Michael's question around stranded cost because it's really top of mind amongst every investor we talk to. When you spun out Keebler, I think the stranded cost equated to something a little north of 10% of Keebler sales.

Is there any reason to believe that, that's not a fair number to work with as we think about what Global Snack Co.

could be saddled with as you spin out North America and Plant Co.?.

Yes. I think if you look at Keebler, right, in the end, and if you look at our '21 results and you look at where our overheads are, I think the teams and the organization did a terrific job working through the stranded costs.

And so I think as you look back on our results, we worked those stranded costs through the system, and there was a lot of work to make that happen. So as we embark on this spin, I think we're very mindful of the challenge. No question, our businesses are well integrated. And so as we -- and there are entanglements.

But I think to the point that Steve was making, as we work on the separation, we are very mindful as well of stranded costs and program and having the necessary programs in place to address them over time..

Operator, I think we have time for just 1 more question..

And the question will come from Chris Growe with Stifel..

I just had a quick question, just to follow up on an earlier question from Cody. I believe it was on, does just -- and this is just based on the pricing you've announced so far. Does pricing accelerate in 3Q versus 2Q? Not asking for prospective pricing, just what you've announced so far..

I wouldn't say it accelerates, Chris. It's quite high right now. And so I'd say you're going to see the same type of end market that you're seeing right now..

And the only thing I'd add is we've had multiple rounds of pricing around the world. And so I think we've been reacting to what we are seeing on commodities and input costs. As Steve said, we've got productivity programs in place so we've been through multiple rounds..

I get it. And you're starting to lap -- this stuff started happened a year ago so I get there's a lot of year-over-year comparison factors. I just wanted to understand that a little better. And then there was a comment on my -- just my last point or question would be on price elasticity in cereal in Europe.

The comment you made, you're seeing, I think, in the continent. Is that getting back to like historical levels? Is that a rate that you would generally expect to kind of creep into the U.S. and other divisions based on your second half expectation for elasticity to pick back up? And I can leave it there..

Yes. Chris, I'd say in Continental Europe, it's not back to historical levels but it's gradually approaching that. And it's unique to the continent. It's not in the U.K., nowhere near that in the United States. And so Continental Europe has obviously always been a different market. It's seeing inflation. And it never sees inflation. It's used to deflation.

So I'd say it's not a good indicator of what might happen around the world, but it is happening in the continent, in Continental Europe, but principally Germany, Italy and Spain..

And with that, we're going to -- we're at time.

Steve, any last comments or thoughts?.

Yes. I would just say thanks again for your interest. Thanks for your time. We certainly appreciate it. We're proud of the work that was done this quarter, the momentum that we have. And I'll close it out by thanking all of our associates around the world who made this happen. We really appreciate all of their efforts and wish you a very good day..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..