Q3 2023 WK Kellogg Co Earnings Call
Good day and welcome to the Q3 W. K Kellogg Co earnings Conference call. Today's call is scheduled to last one hour, including remarks by management and then a question and answer session. All lines have been placed on mute to prevent any background noise. If you would like to ask you.
During this time simply press star followed by the number one on your telephone keypad.
We'd like to withdraw your question. Please press star followed by <unk>.
Thank you.
Now I'd like to turn the call over to Karen Duke Vice President planning and Investor Relations. Please go ahead. Thank you operator, good morning, and thank you for joining us today for a review of our third quarter results I'm joined this morning by Gary <unk>, Our chairman and Chief Executive Officer, and Dave Mckinstry, our chief financial assets there.
Slide number two shows our forward looking statements disclaimer as you are aware certain statements made today such as projections for the 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 factors listed on the disclaimer slide as well as those in our public SEC filings.
<unk> the risk factors in our registration statement on the farm.
As we discuss our results today unless noted as reported we'll be referencing the respect of non-GAAP financial measure, which adjust for certain items included in our GAAP results and which also are presented on a standalone basis.
You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release and in the appendix to the slide presentation.
I will now turn the call over to Gary.
Thanks, Karen and good morning, everyone. Thank you for joining us today on our very first earnings call as W. K Kellogg co works.
We're excited to be speaking with you as an independent company and to have the opportunity to share our confidence in the strategy. We presented at our Investor day today, we will share more detail about how we will be running the business as a quick overview for today's call I will provide a reminder of the underlying <unk>.
For the spin discuss our strategic priorities and discuss our recent performance.
I will then turn the call over to our Chief Financial Officer, Dave <unk>, who will provide additional detail on our performance and outlook I will then provide closing comments and open the call to Q&A.
Turning to slide four the key takeaways from our call today is that we're on track and we're on track in a variety of ways first we're on track to deliver 2023 slightly ahead of the financial targets. We provided at Investor Day, we have positive margin momentum in the business as we begin our journey and continue to.
Cover from the fire and strike second we are on track to deliver 2024, and this morning, we reaffirmed our financial outlook to be clear during Investor day, we provided guidance earlier in the cycle than we plan to going forward and we did so to give clarity ahead of the spin today we are.
<unk>, our continued confidence by reaffirming that guidance, we will come back in February during what will be our normal cadence to further refine our financial outlook for 2024 next we are on track with key separation milestones, we successfully executed the spin with minimal business disruption.
And we continue to build plans to execute and then exit the transition services agreement again with a focus on minimizing disruption as we stand up our independent company.
Last we are on track with each of our strategic priorities that we outlined during investor day, while we have been an intercompany company for just a few weeks, we got off to a fast start we've been executing on each of our strategic priorities that is driving an integrated commercial plan to win.
Modernizing our supply chain, and unleashing and energized and winning culture on.
On slide five I would like to start by recognizing our team and the tremendous work that went into establishing W. K Kellogg as a publicly traded company for over a year. My leadership team has been developing our strategy, creating our organization building, our culture and executing with the attitude.
An entrepreneurial mindset of a startup with the discipline and expertise fitting of our 117 year history. The entire W. K Kellogg co organization was enroll on August one the day, we entered into what we call company in company and we have been off to the races ever since I could not.
Be more proud of how our team is operating and the passion. They show every day to drive our business forward. This opportunity is unique as is the depth and commitment of our people.
We are all ready to deliver on our purpose of inspiring great days and to capture significant value for all of our stakeholders.
If we zoom out on slide six this all started with the belief that the cereal business will be stronger as an independent company by doing so we would be able to direct our resources towards our unique strategy and unlock the full potential of our business.
Certainly comes through and how we plan to run the company very differently, which in turn we believe will drive very different outcomes. You can see here, our strategic priorities, which have been designed to have the collective impact of driving stable topline and share growth delivering outsized margin expansion and generating long term value for our.
Stakeholders.
You have heard US highlight three key themes that cut across all of our efforts that is focusing integrating and investing for example, we will focus only on winning in cereal, we will integrate the business into and to drive better execution, we will invest in capabilities technology and infrastructure.
<unk> and we will do so in a targeted highly disciplined manner and none of this would have occurred but for the spin again reinforcing why we believe W. K Kellogg is stronger as an independent company now, let's look at how the strategy is coming to life.
<unk> seven speaks to our strategic priority of driving an integrated commercial plan to when you will see there are three pillars to this priority. The first pillar brings together the demand creating infrastructure starting with combining five distinct businesses under the leadership of one commercial team that is there.
Running the business as one unit, while preserving what is unique across the region and channels. This allows us to bring together brand and channel strategies across the business.
And we're doing the same with data and analytics harnessing the power of those efforts under this team.
These businesses have already been joined up and we're operating under the new organizational structure.
With this demand creating infrastructure in place our second pillar will be to drive our consumer impact by executing our new marketing model, we will focus on delivering greater return through more effective and efficient commercial investment.
All of which is underpinned by enhanced data and analytics to drive deeper consumer and customer understanding the combination of which is intended to be a catalyst for winning in the marketplace.
Our third pillar brings this to life in store, what we call. The moment of truth, we will activate these ideas with a focused and dedicated sales force selling only cereal as a reminder, the integrated Kellogg company Salesforce was responsible for several categories most of which were a higher priority.
In cereals.
The sales force has been operating since August one and is substantially the same customer coverage as did the Kellogg company Salesforce with their time and efforts now fully dedicated to driving cereal conversion for our customers. This is a place where we chose to put our investment as we designed our organization.
Driving an integrated commercial plan to win will allow us to scale up big ideas drive consumer demand and more effectively execute with our customers on.
On slide eight we'll discuss how integrated commercial strategy is already coming to life back.
Back in August our Salesforce started showing up with customers as W. K Kellogg and included everything from ordering to shipping to billing early feedback has been quite positive. This also allowed us to meet with customers and share. Our 2020 for innovation that has been well received that said, we arent waiting for 2000.
<unk> 24 to win in the market. He is just one example, our newly integrated commercial team recently relaunched the bare naked brand, which was disproportionately hurt due to manufacturing complexities as a result of the fire and strike.
The relaunch focused on increasing taste appeal and driving fund and so again end to end approach to enhance the eating experience new packaging to highlight the food and brand and new media campaign, which surpassed our expectations now what's in the good hands, our dedicated sales force to drive merchandising distribution.
And overall performance.
Next on slide nine we outlined our second strategic priority, how we will invest to modernize our supply chain.
Our balance sheet flexibility will allow us to move from maintaining to modernizing our supply chain, leading to a much more efficient cost structure and agile system. This priority is the centerpiece of our plan to capture the 500 basis points of margin expansion, we discussed at Investor Day again, there are three pillar.
To this strategic priorities first we will be consolidating production leveraging our more efficient and cost advantaged facilities and platforms. As we said in Investor day. There is an approximately 50% cost differential between our highest and lowest cost facilities.
Have the ability to move it consolidated production across our network and we have effectively implemented these types of changes successfully in the past for.
For example, we continue to expand our production capacity and our Belleville facility. In addition, we're already working with key stakeholders in certain locations to improve plant productivity and economics.
Second as.
As we consolidate we plan to invest in new infrastructure, including adding significantly more flexible and efficient manufacturing and packaging capabilities third we're implementing improvements in our plant operating practices to unlock further efficiencies, which I'll provide an example of in a moment.
Consolidated production investing in new equipment and infrastructure and improving how we operate would result in a more agile reliable cost effective and modern supply chain.
Looking further at our operating practices on slide 10, we are already taking actions to improve engagement and Institute change. In addition to our supply chain investment. Our goal is to drive end to end operating efficiencies through high performing teams to instill the right mindset and fully leverage our assets.
Let me give you a recent example of how our new ways of working can expand capacity reduce cost and drive engagement.
I wonder if our facilities, our cross functional team of subject matter experts leverage data and analytics to reduce complexity and streamline processes, which decrease downtime and increase capacity.
As you would expect we are using this as a blueprint to implement these learnings across our network. While just an early example, it is a big change in the ways of working and demonstrates our holistic approach to modernizing our supply chain.
Unleashing and earnings and energized and winning culture is our third strategic priority on slide 11, again, three things worth mentioning first we recognize this is foundational to everything we do having the right cultural alone can change the trajectory of our business and this gives us even more confidence because.
As of the hand picked organization that the leadership team designed and created over the past year.
We will execute this priority like any other with specific plans goals and performance measures to ensure we are executing this well given its significance to the business and third it's already coming through the organization is coming through our sales force our manufacturing team and the Caribbean in Canada.
At our Battle Creek headquarters across the organization. Our people are engaged empowered to make decisions and are driving towards common goals.
Turning to slide 12, you can see that we're delivering the consistent foundation that makes our financial model at work by holding our topline flat and executing our supply chain modernization, we will deliver outsized EBITDA growth. Let me provide some context as there have been meaningful discrete events that have impacted the business.
The past few years, we relaunched the business in the second half of 2022, as we were coming out of the fire and strike we had limited investment in the front half of 'twenty two as we we're reestablishing supply with our customers. We turned on our commercial activation in a big way in the second half which included increased investment.
We resumed more normalized commercial activity in 2023, where our investment was more evenly spread across the year. The good news is that it has resulted in the type of consistent top line, we expect going forward we.
We started 2023 strong with the launch of our innovation executed pricing and regained our footing from the fire and strike all of which allow us to win in the marketplace. We have maintained our consistent delivery into Q3, even in the face of rising price elasticities in a challenged consumer.
Now on slide 13, let's take a look at our brands and performance year to date.
These brands have broad appeal across cohorts are supported by proven marketing capability and have a track record of successful innovation.
<unk> W. K owns nine of the categories top 20 brands across the U S and Canada.
This is core to what we bring to the table a strong foundation from which W. K will build in the U S. Our share of the market is up 70 basis points. This year, our big six brands are performing well with share growth on special K Raisin Bran and rice Krispies, we've increased total points of distribution in the U S on <unk>.
Frosted flakes, Froot loops, rice, krispies and continue to build plans to gain more points of distribution.
In Canada share is up 180 basis points driven by growth in frosted flakes, Rice krispies and vector the business is on track and we are executing our plan as expected.
Let's look now at how consistent topline is benefiting our profitability on slide 14 on a year to date basis gross margin has improved almost five full percentage points with three points dropping through to EBITDA.
Our improved cost structure reflects our underlying business momentum and a recovery from the fire and strike. We will continue to focus on winning in the marketplace and driving margin improvements now, let's turn to slide 15 to bring it all together.
From this point forward everything we do is in service of cereal our team wakes up every day focused on executing our strategic priorities, we're leveraging our integrated organization and demand creating capabilities to drive our commercial plan to win in the market, we are relentlessly pursuing opportunities to unlock profitability.
<unk> and optimize our cash flow.
We are not waiting you already heard about focused initiatives, we're implementing to drive better outcomes for this business.
We mentioned a couple of examples of how we will operate differently to drive high return on our investments and unlock EBITDA margin growth when.
When you bring it altogether, we plan to win in the market through the launch of our new marketing model activated in store by our dedicated sales force and enabled by a modern and reliable supply chain. We are just getting started I will now hand, the call over to Dave to take you through our financial results and outlook.
Thank you Gary.
My commentary today and details around financial results will be provided on a standalone adjusted basis, which we feel is the best depiction of our business going forward full detailed results and reconciliations have been provided in today's press release and the appendix to this presentation.
Turning to slide 17, Youll see that net sales for the third quarter were in line with our expectations at $684 million.
A one 9% decline versus the prior year period.
Year to date net sales were up four 6%, reflecting positive price realization and good momentum as we continue to rebuild the business from 2022 depressed levels specifically in the first half.
Our product performance is highlighted with share growth led by special K, Rice, Krispies, and Raisin bran and slightly offset by a health and wellness portfolio, which includes Kashi and bare naked.
For the third quarter volume was impacted by increasing levels of price elasticity lapping inventory rebuild in the prior year period, and a more disciplined promotional approach focused on balancing volume and profitability.
As previously mentioned, we have relaunched the business in the second half of 2022, which included increasing our commercial investment and led to elevated levels of promotional activity.
On price elasticity as we have seen an increase in Q3 versus levels. We previously saw throughout this inflationary cycle.
These levels are tracking with the expectations, we laid out at Investor day, and we expect they will continue into the fourth quarter and early 2024, as we lap list price actions.
All of this was expected and we remain confident in our ability to deliver our financial commitments for the year.
Gross margin for the third quarter was 28, 5%, a 290 basis point improvement versus the prior year, reflecting the benefit of positive price mix.
Our year to date gross margin improvement of 460 basis points as elevated above Q3 levels due to the lapping of fire and strike in the first half and an insurance recruitment in Q2, which we previously disclosed in our form 10.
This one time recruitment was an 80 basis point benefit to gross margin on a year to date basis.
EBITDA for the third quarter was $51 million, a 65% increase versus the prior year, driven by improved productivity and increasing levels of operational discipline.
EBITDA margin for Q3 was seven 5%, a 310 basis point improvement versus the prior year period note Q3, EBIT margin reflects our seasonally highest level of brand building to support our back to school activity.
Year to date, EBITDA is $206 million up 50% versus prior year and reflects the aforementioned drivers in gross margin and EBITDA.
This resulted in EBITDA margin year to date of nine 9%, a 300 basis point improvement.
For the year, our business has performed as we expected and we are showing steady improvement on a rolling 12 month basis, we are on track to deliver against our financial commitments for both 2023, and 2024, which will cover in just a moment.
Looking now at slide 18 discharged demonstrates the improvement we've seen in our business throughout 2023 on a trailing 12 month basis.
We already saw the consistency of our topline looking at net sales on the slide you can see we are delivering in the $2 $7 billion range.
Our top line performance has been a positive catalyst for our margin improvement.
Next looking at gross margin, you'll see that since Q1, we gained 140 basis points due to positive price mix driven by revenue growth management initiatives and increased efficiencies finally, looking at EBIT margin profitability as drop through which has resulted in a 100 basis point improvement.
Through the third quarter EBIT margin was eight 7% and in line with our expected margin trajectory, realizing price and recovery from the fire and strike.
This is a type of steady improvement we expect to continue as we finish 2023.
Moving to our opening debt position on slide 19 at the completion of our spinoff our debt balances consisted of $500 million on our term loan a and.
And $164 million of borrowings under our revolver.
At the end of Q3.
We had cash and equivalent position of $64 million and in addition, we received $44 million of cash AD spend from <unk>, resulting in implied net debt of $551 million at spin.
As Youll recall from Investor day, the proceeds from our debt, we're largely intended to fund the dividend back to <unk> for the purposes of splitting the balance sheet.
We initially estimated this dividend would be $400 million. However, the Mount increase to account for the timing difference in networking capital. This timing difference will normalize in Q4 as working capital accounts reach ongoing run rates, we expect net debt to be at targeted levels by the end of Q4.
In fact, we already paid down our revolver balance to zero as we start to realize cash inflows related to this normalization of core working capital balances.
As a reminder, our term loan a has a capacity up to $750 million with a $250 million delayed draw feature and we will primarily be used to fund our supply chain modernization.
Our revolver has a capacity up to $350 million and will primarily be used to supplement our seasonal cash flow as needed.
Turning to our outlook on slide 20 for 2023, our guidance is slightly ahead of the targets provided at Investor day.
We expect net sales to be in the range of $2 72 billion and $2 74 billion, which reflects growth of two one to two 8% we.
We expect EBIT margins to be between nine 1% and nine 2%.
This compares to $2 7 billion in net sales and approximately 9% EBITDA margin, we discussed at Investor day.
Additionally for Q4 2023 are below the line assumptions include consolidated <unk> expense of approximately $5 million and an effective tax rate of approximately 24%.
Moving now to 2024, we are reaffirming the financial outlook, we provided at Investor Day, where we said net sales would be approximately flat and EBIT dollars would be in the range of $255 million to $265 million as.
As mentioned, we provided early guidance in August for increased visibility heading into our spin and we remain confident in our ability to achieve those numbers, we will come back to you in February with more specific guidance.
Additionally for 2024 are below the line assumptions included consolidated <unk> expense of approximately $15 million.
Effective tax rate of approximately 24% again all of this is consistent with what we said on Investor day, and we will refine our 2024 financial outlook further in February at our Q4 earnings call.
Let's now move to slide 21, and take a look at our capital allocation.
First we will be focused on high ROI investments to unlock our margin expansion opportunity moving us closer in line with our center store mid cap peers.
Second we will be focused on returning capital to shareowners and with that we declared our very first dividend for Q4 of <unk> 16, a share.
Last we covered our debt position on a previous slide and our long term focus is maintaining our leverage position of approximately two times EBITDA, which we feel provides the right level of strategic flexibility.
As we begin to execute our supply chain modernization, our daily focus is on driving disciplined business decisions that improve our profitability and to optimize our cash flow for the short and long term.
In summary, we executed the spin with the balance sheet in line with expectations. Our topline is delivering consistently against our expectations and our EBITDA margin improvement journey is off to a great start.
With that I will now turn the call back over to Gary. Thank you Dave on Slide 22, let's take a final look and are reviewing the opportunity that lies ahead, we operate in a large durable category with many of its most iconic brands our singular focus on cereal, while integrating the business we will do.
Drive delivery of stable topline and share growth our actions to invest in our people and optimize our resources will allow us to realize the full benefit of our supply chain investment and deliver outsized margin growth and finally executing on our strategic priorities will lead to a significantly more cash.
Generative business producing attractive returns for our shareowners our team of 3000 colleagues across W. K Kellogg co is excited to be at the helm of this new independent company and Dave and I would like to personally. Thank each one of them for what they've done what theyre doing and what they will do to bring this strategy to <unk>.
We hope you can hear our confidence and see the progress we are making in just the first month.
Independent company I will now open the call to Q&A.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason you would like to move that question. Please press star followed by team.
To ask a question. Please press star followed by one we kindly ask that each person limit themselves to one question and one follow up thank you.
Our first question today comes from the line of Mexico from BNP Paribas. Please go ahead. Your line is now open.
Alright, Thanks for the question and it was nice to see the 'twenty three 'twenty four outlook reaffirmed.
I was curious on the shelf.
Share loss trends, we're seeing so you did highlight <unk> gained share this year by.
More recently over the last couple of Quad weeks, we've seen share losses resume in cereal.
It's pretty meaningful.
Wondering what the driver, but the drivers are and how that informs your view of <unk>.
Delivering stable growth in 2024.
Thanks, Matt terrific question.
Glad that you're here with us today, and let's start with as we answer these questions. As we were forecasting this business back at Investor Day, a lot of this has already been baked in and the reason you can tell that we were thinking that because that gave us the ability to reaffirm this morning, our 'twenty three forecast as well as our 24, but it is a very fair.
Question about the way our share performance is moving in the category. When we see this as a couple of different things that are worth mentioning first price elasticity price elasticity has hit the market pretty meaningful meaningfully in Q1, you might recall that there's been about 35% of price increases over the last couple of years.
For us and the elasticity is where rail fairly benign for quite some time with a significant uptick recently so price elasticity is comment again. This is something that we saw coming and it was part of our forecast for the second thing for US is where the impact of the timing of pricing actions on our business as we were.
Covering from our fire and strike Max we actually took pricing a little bit later than other folks and you can see in the market data that we have up highest price realization in the quarter and gives you a sense of the impact of the timing delays or the different timing for those pricing actions. So if you look at volumes over a shorter period of time, if you look at share over a shorter period of time it has a.
Pretty pronounced impact, but over time it starts to then even out now.
We continue thinking about what's happening with our share there has been a disproportion impact on us because of the way we're handling promotions last year, we were re launching the business in the first half of the year. It was really about reestablishing supply back half of the year, we turned on our commercial activation, including pro.
Motion when you see the year over year comparison this year, we're down pretty significantly and that was intentional that was part of the plan. We're looking for a more balanced approach, where we balanced volume and profitability. So all those things together, that's what's having an impact on our volume one last thing that's worth mentioning is what's happened.
With our health and wellness brands, Kashi and bear naked, they're getting hit even harder now you heard in our prepared remarks, we see this as an opportunity going forward, we've already relaunched our bear naked brand with new food new packaging new messaging. So we think we can do something special with those brands, but it's a combination of those things that in the near term.
Has impacted our share we do think that continues into the fourth quarter as we start lapping the price increases and as we start lapping what was last year, a very meaningful investment in our commercial activation.
Sure.
Thanks, very helpful and one follow up on that topic is just specifically what youre seeing with regard to value seeking behavior, whether it's a move to private label R. R.
Reducing of waste or maybe it's a move from more premium oriented brands too.
Mainstream brands, just curious for any signs you're seeing of value seeking behavior, if things seem to be getting more extreme earthquake peaked to some degree thanks very much and I'll leave it there.
I think undoubtedly the consumer is under pressure read a report this morning about dropping consumer confidence. So we recognize that's happening in the broader environment. It's interesting for us the cereal category tends to perform well in situations like this when the economy is behaving the way it is.
We have seen private label has actually gained some share if you take a step back and you look at private label earlier. This year, they're Tdp's went up and <unk> are highly correlated with sales growth. So that's what happened during the course of this year. If you look at some of the near term data it looks like the share has leveled off around 7%.
See that private label has had a meaningfully lower stake in our category than many others in dry grocery probably for a couple of reasons. One. This is a highly branded business and the big manufacturers. They invest a lot in innovation and brand building into this category and that's what makes this this category so.
Very special.
The other thing about about private label a stake in the categories, it's already quite an affordable category.
Cereal with milk a bowl is less than one dollar that's a meal. So it's already quite accessible to a lot of consumers and what's most interesting about what's happening right now in the category because youre right. The consumer is under pressure, but the premium end of the category is growing which I think gives you a sense of even at the premium side.
Of the business that it's still very accessible and affordable to our consumers. In fact, we're playing there already we introduced the first zero added sugar cereal to the category, we have specialty high protein and were expecting to do more so that's actually an exciting place for us. So yes, I think consumers are making choices there.
Undoubtedly but these category dynamics is something that we actually can work in our favor longer term.
Great. Thank you and congrats on completing the split.
Thank you Max.
Our next question today comes from the line of Ken Goldman from Jpmorgan. Please go ahead. Your line is now open.
Hi, good morning, Thank you.
I just wanted to clarify.
Is the messaging about volume just given that your commentary about share still being hit into the fourth quarter and you are lapping some meaningful investments is the messaging that we shouldnt necessarily get ahead of ourselves and model a meaningful improvement in your volume number in <unk> versus <unk>, just kind of want to get a better sense of the <unk>.
<unk> for that volume number into the next quarter and as we begin next year.
No. That's a great question, Dave wanted to given the shape of how we're thinking.
Yes, and I would suggest that the volume will be relatively consistent from Q3 levels into Q4, right as we head into next year.
I would expect Q1 to start seeing a little bit of improvement now one thing that we think about volume.
Zinc price realization.
<unk> component of our overall profitability journey right. So our GM initiatives as we go forward, we expect those things to continue and we want those things to continue as they drive meaningful amounts of profit for us.
It'll change, we think will change from some of the list price behavior that we've seen over the last couple of years, but going forward. After we lap the price increases really around the end of Q1, we'll probably see a improvement in volume, but again I do want to emphasize that we like and we want to try to continue to realize price in the March.
Place in.
And that's part of our initiatives to drive profitability.
So just to build on that is it possible that we will see.
Positive price.
Into 2024 and will some of that be on the list price side or is that more on the <unk>.
So I just wanted to get a sense of kind of the shape of that.
A little more help on that comment on what that necessarily means for the shape of the year.
Yes, I would expect that we do see positive price realization throughout the year not at the same levels, we have especially after Q1.
As I mentioned I think on the prior piece of your question I don't expect it to be heavily list prices, we've seen kind of the inflationary environment stabilize at the current levels.
Great. Thank you.
Thanks, Ken.
The next question today comes from the line of Rob Dickerson from Jefferies. Please go ahead. Your line is now open.
Great. Thanks, so much.
Maybe a follow up the follow up.
Yes.
Yes.
What we're hearing is.
Continued volume pressures in the quarter just in the labs.
Moving pieces.
But as we think about next year, maybe there is some ongoing and go forward.
<unk> potential.
But clearly as you said at the Investor day kind of reiterate.
Day sales should be flat.
For next year so.
That's kind of the first basic question would be kind of the assumption would be that I guess.
Volumes would still be down next year, and then kind of more broadly speaking just kind of want to ASIC.
Do you feel like Youre kind of.
Operating with discipline very fine line with respect to like our GM thought process vis vis the private maybe volume reaction on the go forward.
Because you've also clearly imply that you expect to take category share, which sounds like Florida dollar share maybe that volume share.
All right.
No. Thanks, Rob I think the way we would look at it is as you take a step back and look at what the.
Business was doing over the last couple of years from a member in 2022, we were supplying the supply in the category of supplying our business. The back half we had meaningful investment as we turn our commercial activation back on that's what we're lapping right now and it was a different promotional approach a different level of investment and I think youll see that.
That even more in Q4, so that is what we're working through right now as we're lapping that again that was all part of the plan. The business is executing the way we thought it would be executed and Thats why we were able to reaffirm 'twenty three and 'twenty four now going forward you have it exactly right. We are looking for a flat top line that's going to mean.
With our assumptions that we would win back market share we will use <unk> as one of those levers we think thats an important way to do that looking backwards. There's been significant price increases. We don't think that's what's going to be happening going forward. There is ways for us to manage this business, where we maintain that top line through our GM into other activities, but we're also going to be.
Turning on all the new ways, we're doing business you have to remember we just started operating five weeks ago. So we're integrating our commercial plan to win in cereal that means integrating five separate businesses finding all of the opportunities there, including our new marketing model.
Just getting started with our fit for purpose Salesforce, where all theyre going to do is be selling cereal and then over time, our supply chain gets that much more reliable. So if you think about that flywheel as the demand, creating the sales force and the supply chain functions are all working together you can see the dynamic impact that should have.
On our business as a whole, but youre right. Our GM is going to be important to us doing that in the right way the balanced promotional approach we're going to have all of that collectively we will have the impact on our topline going forward.
Alright, thank you so much.
Youre welcome. Thank you.
The next question today comes from the line of Pizza call Day from Bank of America. Please go ahead. Your line is now open.
Hey, Peter Hey, guys. Good morning, Thanks for taking the question. Thank you good morning.
Dave I know you don't want to get too much into into 'twenty four.
Official guidance, but.
I was just wondering if you could talk a little bit about the cadence of gross margin. Obviously, you've had some nice progression here in 'twenty three I think there were maybe some one off factors as well in the year, but just as we're starting to think about kind of 24 relative to 'twenty three gross margin.
Could discuss some of those.
Non repeating factors and then maybe some of your expert to expectations on underlying improvement.
Yes, I appreciate the question so I would start by saying, yes, we will come back with further detail in February and refine these numbers for you.
But Peter is where I would start is as you can pretty quickly get to that we're expecting some level of margin.
Improvement into 2024 from our current 2023 guidance that we're giving today.
I would suggest that the majority of that comes at gross margin right. So youll see a pretty close flow through from gross margin to EBITDA margin and.
In total in 2024 again little bit early for us to quantify that will come back to it I did mentioned some one time things that we had we talked about the recruitment and the impact that that had on this year and that will be a lab for us that even with that one time thing coming away. We do expect gross margin to continue to improve into next year.
Got it Okay. That's helpful and maybe just and I don't want to pin you down to it but any any early thoughts on a couple of cash flow items for next year.
Capital spending free.
Cash flow just how we should kind of start to think about that.
Yes, again, we will come back in February with more detail on it I think one thing that we said on cash flow Investor day, as we expect to convert.
Around 100% of net income to cash before investments.
We're still working on.
Exact detail exact timing of those cash outlays.
Insignificant as we think about our modernization program. So still further refinement, there and we'll come back in February in more details, but I.
I think we've given some simple direction on base cash flow and then it's really coming back to refine those those investment assumptions.
Great. Thanks, so much.
Thank you.
Our next question today comes from the line of Andrew Lazar from Barclays. Please go ahead. Your line is now open.
Great. Thanks.
Gary and Dave.
Good morning, Andrew Good morning.
Great.
You talked a little bit about sort of the promotional merchandising approach trying to balance sort of the profitability and the merchandising aspect of it I'm curious if you could talk a little bit about what youre seeing in terms of the effectiveness.
However, the promotional and merchandising activity that you are putting out there.
This merchandising activity.
For I think for most of the industry tends to be pretty high return.
It generates typically on a incremental volume when sort of done the right way.
What are you seeing in terms of the trends in your incremental merchandising that you are putting out there in terms of the return profile to the extent that you can sort of measure it in that way.
Well I appreciate you asking the question Andrew.
Promotions have been and always will be an important part of our business and we talked earlier about a balanced approach and we can do so much from a repeat that as we enter into this answer which is we're balancing this year more about volume and profitability as we're thinking about our promotions and we do believe it is delivering what we expected to deliver again.
Im repeating myself, Andrew it's one of the many reasons, we are able to reaffirm 'twenty three and 'twenty. Four now we did talk at Investor Day that we think there is a meaningful opportunity for us and merchandising and promotion in general when you think about 2019 levels. We're not back there yet the category is we think theres opportunities for.
To get there in cereal does have some of the better lifts and dry grocery so for us it's doing what we expected it to do but I would also tell you given the what we're doing in our business and our strategy. We would expect to execute this even better going forward. When you have the demand creating infrastructure, that's being integrated together with our sale.
For us we absolutely believe in one of the things that were.
We believe will help drive the business going forward is the way we execute so where we are right now with what we were expecting but we think we'll do even better as we go forward as we turn on this new machine that we are creating a W. K Kellogg.
Great and then a quick follow up just on a specific brand I remember a couple of years ago Special K, a very big brand was trying to do a process to sort of really reinvent basically.
The brand proposition to consumers right. It was going from sort of what it would be.
The weight loss oriented brand to I guess more of a weight wellness type of approach.
Those types of things and redefining our brand to consumers right can be tough, but it sounds like.
Now in a much better track if I'm if I'm hearing you right. So I'm curious how is that process played out in that brand.
Or is it now with respect to sort of I guess consumers.
I would agree with.
We talked a lot about this quite some time ago about.
Special K was positioned as a diet brand and let's remember specialty we've really benefited from that but the world then turned against diet brand special K and others like that in the industry and Youre right. Turning a brand like that is not easy to do we feel good about where special K is right now and it's getting after health and wellness and better diets and.
Wellness of our consumer a couple of recent examples.
<unk> brings to life the way the team is thinking about the brand would be special K zero, the first euro added sugar.
Cereal into the category as well as specialty high protein two things there you can see the nutrition credentials in the food just in the names of the products.
But it's also these businesses are really about how do we drive this forward and how do we drive the business into more premium products as well. So it's both of those things health and wellness, we're moving into premium but look specialty is also for all consumers. So I think the team has done a terrific job of transitioning that brand evolving as we go.
Forward to match changing consumer behaviors, which is what we need to do as a business going forward.
Great. Thanks, so much.
Our final question today comes from the line of David Palmer from Evercore ISI. Please go ahead. Your line is now open.
Thank you just to confirm just on sales guidance and what it implies.
How are you thinking down 3% to 4% organic sales in the fourth quarter in the rough.
Roughly flat zero segment, and your 24 guidance implies that youre going to stabilize share and a flat cereal segment.
Yes, I think if you look at Q4, you can pretty quickly get to what we think of Q4 and it's going to be not all that dissimilar maybe down in the 2% to 3% range for Q4, So again not all that different from where we're at in and in Q3.
Our current trajectory.
Remember, though we're lapping quite a bit of promotional activity. We spoke about that in the base year. We also had a step up last year in Q4 and brand building. So we have those two things that are kind of tailwind in the second half of last year driving incremental volume for us, but now we're lapping as we got back to the more disciplined I'll call. It approach.
The other thing to remember in Q4 as Q4 is seasonally our lowest dollar value quarter of the year and not insignificantly cell.
As we transition going forward I think you said it well is that we expect the category to kind of return to the pre pandemic levels and that we'd be at a more of a flattish net sales level. So I think you said it well there David and that is what we expect over the next quarter and beyond.
And then just broadly youre not repeating some promotional activity we could see it in the data.
That you're you've lost share of promotional activity out there clearly clearly you didn't want to repeat some of that and I guess going forward.
Maybe you can characterize what type of activity that was thats may not have had a positive ROI and the type of thing that growth spending you would like to make as you try to stabilize market share I think that would be helpful. Thank you.
Yes, that's the right observation.
The best way for us to answer that is to sort of compare and contrast last year to this year. These were intentional choices that we made and it was intentional last year as you reestablishing the business and turning your commercial activities back on in a big way, we leaned into promotions. We're now at a different year, we've normalized the way, we're spending our advertising and promotion.
<unk> much more evenly balanced throughout the year. So we were making different choices in the back half because you simply smoothing it out more what you can what you can think about is the way we think about promotions going forward, it's about doing the right decisions.
Driving the right return with those promotions that balance of volume consumption and profitability and for us and I'm going to repeat myself a little bit here what gives us a lot of confidence going forward is we're going to have better supply as we move forward, we're going to have a dedicated sales force as well and the integrated.
Demand, creating infrastructure, we're pulling together, it's going to let US design these promotions and execute them even better. So that's how we're thinking about this but again. This is a choice that we made the right choice and I think you can sense that we knew that was going to be the impact of that is how we forecasted the business back in August.
Okay. Thank you.
Youre welcome.
There are no additional questions at this time, so I'd like to pause.
The group that David <unk> for any closing remarks.
Well, we'd like to thank you all for joining our call. Our very first earnings call as W. K Kellogg co. We look forward to sharing our Q4 results with you in February very much appreciate it everybody.
This.
Today's conference call. Thank you all for your participation you may now disconnect.
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