Kellogg Company
Q1 2019 Earnings Call Transcript

Published: 2 May 2019

[Operator:]

Good morning. Welcome to the Kellogg Company First Quarter 2019 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] Please limit yourself to one question during the Q&A session. Thank you. 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.

[John Renwick:]

Thank you, Gary. Good morning and thank you for joining us today for a review of our first quarter 2019 results and update of our full year 2019 outlook. I'm joined this morning by Steve Cahillane, our Chairman and CEO; and Fareed Khan, our Chief Financial Officer who has announced that he will be leaving Kellogg this summer. Therefore we are also joined by Amit Banati who is on the call not only as our current President of AMEA, but also as our incoming CFO. Slide number three shows our usual 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 this third slide of the presentation as well as to our public SEC filings. A replay of today's conference call will be available by phone through Thursday, May 9th. The call will also be available via webcast which will be archived for at least 90 days. As always when referring to our results and outlook, we will be referring to them on a currency-neutral adjusted basis unless otherwise noted. And now I'll turn it over to Steve.

[Steve Cahillane:]

Thanks John and good morning everyone. I think it's appropriate to start the call with our news of a transition in our Chief Financial Officer role. As you saw in our press release, Fareed will be leaving the company following the completion of our second quarter. Fareed has contributed mightily to the completion of Project K and to the creation and launch of our Deploy for Growth strategy. He has shown a real passion for growing our business and he's been a valued partner to me and to our entire executive committee. So, thank you Fareed for your service. We are fortunate to be able to name a fellow executive committee member Amit Banati to succeed Fareed. Most of you already know Amit who has been a driving force behind the transformation of our Asia-Pacific, Middle East, and Africa business. Not only does he have AMEA on track to more than double in size during his tenure, but he's diversified its portfolio, improved the margins of the base, and posted consistently solid results. What you may not know about Amit is that he earned his finance stripes early in his career which makes him a particularly effective and financially-oriented general manager. Because these two gentlemen have worked together for the past couple of years and because Fareed is staying on to ensure a smooth transition, you can be confident that this transition will be orderly and will cause no disruption to our plans, our results, or our transparency with investors. You'll hear from both of them momentarily. Turning to the quarter, I would describe our Q1 as on strategy and on plan. During the quarter, we took further decisive actions under our Deploy for Growth strategy. Some of these are listed on slide number six. For instance, we continued to shape a growth portfolio reaching an agreement to sell cookies, fruit snacks, pie crusts, and ice cream cones to Ferrero. While it's never easy to depart with solid brands and talented employees, we feel good that they are all going to a quality company. And for us, this divestiture will focus our portfolio on our biggest snacking categories and brands and improve our financial flexibility through a better margin mix and reduced debt. We reached an agreement expediently and will likely record a small gain on the sale. So, a very good outcome. Importantly, we continued to expand our emerging markets presence. Focusing on affordability and occasions, we have broadened our product line both in foods and packaging. And recognizing the critical importance of distribution in these markets, we have bolstered our go-to-market capabilities and reach. As a result, our emerging markets had another strong quarter of organic net sales growth and that does not even yet include the double-digit growth of our Nigerian distributor, Multipro. We also continued to invest in capabilities and processes. As you know we recognized our North America -- we reorganized our North America structure for a flatter, more nimble organization. As our new ways of working get refined, we should see greater agility and focus. We realigned global resources around key commercial priorities and we invested money and resources into areas like digital and e-commerce. All of this requires investments upfront, but will enhance our competitiveness. We're also on plan as described on slide number seven. Last year we invested in revitalizing key brands, we adjusted their positioning and their messaging, we ramped up their brand support and commercial execution, and it's working. Brands like the ones listed here did swing into growth or accelerate in 2018. This continued in 2019 with moderated investment behind these now revitalized brands all according to plan. We spent the last couple of years enhancing our innovation capabilities and rebuilding a pipeline. In Q1, we launched a significantly greater quantity and quality of innovation than we have in years. Its early days, but as we'll discuss in a moment, these innovations are off to good starts. We also invested in pack formats such as retail-ready cases, harmonized pack sizes in cereal and On the Go and affordability offerings around the world, just as we said we would. Also as we previously communicated, we implemented revenue growth management actions in the marketplace, across the globe and across our portfolio. Some of these actions started in late Q4, and some of them were implemented during Q1. Our international regions are showing solidly positive price realization already, while North America is just getting going but turned positive already. As a company, we returned to organic growth in net sales in Q1, and this was despite some headwinds in North America. As we'll discuss in a moment, our recall of certain RXBARs required inventory write-offs at our customers, pressuring net sales and profit. And we saw timing differences between shipments and consumption in certain categories, notably U.S. Cereal. But behind these headwinds was good growth on core brands in North America, and our international regions continued to grow strongly. So we come out of Q1 on track for our first half and full year earnings estimates. And our full year guidance does not change either, safe for layering on the impact of our already announced divestiture. So we're on strategy and on plan. Now, let me turn it over to Fareed, who will take you through our financial results and outlook in more detail.

[Fareed Khan:]

Thanks, Steve, and good morning, everyone. Let me start by saying how much I've enjoyed my time at Kellogg and in working with all of you. And I can assure you that you're in very good hands with Amit, and he will continue to drive Kellogg in the right direction. Now to our results

[Steve Cahillane:]

Thanks, Fareed. Among the many signs that Deploy for Growth is gaining traction is the fact that our improvement in top line performance is broad-based. As shown on slide number 19, each of our four regions is showing undeniable improvement. Yes, North America was still down in Q1, but we've explained the unusual factors that caused that

[Amit Banati:]

Thanks, Steve. Let me first state how excited I am for the opportunity to succeed Fareed as CFO. Fareed has done a great job and he leaves the company in solid financial condition. It has been a pleasure working with him, and I'm sure all of you have enjoyed working with him as well. I'll be working closely with him, during our transition over the next couple of months. And I look forward to meeting all of you in the coming weeks and months as well. So let's finish our Q1 review with our Asia-Pacific, Middle East and Africa business shown on slide number 26. As you know, our Middle East, North Africa, and Turkey operations which we call MENAT will move out of Kellogg Europe and into this region. This consolidates all of our Africa businesses under a single leadership, and what an exciting opportunity Africa is for us. Our MENAT business posted double-digit growth in quarter one driven by growth in cereal, biscuits, and noodles. In West Africa, our operations with partner Tolaram continue to expand. Multipro, the West African distributor whose results are consolidated into us continued to grow at a double-digit clip in Q1. And not included in AMEA's net sales or operating profit, but equally exciting is the continued growth of Dufil the noodles manufacturer in West Africa and the very strong growth in our joint ventures that manufacture and market Kellogg's brand of cereals, snacks and noodles. Pringles continued its consistent growth growing at a mid-single-digit rate even before including the year-on-year growth of MENAT. With MENAT's growth our region's Pringles net sales accelerated to a strong double-digit gain across the region in quarter one. The drivers of this growth remain strong commercial execution, geographic expansion and the expansion of more affordable pack sizes. And we should mention Australia the most developed market in this region. Australia's net sales were up in quarter one with good growth in Pringles. And even excluding Pringles, we grew in Australia continuing to show how we can stabilize and grow cereal consumption in a very developed market. So another strong performance by AMEA and with the portfolio and geographic expansion we are doing in a region right with population growth and economic upside AMEA is going to be a growth driver for Kellogg for a very long time. And now, I'll turn it back over to Steve to wrap-up.

[Steve Cahillane:]

Thanks, Amit. Let me finish with slide number 28. As I said at the outset of this call, we remain on strategy and on plan. During Q1, we continued to take major actions to improve the trajectory of our company from reorganizing our biggest region to shifting resources and enhancing capabilities, from continuing to invest in the revitalization of our biggest brands, to continuing to expand our reach and portfolio in emerging markets. We even took another major step in our efforts to reshape our portfolio with the agreement to divest our cookies, fruit snacks, pie crusts and ice cream cones businesses. We are confident that these great brands and the talented employees that manage them are going to an outstanding new home in Ferrero. And we come out of Q1 on plan. Our top line improved despite some temporary headwinds and we have every reason to believe it will continue to improve. Our profit performance keeps us on track for our full year guidance. This guidance does not change nor does the impact of the pending divestiture, which we disclosed back in early April. Deploy for Growth is working. Our portfolio is being shaped towards growth. Our brands are revitalized. Our capabilities are being enhanced. And we're becoming that much more competitive in the marketplace. As always, I salute our employees for their dedication and hard work to make all this happen, during a period of incredible change. Our people truly are our competitive advantage. And finally, we wish Fareed the very best in all of his next adventures and we welcome Amit to his new role. And with that, we're happy to take your questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Laurent Grandet with Guggenheim. Please go ahead.

[Laurent Grandet:]

Hey, good morning, everyone. And thanks for the opportunity. I'd like to focus on SG&A. Significant improvement in SG&A in this quarter despite you saying last quarter you will continue to invest significantly behind your brands. So how should we understand the first quarter performance? Is it just a phasing of marketing investment that has been pushed later in the year? Could you please give us more color here for the quarter and how we should think about SG&A going forward? Thank you.

[Steve Cahillane:]

Yes. And thank you for the question. I'll start and maybe Fareed will build on it. From an SG&A perspective it's important to note a couple of things. First, on a currency neutral basis SG&A was down about 2% year-over-year, so currency did help there. Brand building was also down year-over-year. As you'll recall, we were lapping nearly a $50 million increase that we put into the first quarter of last year. And so we are lapping that. We also delayed some brand building investment, particularly for RX during its recall because you don't want to be advertising against empty shelves, for example and also some capacity-constrained items in snacks and frozen, as well as the SKU changes that we are undertaking in cereal. Overhead increased mainly because of the Multipro consolidation and we continue to invest in capabilities such as RGM e-commerce integrated business planning as well as the RX international expansion. But I close that by saying we feel good about our brand building investment overall again, lapping the big increase from the last quarter pushing some of that into later in the year. And in general, we feel good about our SG&A performance as well as the brand building levels of investment that we have currently and in the plan.

[Laurent Grandet:]

Thank you very much. I’ll pass it on.

[Operator:]

The next question comes from Rob Dickerson with Deutsche Bank. Please go ahead.

[Rob Dickerson:]

Great. Thank you very much. Thank you for your call. This is -- kind of a question on gross margin. I don't think historically you guided gross margin, but obviously the gross margin is a large piece of the year first half second year -- I mean first half, second half, sorry. So as Multipro comes out after April the single serve piece is supposed to keep an eye on things shipped out kind of after Q2. Do we -- should we be expecting a stabilization in the gross margin as we get to the back half? Or is it -- or the other buckets the growth-related bucket could that still potentially pressure the gross margin? And the reason why I ask Steve just to keep it simple is really obviously operating profit is still flat on the guide. You're investing up in the business, which is likely the right thing to be doing. But that gross margin piece, obviously, over a very long period of time much before you arrived has kind of continued to drift down. I just want to make sure the line of sight is that gross margin has actually improved at some point.

[Fareed Khan:]

Yes, it's Fareed. Let me take that Rob. So we expect sequential improvement in gross margin as we go through the year and there are several drivers of that that will come together. Let me just walk you through the main moving parts. The first is that we initiated revenue growth management actions, sort of, Q4 - Q1 and we expect that to flow through as we get into Q2. And there is evidence of that as you see in our price/mix. The second thing is as we go deeper in the year some of the year-over-year cost inflation that we saw starts to lap and that will be less pressure on that sort of ongoing cost inflation bucket that we have. You mentioned the mechanical impact of Multipro. We've got one more month of that in the quarter. And on an ongoing basis, we will see a little bit of emerging markets mix. We've got a much more focused emerging market strategy. We're putting bets on specific markets. But as those businesses build scale we'll see margin improvement over the longer term. And the last thing is single serve and we've always talked about how we can take some short-term things around single serve. We love the growth. We love the market opportunity. It's an under-indexed area for us. But the real fix is to the profit flow-through of that business is going to come from some of the supply chain changes. And as you know we put those initiatives in place. We put CapEx up against those. But that's really going to be a second half impact. So you kind of put all those dynamics together you get a line of sight around an improving gross margin picture as you go through the year and it's sort of a good exit rate.

[Rob Dickerson:]

Thank you.

[Operator:]

The next question comes from Jason English with Goldman Sachs. Please go ahead.

[Jason English:]

Hey, good morning, folks. I guess I just want to follow up on Rob's question. I don't think you answered his question on whether or not you would expect gross margins to become stable or up as we progress through the year. I heard you loud and clear on sequential improvement but is this sequential improvement into growth?

[Fareed Khan:]

Yes. I mean margins are going to be improving as we go through the year and we will see some growth come in yes.

[Steve Cahillane:]

You should anticipate us by the end of the year exiting the year with growth in gross margin.

[Jason English:]

Excellent. Thank you very much for that. And then I want to come back to cereal real quick. I appreciate some of the turbulence early on with some of your pack size reconfigurations. As we're looking in the data just like -- which we recognize there's ample imperfections there a lot of your share weakness and frankly some of the category's weakness suggest it could be due to promotional intensity. Promoted sales are down a lot. I suspect that that reflects a slightly more subdued level of merchandising out there. As you work your way through this transition should we expect the promotional intensity or the merchandising intensity behind the category to improve? So do you think-- are you expecting this to be an enabler of not only your market share improvement but hopefully some of the category trend improvement as well?

[Steve Cahillane:]

Yes, Jason what I'd tell you is a couple of things. As we went through this whole transition, we essentially de-prioritized promotions in the first couple of weeks of the year obviously because we were going through this transition. And that's where we saw our steepest drop. You should expect to see a return to what I would call normal in terms of promotion activity and merchandising effectiveness as we continue to go through the transition.

[Jason English:]

And what is the timing there? You mentioned this is first phase. Do we have another phase? So in other words, could this transition -- how long does the net transition span?

[Steve Cahillane:]

Into the middle of the year, and so we've done our adult portfolio. We'll do our kid’s portfolio next -- other way around sorry. We did our kids portfolio first, we'll do our adult portfolio later. And so there’ll be some turbulence but we learned a lot going through the first phase that we'll apply into the second phase.

[Jason English:]

Helpful. Thank you so much guys.

[Operator:]

Excuse me. The next question comes from Alexia Howard with Bernstein.

[Fareed Khan:]

Good morning.

[Steve Cahillane:]

Good morning, Alexia

[Alexia Howard:]

Hi. So, can I stick with this question of pricing dynamics in North America? The -- and it may be to do with the promotional changes calendar that you just described. But the on-shelf pricing is over 3% in on-shelf measured channels in North America across the portfolio, and yet you did only see about 0.2% price/mix improvement in North America. If retail has continued to manage some of these products with faster on-shelf price growth than you're able to realize, how the volume trends improve if you're having to paddle against those higher on-shelf prices? And I guess linked to that just a quick question on cereals, are you seeing any destocking in cereals? We've heard that from other companies as part of the reason that the shipments were behind the takeaway on the cereal side? Thank you.

[Steve Cahillane:]

Yeah. Thanks for the question Alexia. A couple of things. First I'll tell you, our Q1 price realization in North America was blurred by the RXBAR recall, which was about one full point in pricing. So you’d expect to see something above 1 closer to 1.2 without that. The other thing is in cereal and the rest of the portfolio, we did take pricing in Q4 and Q1. We're expecting that to flow through essentially in Q2. Not much flow through or not as much flow-through in Q1 based on protecting promotions and things that are very standard in terms of you take a price but you have promotional activity booked in the first quarter. So you should see that happening. And the last part of your question. If you look back over time both from a average number of SKUs and ACV weighted distribution there has been virtually no change in cereal for the last several years. And then one additional point in terms of trade inventory, we did see a reduction in trade inventory for cereal, which we're expecting not to be a trend but it looks to be kind of a one-off. So hopefully that answers your question.

[Alexia Howard:]

So in terms of the retailer on the shelf pricing, do you have control over that, or are you aware that that's taking pricing up more quickly, or is that just not a concern?

[Steve Cahillane:]

We do not control retail pricing. We never have. And retailers it's up to themselves. But we have -- you will see us having more price realization flowing through our P&L in the second quarter and beyond.

[Alexia Howard:]

Thank you very much. I’ll pass it on.

[Operator:]

The next question comes from Chris Growe with Stifel. Please go ahead.

[Chris Growe:]

Hi, good morning.

[Steve Cahillane:]

Hi, good morning.

[Fareed Khan:]

Hi, Chris.

[Chris Growe:]

Hi. I just wanted to ask a quick question a bit of a follow-on. With SG&A being down in the quarter, as I was just thinking back to some of your commentary from the fourth quarter call, you did have a -- you talked about like a heavier innovation pipeline in the first half of the year. I guess I'm trying to understand, is there more marketing made press to come in the second quarter as part of your investment behind these new products? If I could just add to that, as you make investments in capabilities and that kind of thing and those were heavier expenses second half of last year, and those would theoretically flow through this year, are those more SG&A or cost of goods sold? And where are those investments falling? Are those kind of in line with what you're expecting?

[Steve Cahillane:]

Yeah. I'll start and I'll let Fareed build. We do have good support around some of our innovation launches and we feel very good about that. If you look at just a couple of them Cheez-It Snap'd, Pop-Tarts Bites both over close to 60% ACV distribution with velocities greater than their categories. So the support that we're putting behind them is clearly working. The biggest change in SG&A as I mentioned was pushing out some of the RX spend into later in the year due to the recall. We do continue to invest in capabilities, a lot around RGM, a lot around business planning and that should continue throughout the year. But when we look at our overall brand building levels as I mentioned earlier we feel good that the very significant step-up that we started in 2017 and into 2018 puts it at about the right base level in terms of what we should expect going forward. We want to maintain our agility as we go forward. But we see good support around the investments that we're making in innovation and we're seeing that very successfully in the marketplace.

[Fareed Khan:]

And the only thing I'd add is that investments against the brands, we're taking a very nimble approach. So we can -- we like what we're seeing with the big brands and the in-market performance. And so we can react when RXBAR recall for example and pivot some of that investment. We also have through Project K and through some of the organizational changes that we've talked about in North America savings coming through. And that's what's allowing us to fuel some of the reinvestments the logistics team gave. And I'd also add to that analytics and digital and an international RX expansion as well.

[Chris Growe:]

And so would you expect SG&A to be down? I guess from the statements last year it sounds like it should be down again this year even with some spending being up. Is that correct?

[Fareed Khan:]

Well, I'd put that in the context of our overall guidance and we'll continue to see savings come through. We'll make targeted investments brand building. There's a little bit of phasing there. But I think generally this -- I think first half second half may be pretty close to how we framed the full year before the recall.

[Chris Growe:]

Okay. Thank you.

[Operator:]

The next question comes from Robert Moskow with Credit Suisse. Please go ahead.

[Robert Moskow:]

Hi. I'm going to try to sneak in two questions. One is when we take a look at second quarter; I think you said that you would shift some of your investment spending out of first and into second. How should we think about earnings and profit growth as a result in the second quarter? Will it be down versus year ago? And then a broader question about spending at the retailers. In your brand building do you include the money that you give to retailers for digital commerce and the omnichannel kind of efforts that they have the advertising on those omnichannel efforts? I understand that the retailers are pushing harder and harder for more resources in that regard. Thanks.

[Steve Cahillane:]

Yes. So, as we said in the prepared remarks, Rob, much of the brand building will be shifted into Q2, right? So, you should think about the guidance that we've given in terms of first half, second half as remaining the same. In terms of the way we spend with retailers for competitive reasons, we're not going to get too much into the detail. But retailer data if it's good data, we will engage with them right? And so we are looking always at the ROI of our spend. And if you look at some of the retailers with excellent data and I mean consumer shopper data, you combine that with -- or shopper data combined with our consumer data, one plus one can really equal three. So, I'd look at it as the continued digitization of the opportunity to engage with consumers. And where we can make good investments, we'll make those good investments but it will be our choices.

[Fareed Khan:]

And just to build on sort of the operating profit sort of outlook for the year without getting to specific quarters that whole gross margin conversation that we had I think is very applicable to this topic as well with the caveat of sort of the brand building which is kind of a Q1-Q2 dynamic. But if you go back to that old dialogue about gross margin, that's sort of the similar shape to OP as well.

[Robert Moskow:]

Thank you.

[Operator:]

The next question is from Ken Goldman with JPMorgan. Please go ahead.

[Ken Goldman:]

Hi, thank you. Fareed, best of luck to you. Thanks for all your help.

[Fareed Khan:]

Thank you, Ken.

[Ken Goldman:]

And Steve you said Special K had a very soft quarter. I just wanted to pick your brain a little bit on your thoughts on this brand which I think was supposed to be doing much better by now. Was the corporate weakness a little bit of an anomaly, or is it something where you're actually rethinking the strategy that you're applying to it at this point?

[Steve Cahillane:]

Thanks for the question Ken. I wouldn't say we're rethinking the strategy so much. As we were lapping a very, very strong promotion in the quarter -- first quarter of 2018 we decided not to put that level of investment against it. We still have work to do on Special K in the United States. We are learning from some of the successes we've had in Australia, New Zealand, and the United Kingdom around Special K to get that brand to stabilization. But we think about the opportunities in cereal as a total portfolio. And so as if you look at some of the other adult -- I mean consumption on Corn Flakes was up nearly 22% in the quarter, Raisin Bran was up almost 5%, Mini-Wheats was up almost 1%. And so we're making good progress in a number of our big brands. And we still have to fix Special K and we're bound and determined that we will do it. But we have to think about portfolio investments and getting the most out of our cereal business and that includes all of our brands.

[Ken Goldman:]

Thank you.

[Operator:]

The next question is from Bryan Spillane with Bank of America. Please go ahead.

[Bryan Spillane:]

Hey good morning everyone. I'm going to try to just get one clarification and then a question. On other income Fareed, I guess, we're still guiding for it to be down because of the value of the pension assets. But with the markets up as much as they are is there a chance that that will get re-measured at some point and potentially be less of a drag?

[Fareed Khan:]

Yes. Unfortunately we measure once a year and that's the end of Q4 measurement. And those assumptions on the returns stick for the full year and then we'll re-measure it again. So, it's a fixed assumption as we go through. Now, as we re-measure it, that will have a different dynamic.

[Bryan Spillane:]

Okay. Thanks. And then Steve just a bigger question. There's been a lot of energy around the plant-based meat alternatives recently. We've got a couple of new -- a couple of companies that are really emerging with I guess next-generation products. So, as you look at Morningstar and you evaluate I guess the market opportunities, is there a potential that you'll begin to maybe look to flex more resources there as a way to enter that market as it evolved?

[Steve Cahillane:]

Yes. Thanks Brian. It clearly is an exciting category. It's been much in the news. We're excited about where Morningstar Farms is. As I mentioned on the prepared remarks, we've got a lot happening in chicken, but we see a lot of opportunity to do things beyond that. And for competitive reasons, I wouldn't get much into that except to underscore what you said it's an exciting space. It's a space where we feel like we have the right to win. You've heard us talk about our sales being kind of the original plant-based protein company. We believe that. And so we'll continue to innovate in that space and I would just say watch the space.

[Bryan Spillane:]

Okay, great. Thank you.

[Operator:]

The next question is from Priya Ohri-Gupta with Barclays. Please go ahead.

[Priya Ohri-Gupta:]

Hi thank you so much for the question and Fareed, best of luck. Just a quick question on the debt paydown comments, using the divestiture proceeds. So hoping you could give us some context as to how to think about prioritization in using those proceeds. You do have some maturities later this year. Would those be sort of first and foremost, or would you look to perhaps bring down some of the higher coupon debt that you have to help with interest expense? Thanks.

[Fareed Khan:]

Yeah. So many of those factors would go into our thinking, as you know, we've got some maturities that are coming up in the near term. But we would look across the entire profile and make those best choices. I won't give any specific tranches that we would or wouldn't go after. But it's a balanced approach and optimizing both maturities and interest. All that would factor into our decisions.

[Priya Ohri-Gupta:]

Great, thank you.

[Operator:]

The next question is from David Driscoll with Citi. Please go ahead.

[David Driscoll:]

Great thank you and good morning.

[Fareed Khan:]

Good morning, David.

[David Driscoll:]

Fareed, I want to say thanks for all your help. And Amit welcome to the new job. I wanted to ask a little bit -- again just a clarification on divestitures and then a question about the, On the Go snacks. The divestitures I think you presented information that it's 4% to 5% dilutive this year, but it's just a partial year. But then in another slide the full 12-month dilution stays at just 5%. I assume this relates to the timing and the use of the proceeds. But can you just clarify here? Just on the surface the numbers are the same even though it's only what five, six months dilutive or -- gone this year whereas a full the full 12 months next year.

[Fareed Khan:]

Yeah. So you're right David, its Fareed. So it's more of an impact in 2019. And it's really those dynamics around the -- as the business goes, the costs that stay the transaction support for the buyer for the business and that all factors into it. So, you're right, in terms of the way that's weighted across 2019 and into 2020.

[David Driscoll:]

All right, the follow-up question or the main question is just on the On the Go. Obviously, last year you had a surprise on the margin structure of that business. And I think your comments about gross margins are probably a portion of the answer. But I want to be real specific here. Are you on track for the in-sourcing of these On the Go products? And Steve, I just like you to comment. You've got all these new products in snacks. You've got the size change going on in cereal in North America. And you've got the in-sourcing of all these On the Go products. There's just a lot of complexity. And for me, this is an executional question for the organization. How do you feel about all these things happening? And then specifically, are we on track for the On the Go in-sourcing?

[Steve Cahillane:]

Yeah, David Thanks. The short answer to your question yes we are. In Q1 and Q2, it's really about SKU rationalization and revenue growth management. In Q3 and Q4, it's around centralized packing sites getting opened and so therefore repatriating volume inside. And so we are very confident that we have a gross margin path towards this. This is part of it, but an important part of it where I said we exit the year on a path towards gross margin growth. So, the answer to the question is yes. And we continue to see outstanding growth as you saw on one of the slides in those On the Go packs. In terms of overall like the innovation and the complexity and all the things that we're doing we feel very confident about that. And if I just -- I threw out some numbers before but if you look at just the consumption in the United States in Q1 on the big brands that we're investing against and innovating around, Pop-Tarts was up 14%, Cheez-It was up over 12%, Rice Krispies Treats was up 8%, Pringles was up over 4%, and so forth and so on. So, these are the brands that we said we're going to invest in around our Deploy for Growth strategy. These are the brands that have the On the Go pack formats. And these are the brands that have the new big innovations. And it's working. It's working in the marketplace. And therefore we're going to continue to focus on that. And it's not about proliferation. It's about innovating around the big brands, from a pack format but also from an innovation food format. And we feel good about what that's giving us in the marketplace.

[David Driscoll:]

Thanks for all the detail.

[John Renwick:]

Operator, I think we only have time for one last question.

[Operator:]

And that question will come from Eric Larson with Buckingham Research Group. Please go ahead.

[Eric Larson:]

Yeah. Thank you everyone. And Good luck to you Fareed as well as Amit. Looking forward to working with you now as well. So Steve, it's a follow-up question here that I have. It's again on snack which is really working for you. And you're a bigger snacking company today than you're a cereal company and so this is important. And the goal of changing your DSD was to free up the resources the marketing resources, so that you can invest against the brands. And I think you sort of lapped -- I think mid-part of last year you finally lapped all of that conversion process. So my question is you talked about spending all -- are we still looking at a significant year-over-year increase in let's say your advertising/promotional investment in North America snacks? Are we halfway through that and this year is still. I'm just trying to gauge the great sustainability you've got here of the top line momentum.

[Steve Cahillane:]

Yes. Thanks for the question, Eric. We have fully lapped the DSD transition and that includes the investments that we shifted from DSD capability into brand building. And so, as I said before, we are going to maintain our agility, but we feel like we have the right levels of investment against the right brands. And it's working in the marketplace. It's showing good consumption growth against those brands that I just rattled off and you can look at the same Nielsen numbers we look at when you look at things like conversion of feature and display. We feel good about the way we're executing in the marketplace in a post-DSD world. So fully lapped right levels, more or less of brand building against those brands and good execution in the marketplace and the consumption is showing that it's working.

[Eric Larson:]

Okay, thank you.

[John Renwick:]

Operator, I think that's all we have time for.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to John Renwick for any closing remarks.

[John Renwick:]

Thanks, everyone, for your interest. And I am around all day so give me a call. Thanks.

[Operator:]

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