Q1 2024 WK Kellogg Co Earnings Call
Yes.
Operator: Good day and welcome to the Q1 WK 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.
Good day and welcome to the Q1 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. Thank you I'd now like to turn the call over.
Operator: Thank you. I'd now like to turn the call over to Karen Duke, Vice President of Finance and Investor Relations. Please go ahead.
Operator: Kevin Jake Vice President Finance and Investor Relations. Please go ahead.
Karen Duke: Thank you, operator. Good morning, and thank you for joining us today for a review of our first quarter results. I'm joined this morning by Gary Pilnick, our Chairman and Chief Executive Officer, and Dave McKinstry, our Chief Financial Officer. Slide number two shows our forward-looking statement disclaimer. As you are aware, certain statements made today, such as projections for the company's future performance, are forward-looking statements, and actual results could be materially different from those projected.
Karen Duke: Thank you operator, good morning, and thank you for joining us today for a review of our first quarter results.
Karen Duke: I'm joined this morning by Gerry Pilnak, our chairman and Chief Executive Officer, and Dave Mckinstry, Our Chief Financial Officer Slide number two shows our forward looking statement disclaimer as you are aware certain statements made today, such as projections for the company's future performance.
Karen Duke: 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 SEC filings, including the risk factor section. As we discuss our results today, unless noted as reported, we'll be referencing the respective non-GAAP financial measures, which adjust for certain items included in our GAAP results. For periods prior to the spin-off, results are presented on a stand-alone basis.
Karen Duke: 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 SEC filings, including the risk.
Karen Duke: <unk> Factors' section as we discuss our results today unless noted as reported we'll be referencing the respective non-GAAP financial measures, which adjust for certain items included in our GAAP results.
Karen Duke: For periods prior to the spin off results are presented on a standalone basis.
Karen Duke: For periods after the spin-off, results are presented on an adjusted basis and compared to our 2023 stand-alone adjusted results. You can find definitions of each non-GAAP measure and GAAP-to-non-GAAP reconciliation within our earnings release and in the appendix of the slide presentation. I will now turn the call over to Gary.
Karen Duke: For periods. After the spin off results are presented on an adjusted basis and compared to our 2023 Standalone. Adjusted results you can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliation within the earnings release and in the appendix of the slide.
Karen Duke: Titian.
Karen Duke: I will now turn the call over to Gary Thanks, Karen and good morning, everyone. Thanks for joining us for today's call I will discuss first quarter results business performance and the progress we are making executing our strategy.
Gary H. Pilnick: Thanks, Karen. Good morning, everyone.
Gary H. Pilnick: Thanks for joining us. On today's call, I will discuss first quarter results, business performance, and the progress we are making on executing our strategy. You'll hear how we're on track and delivering on our commitment. You'll also hear how we're optimizing our business by being a focused, integrated team, which leads to our stable top line and expanding margins. I will then turn the call over to our Chief Financial Officer, Dave McKinstray, who will provide additional detail on our Q1 performance. We will close out the call with time for Q&A.
David McKinstray: We'll hear how we're on track and delivering on our commitments. You'll also hear how we're optimizing our business by being a focused integrated team, which leads to a stable top line and expanding margins I will then turn the call over to our Chief Financial Officer, David Mckinstry, who will provide additional detail on our Q1 performance we will close.
David McKinstray: <unk> out the call with time for Q&A on.
Gary H. Pilnick: On slide 4, before moving to our financial results, I would like to remind you of the unique opportunity that we have at WK Kellogg. If you zoom out and simplify our approach, there are two things that we believe will deliver outsized value. First, maintaining a stable top line, and second, expanding EBITDA margin by 500 basis points as we exit 2026. This is the goal of our first Strategic Horizon.
David McKinstray: On slide four before moving to our financial results I would like to remind you of the unique opportunity that we have a W. K Kellogg co.
Gary H. Pilnick: If you zoom out and simplify our approach there are two things that we believe will deliver outsized value first maintaining a stable top line and second expanding EBITDA margin by 500 basis points as we exit 2026.
Gary H. Pilnick: This is the goal of our first strategic Horizon, we believe we will deliver significant value for our stakeholders by growing our margin from 9% to 14% while maintaining our top line you have already seen the early results as our top line has improved quarter over quarter add to that we have discussed improvements in our operating.
Gary H. Pilnick: We believe we will deliver significant value for our stakeholders by growing our margin from 9% to 14% while maintaining our top line. You have already seen the early results as our top line has improved quarter over quarter. In addition to that, we have discussed improvements in our operational efficiency, our customer service, and capacity during our Q4 call and at CAGNIC. What you will hear more of today and on future calls is how strategic priorities are working together to deliver on our unique opportunities. As we have said, a 14% adjusted EBITDA margin is a milestone, not a destination.
Gary H. Pilnick: Efficiency, our customer service and capacity during our Q4 call and at Cagny.
Gary H. Pilnick: You will hear more of today and our future calls is how strategic priorities are working together to deliver on our unique opportunity as.
Gary H. Pilnick: As we have said a 14% adjusted EBITDA margin as a milestone not a destination, we will focus on continuing to drive margin improvements beyond 2026 during our second strategic horizon now, let's look at our financial results for Q1, and see how our performance fits squarely in line with our expectation.
Gary H. Pilnick: We will focus on continuing to drive margin improvements beyond 2026 during our second strategic horizon. Now, let's look at our financial results for Q1 and see how our performance fits squarely in line with our expectations for this year as well as our long-term model. Looking at slide 5, you can see our financial results for Q1. For the first quarter, adjusted net sales declined 0.8%, in line with our full year guidance and a sequential improvement versus Q4 2023.
Gary H. Pilnick: For this year as well as our long term model.
Gary H. Pilnick: Looking at slide five you can see our financial results for Q1.
Gary H. Pilnick: For the first quarter adjusted net sales declined 8% in line with our full year guidance and a sequential improvement versus Q4 2023. We've previously discussed that we will be lapping our last price increase in March and you likely saw in the public data that our results improved as we moved through the <unk>.
Gary H. Pilnick: We previously discussed that we would be lapping our last price increase in March, and you likely saw in the public data that our results improved as we moved through the quarter. Adjusted Gross Margin Expanded 240 Bases. This performance reflects the benefit of everything we do being in service of Serial and focusing our organization on continued operational discipline and enhanced execution. We delivered adjusted EBITDA of $75 million, 13.6% growth versus a year ago, and a margin of 10.6%, reflecting the benefit of improved gross margin.
Gary H. Pilnick: <unk>.
Gary H. Pilnick: Adjusted gross margin expanded 240 basis points. This performance reflects the benefit of everything we do being in service of cereal and focusing our organization on continued operational discipline and enhanced execution.
Gary H. Pilnick: We delivered adjusted EBITDA of 75 million 13, 6% growth versus year ago, and a margin of 10, 6%, reflecting the benefit of improved gross margin. We are encouraged by our start to the year and how the organization is executing our priorities turning to slide six.
Gary H. Pilnick: We are encouraged by our start to the year and how the organization is executing our priorities. Turning to slide six, the U.S. cereal category improved sequentially and was broadly flat in Q1, with volume declining low single digits, and, as we mentioned on previous calls, the gap between price and volume narrowed.
Gary H. Pilnick: U S cereal category improved sequentially and was broadly flat in Q1 with volume declining low single digits and as we mentioned on previous calls the gap between price and volume narrowed our performance in the U S. Lagged the category slightly as we continued to see the impact of our 2023 list price increase which.
Gary H. Pilnick: Our performance in the U.S. lagged the category slightly as we continued to see the impact of our 2023 list price increase, which we did not fully lap until March. However, we are pleased with the performance of our core portfolio of iconic brands; four of our core six brands grew in the quarter despite the headwind from lapping prices. And our Canada team delivered excellent results, growing 4.6% during the quarter and extending our category-leading share position by 240 basis points to 39.3%. Overall, the business performed largely as expected, and our Q1 performance has us on track for the year.
Gary H. Pilnick: We did not fully lap until March we are pleased with the performance of our core portfolio of iconic brands.
Gary H. Pilnick: Four of our core six brands grew in the quarter. Despite the headwind from lapping price and our Canada team delivered excellent results growing four 6% during the quarter and extended our category leading share position by 240 basis points to 39, 3% overall the business.
Gary H. Pilnick: Largely as expected and our Q1 performance has us on track for the year now lets look at our strategic priorities on slide seven all of which you've seen before today I will start with a brief reminder of each and then give you a tangible example of how our priorities worked together to drive the business end to end.
Gary H. Pilnick: Now, let's look at our strategic priorities on slide seven, all of which you've seen before. Today, I will start with a brief reminder of each and then give you a tangible example of how our priorities work together to drive the business end-to-end. Our first pillar of driving an integrated commercial plan to win brings together our demand-creating infrastructure with our in-store activation. This priority allows us to operate more seamlessly as we move our products from idea to shelf to the consumer's pantry.
Gary H. Pilnick: Next, our second strategic pillar, Modernizing Our Supply Chain, is about delivering meaningful operating improvement, gaining flexibility and agility to win in the market, and driving increased reliability. As we have said, this is the centerpiece of our margin expansion efforts and also helps to drive our top... Finally, our third pillar, unleashing an energized and winning culture. This underpins how we do things at WK. It's something we call the WK Way.
Gary H. Pilnick: Our first pillar of driving an integrated commercial plan to win brings together our demand creating infrastructure with our in store activation. This priority allows us to operate more seamlessly as we move our products from idea to shelf to consumers' pantries.
Gary H. Pilnick: Next our second strategic pillar modernizing our supply chain is about delivering meaningful operating improvement gaining flexibility and agility to win in the market and driving increased reliability. As we have said this is the centerpiece of our margin expansion efforts and also helps to drive our topline fine.
Gary H. Pilnick: Our third pillar, unleashing and energized and winning culture.
Gary H. Pilnick: This underpins how we do things at W. K, it's something we call the W. K way.
Gary H. Pilnick: Now, let's look at an example of how our strategic priorities work together and operate in an integrated way to drive the vision. Slide 8 demonstrates how we are executing end-to-end with our largest brand, Frosted Flakes, which grew dollar sales 1.4% in the U.S. in Q1. First, we are executing our new marketing model, and Frosted Flakes is one of the first brands on which we focus. It starts with a new ad campaign that we're running in both the US and Canada.
Gary H. Pilnick: Now, let's look at an example of how our strategic priorities work together and operate in an integrated way to drive the business.
Gary H. Pilnick: Slide eight demonstrates how we are executing end to end with our largest brand frosted flakes, which grew dollar sales one 4% in the U S. In Q1.
Gary H. Pilnick: First we are executing our new marketing model and frosted flakes is one of the first brands on which we focused.
Gary H. Pilnick: It starts with a new AD campaign, which were running in both the U S and Canada.
Gary H. Pilnick: The next generation of their great campaign was developed with additional assets specifically designed for a variety of media channels, including TV, digital, and social. These assets allow us to target and expand our reach to different cohorts, notably without additional cost.
Gary H. Pilnick: The next generation of their great campaign was developed with additional assets specifically designed for a variety of media channels, including TV digital and social.
Gary H. Pilnick: These assets allow us to target and expand our reach to different cohorts, notably without additional cost second our dedicated sales force is activating in store during the quarter, we leveraged in store programming to highlight the brand and are better utilizing our data and analytics to drive store specific insights.
Gary H. Pilnick: Second, our dedicated sales force is activating in-store. During the quarter, we leveraged in-store programming to highlight the brand and are better utilizing our data and analytics to drive store-specific insights. One example of how our commercial teams are working in tandem is our collaboration with CROC. Our growth team secured a relevant partner, developed specialized food with a co-branded box, and offered specialty crock shoes to consumers. The partnership of our iconic Tony the Tiger and Toucan Sam characters with the popular Crocs brand brings excitement to the category.
Gary H. Pilnick: One example of how we our commercial teams are working in tandem is our collaboration with crocs our growth team secured a relevant partner developed specialized food with a co branded box and offered specialty crocs shoes to consumers.
Gary H. Pilnick: Partnership of our iconic Tony the Tiger and Toucan, Sam characters with the popular Crocs brand brings excitement to the category and our sales team is selling the collaboration all the way through they brought our innovation to customers and secured merchandising, allowing us to be ready on shelf and display to excite consumers and to.
Gary H. Pilnick: And our sales team is selling the collaboration all the way through. They brought our innovation to customers and secured merchandising, allowing us to be ready on the shelf and display to excite consumers and drive conversion for our customers. And third, this is all enabled by a reliable supply chain. Better customer service enabled by OEE improvements means we can fulfill our customers' needs consistently and win new opportunities. Unique pack sizes and culturally relevant innovation allow us to win in different channels and with different consumers.
Gary H. Pilnick: Drive conversion for our customers and third this is all enabled by a reliable supply chain.
Gary H. Pilnick: Better customer service enabled by OE improvements means we can fulfill our customers' needs consistently and win new opportunities unique pack sizes and culturally relevant innovation allow us to win in different channels and with different consumers.
Gary H. Pilnick: This ability to reliably supply our core and innovation, as well as the different pack sizes and formats consumers are looking for, is resulting in success across multiple channels. We recognize this is just one brand, and we still have work to do as we transform our business. But this is a great example of how we're executing our integrated strategy end-to-end across marketing, sales, and supply chain to drive positive business results. Now, let's turn to slide 9 to discuss how we're advancing our supply chain priorities.
Gary H. Pilnick: This ability to reliably supply our core and innovation as well as the different pack sizes and formats consumers are looking for is resulting in success across multiple channels.
Gary H. Pilnick: We recognize this as one brand and we still have work to do as we transform our business, but this is a great example of how we're executing our integrated strategy end to end across marketing sales and supply chain to drive positive business results.
Gary H. Pilnick: Now, let's turn to slide nine to discuss how we're advancing our supply chain priorities.
Gary H. Pilnick: Here's a reminder of how we approach modernizing our supply chain with some of the proof points we've discussed. Our approach of investing capital, building capabilities, and consolidating the network will result in more reliable and efficient operations, delivering enhanced margin performance. First, we talked to you about investing capital, for example, in Belleville, where we are expanding the facility and installing new equipment to shift production to one of our most efficient and effective locations. We also work with city and state officials to supplement investments at our Battle Creek location.
Gary H. Pilnick: Here's a reminder of how we approach modernizing our supply chain with some of the proof points. We have discussed with you our approach of investing capital building capabilities and consolidated the network will result in more reliable and efficient operations delivering enhanced margin performance first we talked to you about it.
Gary H. Pilnick: Investing capital for example, in Belleville, where we are expanding the facility and installing new equipment to shift production to one of our most efficient and effective locations. We also work with city and state officials to supplement investments at our Battle Creek location.
Gary H. Pilnick: Next, on our Q4 call, you heard about how we are building capabilities through implementing high-performance work systems and through our WK Academy, a comprehensive training program. Combined, these investments in our people create even more capability and engage teams that drive continuous improvement. Through the WK Academy, our capability building is already taking root, creating higher levels of engagement, which is showing up in our results.
Gary H. Pilnick: On our Q4 call you heard about how we are building capabilities through implementing high performing work systems and through our WK Academy a comprehensive training program combined these investments in our people create even more capability and engaged teams that drive continuous improvement.
Gary H. Pilnick: Due to the WK Kadhum mean, our capability building is already taking route creating higher levels of engagement, which is showing up in our results. For example in Q4, we achieved our highest level of customer service in four years, which we delivered by improving plant reliability and efficiency.
Gary H. Pilnick: For example, in Q4, we achieved our highest level of customer service in four years, which we delivered by improving plant reliability and efficiency. OEE improved across our plants, allowing us to enter 2024 in a more reliable product supply posture. And we are pleased that we have maintained that higher level of efficiency into the first. Finally, at Cagney, we shared how we are consolidating production on our shred platform that produces mini-wheats from three lines at three separate facilities to two lines at two of our lower cost facilities. Now, let's turn to slide 10 for another proof.
Gary H. Pilnick: <unk> improved across our plants, allowing us to enter 2024, and a more reliable product supply posture and we are pleased that we have maintained that higher level of efficiency into the first quarter.
Gary H. Pilnick: Finally at Cagny, we shared how we are consolidating production on our shred platform that produces many weeks from three lines at three separate facilities to two lines at two of our lower cost facilities now, let's turn to slide 10 for another proof point.
Gary H. Pilnick: Since we became an independent company, we have been working to establish better integration across our teams. In Q1, that integration enabled us to better align our demand plan with our production. This provides better visibility to our procurement team when sourcing materials and ensures our manufacturing teams are producing the right product at the right time. This end-to-end connectivity within our supply chain has allowed us to reduce waste through fewer inventory write-offs, which was a positive driver of our Q1 gross margin performance.
Gary H. Pilnick: Since we became an independent company, we have been working to establish better integration across our teams in Q1 that integration enabled us to better align our demand plan with our production plan.
Gary H. Pilnick: This provides better visibility to our procurement team when sourcing materials and ensures our manufacturing teams are producing the right product at the right time.
Gary H. Pilnick: This end to end connectivity within our supply chain has allowed us to reduce waste through fewer inventory write offs, which was a positive driver of our Q1 gross margin performance. While we're just getting started transforming our supply chain. This is a good example of how our focused and integrated team can drive to enhance margin.
Gary H. Pilnick: While we're just getting started transforming our supply chain, this is a good example of how our focused and integrated team can drive enhanced margin through improved end-to-end business planning and enhanced supply chain reliability. Each time we have spoken with you, we have provided updates on our supply chain. You can expect that to continue, and we'll provide another update on our next earnings report.
Gary H. Pilnick: Through improved end to end business planning and enhanced supply chain reliability each.
Gary H. Pilnick: Each time, we have spoken with you we have provided updates on our supply chain you can expect that to continue and we'll provide another update on our next earnings call.
Gary H. Pilnick: Finally, let's turn to slide 11, since Investor Day last August and at every Investor Call Center.
Gary H. Pilnick: Since Investor Day last August and at every investor call since, we've shared with you the ways in which we're making meaningful progress against our strategic priorities. Our transformation is underway. You can see that in the way our new marketing model is coming to life. You can see it in how marketing sales and the supply chain are operating in an integrated way. And you can see it in how it's coming through in our financial results.
Gary H. Pilnick: We shared with you the ways in which we're making meaningful progress against our strategic priorities. Our transformation is underway you can see that in the way our new marketing model is coming to life, you can see it and how marketing sales and supply chain are operating in an integrated way and you could see it how it's coming through in our <unk>.
Gary H. Pilnick: Financial results.
Gary H. Pilnick: This is all underpinned by the WK way, our strong and unique engagement across our organization. As I said, it's early days, and there's much work to be done, both near and longer term, but we are encouraged by our start to the year. We're executing our plan, and we're focused on delivering on our commitments. Now, I'll turn the call over to Dave to walk through our financial results in more detail. Thank you, Gary.
Gary H. Pilnick: This is all underpinned by the W. K way, our strong and unique engagement across our organization as I said, it's early days and as much work to be done both near and longer term, but we are encouraged by our start to the year, we're executing our plan and we're focused on delivering on our commitments and now.
Gary H. Pilnick: I will turn the call over to Dave to walk through our financial results in more detail. Thank you Gary as a reminder, due to the spin our first quarter results and future 2024 results are based on a comparison to our 2023 Standalone adjusted results as we believe this provides the best comparable for our business for us.
David McKinstray: Thank you, Gary. As a reminder, due to the spin, our first quarter results and future 2024 results are based on a comparison to our 2023 stand-alone adjusted results, as we believe this provides the best comparison for our business. Further detail of these measures and reconciliations has been provided in today's press release and the appendix to this presentation. Now, looking at our results on slide 13, you will see that adjusted net sales for the first quarter were $707 million, a 0.8% decline versus the prior year period.
David McKinstray: Details of these measures and reconciliations have been provided in today's press release and the appendix. This presentation now looking at our results on slide 13, you'll see the adjusted net sales for the first quarter were $707 million up <unk>, 8% decline versus the prior year period. This is an.
David McKinstray: This is an improved trajectory versus our fourth-quarter results. As we spoke about in our fourth-quarter call, the gap between price and volume continued to narrow for both us and the category during the first quarter. Price realization for WK was 6.3%, offset by a volume decline of 7%.
David McKinstray: Proved trajectory versus our fourth quarter results.
David McKinstray: As we spoke about in our fourth quarter call the gap between price and volume continued to narrow for both us and the category during the first quarter price realization for W. K was six 3% offset by volume decline of 7%.
David McKinstray: Recall that in the fourth quarter, our net sales declined 2.7% with a positive price of 7.5% and a volume decline of 10.1%. This improved trend in volume is due in part to the lower impact of price elasticities as we lapped our last major price increase in March. Shipment volume also benefited from an increase in retailer inventory versus last year, which we expect to normalize in the second quarter. In the US, Frosted Flakes, as Gary outlined, along with Raisin Brand and Rice Krispies were three of our fastest growing brands in the first quarter.
David McKinstray: Recall in the fourth quarter, our net sales declined two 7% with positive price of seven 5% and a volume decline of 10, 1%.
David McKinstray: This improved trend in volume is due in part to a lower impact of price elasticity as we lapped our last major price increase in March.
David McKinstray: Shipment volume also benefited from an increase in retailer inventory versus last year, which we expect to normalize in the second quarter.
David McKinstray: In the U S frosted flakes, as Gary outlined along with Raisin Bran and Rice Krispies, where three of our fastest growing brands in the first quarter and.
David McKinstray: In Canada, the business continued its strong performance behind brands like Frosted Flakes and Mini Whip. Adjusted EBITDA for the first quarter was $75 million, a 13.6% increase versus the prior year quarter, driven by the benefit of price mix and improved productivity. Our EBITDA growth is a result of our improved supply chain operations and sustained improvements realized in late 2023. In Q1, we also benefited from increased end-to-end focus, which significantly reduced weight.
David McKinstray: In Canada. The business continued its strong performance behind brands like frosted flakes and mini wheats.
David McKinstray: Adjusted EBITDA for the first quarter was $75 million or 13, 6% increase versus the prior year quarter, driven by the benefit of price mix and improved productivity.
David McKinstray: Our EBIT growth is a result of our improved supply chain operations and sustained improvements realized in late 2023.
David McKinstray: In Q1, we also benefit from benefited from increased end to end focus which significantly reduced waste.
David McKinstray: As we step back, the business is performing as we forecasted, and volume and price are narrowing. Our top line has been stable, and we've delivered profitability improvement. Turning to slide 14, I will now focus on our operational highlights.
David McKinstray: As we step back the business is performing as we forecasted and volume and price are narrowing.
David McKinstray: Our topline has been stable and we delivered profitability improvement.
David McKinstray: Turning to slide 14, I will now focus on our operational highlights.
David McKinstray: Building off our net sales performance I spoke about on the prior page, adjusted gross margin for the first quarter was 29.2%, a 240 basis point improvement versus the prior year. This was largely the result of our operational efficiencies referenced on the prior slide. Recall that in Q4, our gross margin reached the highest level in 12 quarters, at 29.2%, and we have sustained that meaningful improvement in gross margin during the first quarter. This reflects a tangible benefit of the focused and integrated way in which we are operating.
David McKinstray: Building off our net sales performance I spoke about on the prior page adjusted gross margin for the first quarter was 29, 2%, a 240 basis point improvement versus the prior year. This was largely the result of our operational efficiencies referenced on the prior slide recall that in Q4, our gross.
David McKinstray: <unk> reached the highest level in 12 quarters at 29, 2% and we've sustained that meaningful improvement in gross margin during the first quarter.
David McKinstray: This reflects a tangible benefit of the focused and integrated way in which we're operating.
David McKinstray: Adjusted EBITDA margin in Q1 was 10.6%, a 130 basis point increase versus the prior year period, driven by the flow through of gross margin, which was partially offset by higher brand building in the first quarter as we rephased investment from the second half of the year. Looking forward, we expect gross margin to continue to be the primary driver of EBITDA improvement. On our below-the-line items, interest expense in Q1 was $8 million, and other income was $6 million. Our reported tax rate for the first quarter was 25.9%.
David McKinstray: Adjusted EBITDA margin in Q1 was 10, 6%, a 130 basis point increase versus the prior year period, driven by the flow through of gross margin, which was partially offset by higher brand building in the first quarter as we re phased investment from the second half of the year.
David McKinstray: Looking forward, we expect gross margin to continue to be the primary driver driver of EBITDA improvement.
David McKinstray: On our below the line items interest expense in Q1 was $8 million and other income was $6 million.
David McKinstray: Our reported tax rate for the first quarter was 25, 9% for 2024, we now expect our full year tax rate to be approximately 25%.
David McKinstray: For 2024, we now expect our full-year tax rate to be approximately 25%. Slide 15 demonstrates how the unique opportunity of a stable top line and margin expansion is already coming through in our results. We showed this slide previously and have updated it to show our trailing 12-month performance through Q1. Looking at the slide, we are consistently delivering net sales and $2.7 billion. Our stable top-line performance has been a positive catalyst for our margin improvement and has been enabled by our improving supply reliability.
David McKinstray: Slide 15 demonstrates how the unique opportunity of a stable top line and margin expansion is already coming through our results.
David McKinstray: We showed this slide previously updated to show our trailing 12 month performance through Q1.
David McKinstray: Looking at the slide we are consistently delivering net sales in the $2 $7 billion range are stable top line performance has been a positive catalyst for our margin improvement and has been enabled by our improving supply reliability.
David McKinstray: Next, since Q2 2023, we've seen a meaningful increase in adjusted gross margin, gaining 200 basis points. This improvement is primarily related to driving operational efficiencies within our supply chain and from positive price mix from our revenue growth management initiative. Finally, looking at adjusted EBITDA margin, our gross margin improvement is largely flowing through, and profitability has significantly improved, moving from 8% to 9.8%, a 180 basis point increase on a trailing 12 Earlier we spoke of the unique opportunity for WK. In our short time as an independent company, we are already making progress against our first horizon goal of a 14% adjusted EBITDA margin as we exit 2026. Next, I'll discuss our deposition on slide 16.
David McKinstray: Next since Q2 2023, we've seen meaningful increase in adjusted gross margin gaining 200 basis points. This improvement is primarily related to driving operational efficiencies within our supply chain and from positive price mix from our revenue growth management initiatives.
David McKinstray: Finally, looking at adjusted EBITDA margin, our gross margin improvement is largely flowing through and profitability has significantly improved moving from 8% to nine 8% a 180 basis point increase on a trailing 12 month basis.
David McKinstray: Earlier, we spoke spoke to a unique opportunity for W. K in our short time as an independent company, we are already making progress against our first horizon goal of 14% adjusted EBITDA margin as we exit 2026.
David McKinstray: Next I'll discuss our debt position on slide 16.
David McKinstray: We ended the first quarter with $494 million of debt and cash and equivalents of $70 million, resulting in net debt of $424 million, an increase of $14 million versus last quarter. This increase is driven by seasonal impacts of first quarter cash flow, largely due to the payment of incentive compensation within the quarter. Overall cash flow for the quarter was slightly ahead of our expectations, driven mainly by the timing of investments to stand up the company and exit TSA agreements.
David McKinstray: We ended the first quarter with $494 million of debt and cash cash and equivalents of $70 million, resulting in net debt of $424 million, an increase of $14 million versus last quarter.
David McKinstray: This increase is driven by seasonal impacts of first quarter cash flow largely due to the payment of incentive compensation within the quarter.
David McKinstray: Overall cash flow for the quarter was slightly ahead of our expectations driven mainly by timing of investments to stand up the company and exit TSA agreements. We continue to progress on our work in this area and there is no change to our estimated cash investment of approximately $80 million this year.
David McKinstray: We continue to progress on our work in this area, and there is no change to our estimated cash investment of approximately $80 million this year. As noted, on our fourth-quarter call in 2024, we'll continue to generate positive underlying cash flow, and we expect our total free cash flow to be slightly negative due to the aforementioned one-time investments in standing up the company. Note that this excludes the impact of investment and modernizing our supply chain, which we will provide an update on later this year.
David McKinstray: As noted on our fourth quarter call in 2024 will continue to generate positive underlying cash flow and we expect our total free cash flow to be slightly negative due to the aforementioned onetime investments in standing up the company.
David McKinstray: Note. This excludes the impact of investment in modernizing our supply chain, which we will provide an update on later this year turning now to slide 17 today, we are reaffirming our 2024 guidance we provided in February on our fourth quarter call.
David McKinstray: Turning now to slide 17, today we are reaffirming our 2024 guidance that we provided in February on our fourth quarter call. We expect full year 2024 adjusted net sales growth to be in the range of negative 1% to positive 1%. As a reminder, Q2 Net Sales will be impacted by the Retailer Inventory Build in Q1. We expect adjusted EBITDA growth in the range of 3 to 5%, which reflects dollar delivery of between $265 and $270 million.
David McKinstray: We expect full year 2020 for adjusted net sales growth to be in the range of negative 1% to positive 1%.
David McKinstray: As a reminder, Q2 net sales will be impacted by the retailer inventory build in Q1.
David McKinstray: We expect adjusted EBITDA growth in the range of 3% to 5%, which reflects dollar delivery of between 265 and $270 million.
David McKinstray: Importantly, recall this EBITDA growth includes lapping the benefit of the one-time insurance recoupment in Q2 of 2023 of $16 million, which impacts the shape of our first half profit delivery. Now, I'll hand it back over to Gary to close out the call. Thank you, Dave.
David McKinstray: Importantly recall this EBITDA growth includes lapping the benefit of the one time insurance recruitment in Q2 of 2023 of $16 million, which impacts the shape of our first half profit delivery.
David McKinstray: And now I'll hand, it back over to Gary to close out the call. Thank you Dave as we said at the top of the call and will be hope you heard today is that we're on track executing our strategy and driving margin improvement. We know it's early days with more work to do that said we are certainly pleased with our first quarter results and how our team is executing.
Gary H. Pilnick: Thank you, Dave. As we said at the start of the call, and what we hope you heard today, we're on track, executing our strategy, and driving margin improvement. We know it's early days, but we have more work to do. That said, we are certainly pleased with our first quarter results and how our team has executed. And it provides us with even more confidence for the year.
Gary H. Pilnick: And it provides us with even more confidence for the year Importantly, every day I see how our culture is building and growing organically, how we're collaborating across the organization to drive the right outcomes for the business is exceptional and it is showing up in our results.
Gary H. Pilnick: Importantly, every day, I see how our culture is building and growing organically. How we are collaborating across the organization to drive the right outcomes for the business is exceptional, and it is showing up in our results. I would like to express my thanks to our team for their continued efforts to drive this business forward. We are executing like a 118-year-old startup, and we're just getting started. I will now open the call to Q&A.
Gary H. Pilnick: I would like to express my thanks to our team for their continued efforts to drive this business forward. We are executing like a 118 year old startup and we're just getting started I will now open the call to Q&A.
Operator: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. If you would like to withdraw your question, please press star 2. In the interest of time and fairness to all participants, we ask that you limit yourself to one question and one follow-up each. Our first question comes from Ken Goldman at J.P. Morgan. Please go ahead.
Speaker Change: Thank you if you would like to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question. Please press star two and the interest of time and fairness to all participants we ask that you limit yourself to one question and one follow up <unk>. Our first question comes from Ken Goldman at J P. Morgan.
Kenneth B. Goldman: Please go ahead.
Kenneth B. Goldman: Hi, good morning, and thank you. I'm not quite sure I picked up on the amount of the trade inventory load. I think you mentioned that at some point during the call in the first quarter on dollar gross margin and EBITDA. Is there any kind of rough range we can think about how much that maybe pushed sales a little bit into 1Q from 2Q and how we think about that from a profit standpoint as well?
Kenneth B. Goldman: Hi, good morning, and thank you.
Speaker Change: Good morning, Ken I am not sure Hi, I'm not quite sure I picked up on the amount of the trade inventory load I think you mentioned that at some point during the call in the first quarter on dollar gross margin and EBITDA is there any kind of rough range. We can think about how much that maybe pushed sales a little bit into <unk> from <unk> and how we think.
Kenneth B. Goldman: About that from a profit standpoint as well.
Gary H. Pilnick: Yeah Ken, good question, and I'll help Dave get into the details, but if you take a look at the public and public data about consumption versus our top line, it's about one point, and it's about timing of shipments in the quarter. So Dave, that's how we would do it.
Speaker Change: Yeah, Ken good question.
Gary H. Pilnick: David get into the details, but if you take a look at in a public to public data of our consumption versus our top line. It's about one point and it's about timing of shipments in the quarter today, that's how we would respond.
David McKinstray: Yeah, so I can just elaborate a little bit more. So the public data shows that we're down just over 1.5%. Our net sales were down about 0.8%. So that's the gap that we're talking about. We would expect that gap to reverse itself as we think about Q2. That's what we alluded to in the prepared remarks. So it's about one percentage point on the first quarter volume that'll flow through. And you can think about that, the gross margin or the gross profit and EBITDA profit impact being kind of directly related.
Dave: Yes, so Tim just to elaborate a little bit more so the public data we are down.
Kenneth B. Goldman: Okay, that's helpful. Thank you.
David McKinstray: Just over one 5% our net sales were down about.
Kenneth B. Goldman: 8%. So that's the gap that we're talking about we would expect that gap to reverse then as we think about Q2, that's what we alluded to in the prepared remarks. So.
Kenneth B. Goldman: It's about one percentage point on the first quarter volume that will flow through and you can think about that.
Kenneth B. Goldman: Gross margin or the gross profit and EBITDA profit impact being kind of directly related to that.
Kenneth B. Goldman: And with that context in mind, you know, even if we're kind of reversing that out a little bit, the gross margin in one cue was still, I think, stronger than many, many observers expected. I was bouncing back and forth between a couple of calls. So maybe I missed this, but your previous gross margin outlook was for a mid to high 20% range for the year. You're already at the high end of that. And I think you had previously expected one cue to be maybe one of the lower rates of the year. So I'm just curious what your thoughts are on the cadence of gross margin as we go through the year with the understanding there is that modest headwind in two guises as well. Yep, good question, Ken.
Speaker Change: Okay. That's helpful. Thank you and with that context in mind.
Kenneth B. Goldman: Even if we're kind of reversing that out a little bit the gross margin in <unk> was still I think stronger than many many observers expected.
Kenneth B. Goldman: I was bouncing back within a couple of calls so maybe I missed this but your previous gross margin outlook was for mid to high 20% range for the year you are already at the high end of that and I think you had previously expected <unk> to be maybe one of the lower rates of the year. So I'm just curious what your thoughts are on the cadence of gross margin as we go through the year.
Speaker Change: With the understanding there is that modest headwind into <unk> as well.
David McKinstray: Yep, good question, Ken. So as we think about gross margin, we do pick up a little bit of benefit in Q1 based on it being one of our higher volume quarters. Now, there's always nuance between our quarters. If you think about our Q4, then to Q1, as we talked about in the prepared remarks, we've been pretty consistent over the last six months at 29.2%. And as you think of the year to go, there will be some nuance in the quarter. But, you know, the fluctuations between quarters will be smaller in nature, and we'd expect our full year gross margin to be roughly in line with our Q1 performance.
Speaker Change: Yeah. Good question, Ken So as we think about gross margin, we do pick up a little bit of benefit in Q1 based on it being one of our higher volume quarters now there's always nuances between our quarters.
David McKinstray: If you think about our Q4 than Q1 as we talked about in the prepared remarks, we've been pretty consistent.
David McKinstray: Over the last six months at the 29, 2% and as you think of the year to go there will be some nuance in the quarter, but.
David McKinstray: The fluctuations between quarters will be smaller in nature, and we would expect our full year gross margin to be roughly in line with our Q1 performance.
Ken: Great. Thanks, so much.
Ken: Thanks, Ken.
Peter Thomas Galbo: Our next question is from Peter Galbo at Bank of America. Please go ahead.
David McKinstray: Our next question is from Peter Galbo of Bank of America. Please go ahead.
Peter Thomas Galbo: Hey, guys, good morning. Thanks for taking the question.
Peter Thomas Galbo: Hey, guys. Good morning, Thanks for taking the question.
Peter Thomas Galbo: Dave maybe just as a follow up kind of Ken's phasing question.
Peter Thomas Galbo: I think the price mix piece of the business came in a bit stronger as well than we had expected kind of in the quarter.
Peter Thomas Galbo: And the public data I think now has kind of shown that price mix is.
David McKinstray: Dave, maybe just as a follow-up kind of to Ken's phasing question. I think the price mix piece of the business came in a bit stronger as well than we had expected kind of in the quarter. You know, in the public data, I think now it's kind of shown that that price mix is Unknown Attendee, Pamela Kaufman, Andrew Lazar, David McKinstray, Karen Duke, WK Kel
Peter Thomas Galbo: Slipped a bit negative at least in Nielsen. So maybe you can just help us on the phasing of that for the rest of the year that line item what youre expecting.
David McKinstray: Yeah, thanks. Um, so we talked about in the Q4 call the nuance of our list price increase, our last list price increase that we took in Q1 of 2023. And the fact that we would lap that at the beginning of March, and we saw that play out, right? So if you look at our periodic phasing, within the quarter, we saw price realization P1, P2. And then, to your point, we've started to reverse that little bit.
Speaker Change: Yes. Thanks.
David McKinstray: So we talked about in the Q4 call. The nuance of our list price increase our less list price increase that we took in Q1 of 2023 and the fact that we would lap that at the beginning of March and we saw that play through right. So if you look at our periodic phasing.
David McKinstray: In the quarter, we saw price realization of <unk>.
David McKinstray: Now, again, there are some nuances we think about what's going on in the marketplace, and that's going to be largely based on some of the things that we're lapping back to Q1 of 2023. And I think that's one thing that in the environment of all the different pricing actions, all the different things that are in the base, we always have to remember what's in that base. And so is our price or our promotional activity as we think about that in Q1. In Q1 of 2023, we were still having some supply reliability challenges.
David McKinstray: And then to your point, we've started to reverse a little bit now again, there are some nuances, we think about what's going on in the marketplace and that's going to be largely based on some of the things that we're lapping back to Q1 of 2023, and I think Thats one thing that the environment of all of the different pricing actions all of the different.
David McKinstray: Things that are in the base, we always have to remember is what's in that base and so.
David McKinstray: As our pricing or our promotional activity as we think about that in Q1 and Q1 of 2023, we were still having some supply reliability challenges. So as we think about Q1 of this year were really able to maximize our promo activity based on higher supply reliability. So we are able.
David McKinstray: So as we think about Q1 of this year, we were really able to maximize our promo activity based on higher supply reliability. So we were able to have more brands and more activity across our portfolio. And so that has impacted some of our price realization here in the short term, again, compared to a year ago. Now, as we think about it going forward, we've talked about RGM in the past, and we've talked about the fact of the benefit that it plays within our P&L.
David McKinstray: To have more brands more activity across our portfolio and so that has impacted some of our our price realization here in the short term again compared to year ago now as we think about it going forward, we've talked about our GM in the past and we've talked about the fact of the benefit that it plays really with RP.
David McKinstray: And that's something that we want to continue to do. And we talked about the focus areas of RGM. So as we go forward, we would think about, hey, we want to realize price. It won't be near as significant as we saw over the last couple of years, where we had big list price actions. But we do want to continue to realize prices in the marketplace. But remember, there's always going to be nuance between what you're lapping and then any short period, any four-week period, or any single week. There can always be nuance in that. So, just a couple of things to think about.
David McKinstray: And Thats something that we want to continue to do and we talked about the focus areas of our GM.
Peter Thomas Galbo: Okay, that's helpful. Thanks.
David McKinstray: So as we go forward, we would think about hey, we want a realized price it wont be near as significant as we saw over the last couple of years, where we had big list price actions.
Peter Thomas Galbo: But we do want to continue to realize price in the marketplace, but remember there is always going to be nuance between what youre lapping and then any short period and a four week period or any single week. There can always be nuance in it. So just a couple of things to think about.
Peter Thomas Galbo: And then maybe just on your point about cash flow, I know you're saying free cash flow or slightly free cash flow negative for the year. The CapEx number in the first quarter came in pretty light, at least relative to what we had. So maybe you can just help us out with expectations around CapEx for the year. Thanks.
Peter Thomas Galbo: Okay.
Speaker Change: That's helpful. Thanks, and then maybe just on your point about cash flow I know youre, saying free cash flow or slightly free cash flow negative for the year.
Peter Thomas Galbo: The Capex number in the first quarter came in pretty pretty light at least relative to what we had thought so maybe you can just help us out with expectations around capex for the year. Thanks.
David McKinstray: Yep, our CapEx for the year hasn't changed for the full year. What I did mention in the prepared remarks was the timing of some of our stand-alone investments, if you will, being pushed out.
Speaker Change: Yes, our capex for the year hasn't changed on the full year, what I did mentioned there in the prepared remarks was the timing of some of our stand up investments if you will.
David McKinstray: Being pushed out so thats going to be the big impact now I would expect over the next Q2 Q3, you start to see that increase so.
David McKinstray: Our full year numbers haven't changed it's just going to be some some small phasing, even just Q1 to Q2, but but youll see that pick up here in the next couple of quarters.
David McKinstray: So that's going to be the big impact. Now, I would expect over the next Q2, Q3, you start to see that increase. So our full year numbers haven't changed. It's just going to be some small phasing, even just Q1 to Q2. But you'll see that pick up here in the next couple of quarters.
Speaker Change: Great. Thanks.
Speaker Change: Thanks Peter.
Andrew Lazar: Our next question is from Andrew Lazar from Barclays. Please go ahead. Great, thanks.
David McKinstray: Our next question is from Andrew Lazar from Barclays. Please go ahead.
Andrew Lazar: Great. Thanks, so much good morning.
Andrew Lazar: Great, thanks so much for this morning. Good morning, Andrew.
Andrew Lazar: Good morning, Andrew.
Gary H. Pilnick: I think with the guidance I think is calling for sales to be roughly flat for the year. The category that you said was roughly flat a little bit as well, so it sort of implies maybe holding, you know, holding or gaining a little bit of share going forward. As you mentioned in the quarter, Unknown Attendee, Pamela Kaufman, Andrew Lazar, David McKinstray, Karen Duke, WK Kellogg,
Andrew Lazar: I think with the guidance I think it is calling for sales to be roughly flattish for the year.
Gary H. Pilnick: The category I think you said was roughly flat a little bit as well so sort of implies maybe.
Gary H. Pilnick: Holding.
Gary H. Pilnick: Holding or gaining a little bit of share going forward as you mentioned in the quarter.
Gary H. Pilnick: Share was still down a little bit and part of that was because you haven't fully lapped the last of your price increases. So my question is I guess, how would you see the cadence of market share progressed as you move through this year, what should we look for.
Gary H. Pilnick: In some of the data that we all have access to around market share progress.
Gary H. Pilnick: It's a very fair question, Andrew. So if you take a step back and start saying this, we exited 2023 around 27.8, and we exited Q1, 27.6. You mentioned the impact of the price gap. That clearly had an impact on our performance. And as you saw us proceed through the quarter, our business sequentially improved. We grew our share of four of our core six brands, and Canada grew meaningfully as well. It's probably worth mentioning that.
Speaker Change: It's a very fair question to Andrew So if you take a step back and you started saying this we exited 2023 around 27 eight exiting Q1 'twenty seven six you mentioned the impact of the price lap that clearly had an impact on our performance and as you saw US proceed through the quarter our business.
Gary H. Pilnick: Sequentially improved we grew our share of four of our core six brands in Canada grew meaningfully as well, it's probably worth mentioning that grew 240 basis points to closer to 40%. So we feel good about where we are and when we think about our business Andrew what makes our model work is a stable top line as we expand our maher.
Gary H. Pilnick: Grew 240 basis points to closer to 40%, so we feel good about where we are. And when we think about our business, Andrew, what makes our model work is a stable top line as we expand our margins so the profit can rumble through the P&L. And right now, the category is stable. So as we look throughout the rest of the year, one thing we did mention was the timing of shipments that occurred in Q1 that will come back to them in Q2.
Gary H. Pilnick: So the profit can rattle through the P&L and right now that category is stable. So as we look throughout the rest of the year is one thing. We did mention was the timing of shipments that occurred in Q1 that will come back to that in Q2, we think some of that will come out but other than that I don't think theres anything thats remarkable are worth noting at this point the key thing for us is making.
Gary H. Pilnick: We think some of that will come out. But other than that, I don't think there's anything that's remarkable or worth noting at this point. The key thing for us is making sure we stabilize our top line so that way, we can drive value into our business.
Gary H. Pilnick: Sure we stabilize our top line so that way, we can drive value into our business.
Gary H. Pilnick: And then I think last quarter you mentioned that you anticipated volume to be down, call it a low single digit for the full year. Does that still seem like a reasonable assumption in light of some of your comments on pricing and such?
Speaker Change: Got it and then I think last quarter, you had mentioned that you anticipated volume to be down call. It low single digit for the full year is that still seem like a reasonable assumption in light of some of your comments on pricing and such.
Gary H. Pilnick: Yeah, Andrew, I think if you take a step back to one, we're a little bit lower than that. Again, that would have been because of the list price. As we go forward, our anticipation, we get back to the flat dollars, right? So between the down one and the up one. And so what that's going to look like is it would result in the full year being down slightly on.
Speaker Change: Yes, Andrew I think if you if you take a step back in Q1, we are a little bit lower than that again that would have been because of the list price as we go forward our anticipation we get back to the flat dollars right. So between the down one to up one.
Gary H. Pilnick: So what thats going to look like it would result in full year being down slightly on volume.
Gary H. Pilnick: It's probably worth mentioning as well, we like to talk about how the gap between price and value, I'm sorry about that Andrew, but the gap between price and value is narrowing, and that happened in the category, that happened for us, so that's also, we think, a positive sign for our business as well as the category.
Speaker Change: Probably worth mentioning as well, we like to talk about how the gap between price and volume sorry about that Andrew but the price gap between price and value and that narrowing and that happened in the category that happened for us. So thats also we think a positive sign for our business as well as the category.
Andrew Lazar: I understand. Thanks so much.
Speaker Change: Understood. Thanks, so much.
Speaker Change: Thanks, Andrew.
David Sterling Palmer: Our next question comes from David Palmer from Evercore ISI. Please go ahead.
Andrew Lazar: Our next question comes from David Palmer from Evercore ISI. Please go ahead.
David Sterling Palmer: Thanks. My question on the top line drivers, you know, sometimes it's easy for us to just think about things simply around your recovery and in merchandising and promotions and just oversimplifying things. Over simplifying that, could you talk about, you know, sort of the big picture and where you see the biggest chunks of improvement ahead in terms of key top-line drivers, innovation, the distribution recovery, and then perhaps layering into, you know, what you're doing in sales and merchandising promotions. Is there anything that you think would be useful for us to hear about the proportions of top-line improvement that will be coming from each? Thanks.
David Sterling Palmer: Thanks.
David Sterling Palmer: Question on the top line drivers.
David Sterling Palmer: Sometimes it's easy for us to just think about things simply around your.
David Sterling Palmer: Recovery in the.
David Sterling Palmer: The merchandising and promotions and just over oversimplify.
David Sterling Palmer: We are over simplifying that.
David Sterling Palmer: Could you talk about sort of the big picture and where you see the biggest chunks of improvement.
David Sterling Palmer: Head in terms of.
David Sterling Palmer: Key top line drivers innovation distribution recovery, and then perhaps layering into what youre doing in sales and merchandising promotions or anything that you think would be useful for us to hear about the proportions of topline improvement that will be coming from each.
Gary H. Pilnick: No, it's a very fair question, David. I think the way we would look at it is, you know, we can mention a couple different things, but why don't we just talk about two right now? And David, if you want to add anything, feel free. But when you think about our business, first of all, the business is operating as we forecast. One of the things we mentioned in the prepared remarks was our supply posture coming into the quarter.
Speaker Change: No. It's a very fair question, David I think the way we would look at it is we can mentioned a couple of different things, but when we just talk about two right now and Dave do you want to add anything feel free but when you think about our business first of all the business is operating as we forecasted.
Gary H. Pilnick: One of the things we mentioned in the prepared remarks was our supply posture coming into the quarter. So I'm going to start with supply chain as actually being something that we look at as a catalyst for our top line I know I know thats, our centerpiece of our margin expansion program, but don't underestimate the impact that it has on our top line in the <unk>.
Gary H. Pilnick: So I'm going to start with supply chain as actually being something that we look at as a catalyst for our top line. I know that it's the centerpiece of our margin expansion program, but don't underestimate the impact that it has on our top line. And the example here was, as we came into the year, we had talked about our improving service in Q4. That allowed us to come back to more normal activity in terms of the way we were driving our business, our promotional cadence.
Gary H. Pilnick: Example, here was as we came into the year, we had talked about our improving service in Q4 that allowed us to be come back to more normal activity in terms of the way we are driving our business our promotional cadence. So thats a big part of what's happening and we do think that as a tailwind for us as we move forward our second.
Gary H. Pilnick: So that's a big part of what's happening, and we do think that is a tailwind for us as we move forward. A second one would be the sales force. We stood up a new sales force. This has been in the market now since early fall last year. We have new people learning new stores with new managers, and, in fact, if you looked at the business and the way we improved sequentially throughout the quarter, part of that is coming from our sales force really getting its sea legs and creating those relationships and driving the business forward. So we do think those are two notable things in our business that might be unique to us that we do think would drive our top line as well. So Dave? Yeah.
Gary H. Pilnick: It would be as the sales force we stood up a new sales force. This has been in market now since.
Gary H. Pilnick: Early fall last year, we have new people learning new stores with new managers and in fact, if you looked at the business and the way we improve sequentially throughout the quarter part of that is coming from our sales force really getting its sea legs, and creating those relations and driving the business forward. So we do think those are two.
Gary H. Pilnick: Two notable things in our business that might be unique to us that we do think will drive our top line as well so Dave Yes, I think just a couple of other things to look at I think an end market. In Q1, we grew on four of our big six brands, Gary you talked about that in the prepared remarks, and I think a proof point is what we're doing on frosted flakes.
David McKinstray: Yeah, I think just a couple other things to look at. I think in the market in Q1, we grew on four of our big six brands. Gary talked about that in his prepared remarks. And I think a proof point is what we're doing on Frosted Flakes. And Gary went to that in pretty good detail.
David McKinstray: And Gary went to that in pretty good detail. So.
David McKinstray: So, you know, that's really taking the new way we're looking at reaching out to our consumers, our new marketing model, as we call it internally, really taking that, putting it into place, and then really taking it down to the shelf. Gary gave a great example of how we're actively doing that. And again, early days, but we have seen positive results on Frosted Flakes. So I think that gives you an idea or a great example of how we're building this. Frosted Flakes was one of the first brands that we went after within the new marketing model. So how do we really push that out to the rest of our portfolio and really maximize our portfolio?
David McKinstray: That's really taking the new how we're looking at reaching out to our consumers our new marketing model as we call. It internally really taking that putting into place and then really taking it down to the shelf Gary gave a great example, about how we are actively doing that.
David McKinstray: And again early days, but we have been have seen positive results on frosted flakes. So I think that gives you an idea or a great example of how we're building. This frosted flakes is one of the first brands that we went after with the within the new marketing model. So how do we really pushed that out to the rest of our portfolio and really maximize our portfolio.
David Sterling Palmer: Thanks, I'll pass it on.
Speaker Change: Thanks, I'll pass it on.
David Sterling Palmer: Okay.
Max Andrew Stephen Gumport: Our next question comes from Max Gumport from BNP Paribas. Please go ahead.
Speaker Change: Our next question comes from <unk> <unk> from BNP Paribas. Please go ahead.
Max Andrew Stephen Gumport: Thanks for the question. You posted a meaningful beat to start the year, driven by much better than expected gross margin, at least versus how we in the industry have modeled it. So as you think through the year to go period, are there any knowable incremental headwinds? I know you mentioned the trade inventory dynamic in terms of the shift from 1Q to 2Q, but it seems pretty small. So I'm just curious if you're seeing any other headwinds on the horizon or if you would say you now have more visibility and flexibility in achieving your full year guidance. Thank you.
Max Andrew Stephen Gumport: Hi, Thanks for the question.
Max Andrew Stephen Gumport: Was that a meaningful beat to start the year driven by much better than expected gross margin at least versus how we and the street has modeled.
Max Andrew Stephen Gumport: I think through the year to go period are there any notable incremental I know you mentioned that the trade inventory dynamic in terms of the shift from <unk>. It seems pretty small so I'm just curious if youre seeing any other headwinds on the horizon or if you would say you now have more visibility and flexibility in achieving year over year guidance. Thank you.
Gary H. Pilnick: Thanks, Matt. I appreciate the question. And what I can hear in the question is, hey, whether or not we're confident in our future. And the answer is, yes.
Speaker Change: Thanks, Matt appreciate the question.
Speaker Change: What I can here and the question is whether or not we're confident in our future and the answer is yes and in fact, if you go back to February we were confident when we talked about our guidance for the year would now one quarter under our belts, we have even more confidence as we go forward. The business is performing as we would've expected you mentioned something about Q2 and.
Gary H. Pilnick: And in fact, you go back to February, we were confident when we talked about our guidance for the year. We're now one quarter under our belts. We have even more confidence as we go forward. The business is performing as we would have expected. You mentioned something about Q2 and the timing of shipments. The other piece might be that was in the prepared remarks.
Gary H. Pilnick: The lap of the timing of shipments the other piece might be that was in the prepared remarks, we are lapping that onetime insurance payment that had been pre spin last year $16 million insurance payment and recall our growth absorbs that so a growth on top of that other than that we do feel good about where we are with the business momentum.
Gary H. Pilnick: We are lapping that one-time insurance payment that happened pre-spend last year, $16 million insurance payment. And recall, our growth absorbs that. So growth on top of that. Other than that, we do feel good about where we are with the business. Momentum is starting to build. Our confidence, of course, would then build as well because we delivered the first quarter as we expected. And we're pleased that we're able to reaffirm our guidance.
Gary H. Pilnick: <unk> is starting to build our confidence of course would then build as well because we deliver the first quarter as we expected and we're pleased that we're able to reaffirm our guidance.
Max Andrew Stephen Gumport: And then just as a follow-up, we've been hearing from restaurant companies and some of your packaged food peers about early signs of the shift to Who at home as consumers economize and react to inflation. It doesn't sound that you've really referenced that in your remarks. I'm curious if you're seeing the cereal category showing any early signs of benefiting from that type of dynamic.
Speaker Change: Okay, Great and then just as a follow up we've been hearing from restaurant company in terms of your packaged food peers about early signs of this shift to.
Max Andrew Stephen Gumport: Oh, Matt as consumers to economize and react to inflation.
Max Andrew Stephen Gumport: He's really referenced that in your remarks, I'm curious if you're seeing.
Speaker Change: The other category showing any early signs of benefiting from that type of dynamic. Thanks I'll pass it on.
Gary H. Pilnick: Thanks. I'll pass it on. Well, very fair, I mean,
Gary H. Pilnick: Very fair. I mean, right now, when we look at the market, we're not seeing any meaningful change in the trajectory of the business. I mean, that would be a potential tailwind as we go forward, and I would understand that consumer reaction, but we're not seeing it in the market right now.
Max Andrew Stephen Gumport: No very fair I mean, right now when we see the market, we're not seeing anything many meaningful change in the trajectory of the business I mean that would be a potential tailwind as we go forward and I would understand that consumer reaction, but we're not seeing in the market right now.
Robert Bain Moskow: Our next question comes from Robert Moskow from TD Securities. Please go ahead.
Gary H. Pilnick: Our next question comes from Robert Moskow from TD Securities. Please go ahead.
Robert Bain Moskow: Okay.
Robert Bain Moskow: Hi, thanks. I wanted to ask a couple questions about the margin ramp that you have for the next few years. And you mentioned the new equipment that you'll be spending on. Can you give us a sense of the degree of like unlock that this investment provides you? Like, is it very fast? Is this high efficiency equipment that can boost margins, you know, parabolically, in kind of your off years? And then the second question is, you know, once you're out of this TSA agreement, is there any noise we should be aware of in terms of like margin progression, just like into 2025?
Robert Bain Moskow: Hi, Thanks, I wanted to ask a couple of questions about the margin ramp.
Robert Bain Moskow: That you have for the next few years.
Robert Bain Moskow: And you.
Robert Bain Moskow: You mentioned, the new equipment that you'll be spending on can.
Robert Bain Moskow: Can you give us a sense of the degree of like unlock that this.
Robert Bain Moskow: The investment provides you.
Robert Bain Moskow: Is it very fast as this.
Robert Bain Moskow: High efficiency equipment that can boost margins.
Robert Bain Moskow: Parabolic Lee.
Robert Bain Moskow: And kind of your out years.
Robert Bain Moskow: And then the second question is once you're out of this TSA agreement is there any noise, we should be aware of.
Robert Bain Moskow: In terms of like margin progression just like into 2025.
Gary H. Pilnick: No, thanks, Robert. It's an excellent question. So let's talk about supply chain right now, and what you're referring to is one of our key strategic priorities of modernizing our supply chain. You heard us earlier actually reiterate the overall plan that we talked about back on Investor Day about growing, and expanding our margins by 500 basis points from 9% to 14%. We also talked about the timing.
Speaker Change: No. Thanks, Rob it's an excellent question. So let's talk about supply chain right now and what you are referring to is one of our key strategic priorities of modernizing our supply chain.
Gary H. Pilnick: Orders earlier actually reiterate the overall plan that we talked about back in Investor day about growing and expanding our margins by 500 basis points from 9% to 14%. We also talked about the timing, we reiterated that that would be the run rate coming out of 2026. So that continues to be the way. We're looking at this right now.
Gary H. Pilnick: We reiterated that that would be the run rate coming out of 2026. So that continues to be the way we're looking at this right now. We can see that flowing through the P&L. And we have talked before that margin enhancement will follow the investment as well. So that's what I think we should all expect to see over the next couple of years. I will tell you one of the things that encourages us a great deal about modernizing our supply chain. The board, senior executives, and I were in the plants last week.
Gary H. Pilnick: We could see that flowing through the P&L and we have talked before that the margin enhancement will follow the investment as well. So that's what I think we should all expect to see over the next couple of years I will tell you one of the things that encourages us a great deal about modernizing our supply chain.
Gary H. Pilnick: The enthusiasm is coming through from our people. And what's key for us is when you match your financial investment with your investment in people; that's what makes the impact enduring. So we're excited about that program. We always have been. You heard me talk about that it's not just for margin; that's for the top line. So we feel very confident about our ability to take that forward. I'm going to turn it over to Dave in a second.
Gary H. Pilnick: The board senior executives, we are in the plants last week.
Dave: The enthusiasm is coming through from our people and what's key for US is when you match your financial investment with your investment in people. That's what makes the impact enduring. So we're excited about that program. We always have been you heard me talk about that not just for margin is for the topline so.
Gary H. Pilnick: So we feel very confident about our ability to take that forward I'm going to turn it over to Dave and the secondary probably get some more details on when you think that TSA, we're not seeing a major inflection point as we come off the TSA and we started operating on our own but Dave wanted to turn it over to you for both.
Gary H. Pilnick: He'll probably get into more detail, but when you think about TSA, we're not seeing a major inflection point as we come off the TSA and start operating on our own. Dave, why don't I turn it over to you for both?
David McKinstray: Yeah, Rob, thanks for the question. There are a couple things I would say about that. I think if you look at our margin progression over the last six months or so, a couple things I'd mention are our supply chain modernization. We talked about it being a multi-pronged approach, and we're confident we've seen some of the early benefits of that. As we think forward, I think Gary put it well on how we'd step into that 14% that he referenced.
Dave: Yeah, Rob Thanks for the question a couple of things I would say on that I think if you look at our margin progression.
David McKinstray: Over the last six months or so couple of things I'd mentioned is our supply chain modernization, we've talked about it being a multi pronged approach.
David McKinstray: We're confident we've seen some of the early benefits of that as we think forward I think Gary you put it well at how we'd step into that 14% that he referenced.
David McKinstray: On the TSA, just one small addition, two big areas where we have TSA are going to be through our distribution and then our IT infrastructure. And how we've really built the TSA is that there's not a margin headwind or tailwind. So as we're stepping off, we're ramping up, right? So those costs are really just being transferred from, you know, Kellanova is the TSA provider to other third parties or our own infrastructure, whatever it may be, right? So you can think about those overall costs considered in our P&L, and they're relatively smooth. They shouldn't be a big headwind or tailwind as we progress.
David McKinstray: On the TSA just just one small addition, two big areas, where we have TSA is going to be through our distribution and then in our it infrastructure and how we've we've really built the TSA is that there is not a margin headwind or tailwind. So as we're stepping off we're ramping up right. So those costs are really just being transfer.
David McKinstray: From.
David McKinstray: Kelly, Nova is a TSA provider to other third party or our own infrastructure whatever it may be right. So.
David McKinstray: You can think about those overall costs considered in our P&L and theyre relatively smooth they shouldnt be a big headwind or tailwind as we progress.
Robert Bain Moskow: Okay, thanks. I do have a follow-up question. You know, last year, you talked a lot about your master brand strategy and advertising, and one particular execution of that. And then this year, I think you got some criticism from some unexpected places. Has anything changed regarding the strategy for master brand advertising or regarding the execution itself?
Speaker Change: Okay. Thanks, I do have a follow up.
Robert Bain Moskow: Last year.
Robert Bain Moskow: Talked a lot about your master brand strategy and advertising and one particular execution of that and then this year I think you've got some criticism from some unexpected places has anything changed regarding the strategy for master brand advertising or regarding the execution itself.
Gary H. Pilnick: It's a terrific question. When we talk about that, we talk about multi-branding. When you think about multi-branding, the reason why that's effective for us is we get to advertise a combination of brands at the same time with a similar message. That's what we're able to do. So by doing that, you can just imagine the returns would be that much better because we can get to our consumers with our great brands with one message.
Speaker Change: Yes, it's a terrific question when we talk about that we talk about multi brand. When you think about multi brand. The reason why that's effective for us as we get to advertise a combination of brands at the same time with a similar message that's where we're able to do so by doing that you can just imagine.
Gary H. Pilnick: And the returns would be that much better because we can get to our consumers with our great brands with one message. So that'll be something that I think we will continue doing going into the future. Because we think it's quite a good strategy overall and we can apply to a variety of different brands and different circumstances terrific question.
Gary H. Pilnick: So that'll be something that I think we'll continue doing going into the future because we think it's quite a good strategy overall, and we can apply it to a variety of different brands and different circumstances. Terrific question.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Robert Frederick Dickerson: Our next question comes from Rob Dickerson at Jefferies. Please go ahead.
Gary H. Pilnick: Our next question comes from Rob Dickerson of Jefferies. Please go ahead.
Robert Frederick Dickerson: Yes.
Robert Frederick Dickerson: Great, thanks so much. Maybe just the first question. You know, I think I heard you say that Q1 is usually kind of like a nationally higher volume quarter, which I understand. I'm just curious, since, you know, this is, there are a lot of moving pieces to the new company, kind of like how you think about general seasonality of the business, and maybe more specifically, like how you would think about maybe Q4 seasonality relative to Q1 if we were, you know, kind of in a normal, you know, not awkward kind of year-over-year dynamic.
Robert Frederick Dickerson: Great. Thanks, so much.
Robert Frederick Dickerson:
Robert Frederick Dickerson: Maybe just the first question.
Robert Frederick Dickerson: I think I heard you say that Q1's, usually kind of like a naturally higher volume quarter.
Robert Frederick Dickerson: Which I understand I'm just curious since this is there are a lot of moving pieces to the to the newco.
Robert Frederick Dickerson: Kind of like how you think about general seasonality of the business.
Robert Frederick Dickerson: And maybe more specifically like how you would.
Robert Frederick Dickerson: Think about maybe Q4 seasonality relative to Q1.
Robert Frederick Dickerson: We were kind of in a normal not awkward kind of year over year dynamic.
David McKinstray: Yeah, Rob, so thanks for the question. I think one of the things is seasonality has actually changed a little bit, or we've seen it change a little bit as we progress through COVID. It'll be interesting to see whether we continue to move back towards pre-COVID seasonality, or do we find a new seasonality? So that's something we're still working through a little bit.
Speaker Change: Yes, Rob so thanks for the question I think one a couple of things is seasonality has actually changed a little better we've seen it change a little bit as we progress through COVID-19. It will be interesting to see do we continue to move back towards pre COVID-19 seasonality do we find a new seat.
David McKinstray: So that's something we're still working through a little bit.
Speaker Change: Right, but I would say here is generally the shape of our seasonality is Q1 has traditionally been the highest volume quarter for this business Theres a lot of.
David McKinstray: Right. But I would say, generally, the shape of our seasonality is that Q1 has traditionally been the highest volume quarter for this business. There's a lot of, you know, activation around the first of the year. In January, it's typically one of the higher promoted periods of the year. So that really drives Q1. There's a lot of consumers back to routine after the holidays, those type of things. The other big thing I would talk about is back to school, right?
David McKinstray: Activation around the first of the year in January its typically one of the higher promoted periods of the year. So that really drives Q1, there is a lot of consumer back to routine after the holidays those type of things. The other big thing I would talk about is back to school right. That's another area, where again back to <unk>.
David McKinstray: <unk> youre typically getting into the pantry all of those different things than Q4 Q4 of course, you have two big seasonal dynamics or holiday dynamics, I guess I should say around the Thanksgiving holiday and the Christmas holiday what that typically does as you lose in the store, there's a lot of shelf activity display active.
David McKinstray: That's another area where, again, back to routine, you're typically getting into the pantry, all those different things. Then Q4. Q4, of course, you have two big seasonal dynamics or holiday dynamics, I guess I should say, around the Thanksgiving holiday and then the Christmas holiday. What that typically does is you lose customers in the store; there's a lot of shelf activity, and display activity geared toward those holiday seasons, right? So that's typically going to be another area where everyday routines are disrupted, right? So that's going to be a lower volume quarter for us traditionally than Q1.
David McKinstray: The geared towards those holiday season right. So.
David McKinstray: That's typically going to be another area, where everyday routines are disrupted right. So that's going to be a lower volume quarter for us traditionally.
David McKinstray: And then Q1.
Robert Frederick Dickerson: Okay, fair enough. And then I guess I'm just kind of speaking to the full year guide on EBITDA. Yeah, there's been a lot of questions kind of, you know, if there are other headwinds forthcoming, or, you know, how should we think about Q2, but kind of, you know, broadly speaking, right? I mean, clearly, if you kind of run rate Q1, you're ahead of the guide, sounds like they're, you know, kind of, we have the insurance lap, you know, impact, and a little But then also, like, as we think about the back half, and clearly, like, the back half is slower than the first half.
Speaker Change: Okay fair enough.
Robert Frederick Dickerson: And then I guess just.
Robert Frederick Dickerson: No.
Robert Frederick Dickerson: Speaking to the full year guide on EBITDA.
Robert Frederick Dickerson:
Robert Frederick Dickerson: There's been a lot of questions kind of if there are other headwinds forthcoming or.
Robert Frederick Dickerson: How should we think about Q2.
Robert Frederick Dickerson: But kind of broadly speaking right I mean, clearly if you kind of run rate Q1, you're ahead of the guide.
Robert Frederick Dickerson: It sounds like there.
Robert Frederick Dickerson: We have the insurers.
Robert Frederick Dickerson: Lap impact a little bit of the inventory piece in Q2.
Robert Frederick Dickerson: But then also like as we think about the back half and clearly like back half lower than the first half.
Robert Frederick Dickerson: But all that said, kind of roll it up into one, you know, it's like even to kind of, you know, get to the, you know, high end of the 24 EBITDA guide. I mean, it clearly implies, you know, that Q1 is the highest EBITDA quarter, and then maybe, kind of speaking to seasonality, you know, that maybe, like, Q4 is the lowest EBITDA quarter. I'm just trying to, you know, I think, kind of understand broadly, like, hey, you had a great Q1, gross margins were better.
Robert Frederick Dickerson: But all of that.
Robert Frederick Dickerson: It rolled up into one.
Robert Frederick Dickerson: Even take kind of get to the.
Robert Frederick Dickerson: Hi.
Robert Frederick Dickerson: The 24, EBITDA guide I mean, it clearly implies.
Robert Frederick Dickerson: Q1 has the highest EBITDA quarter, and then maybe kind of speaking the seasonality that.
Robert Frederick Dickerson: And then maybe like Q4 is the lowest EBITDA quarter just try to.
Robert Frederick Dickerson: Kind of understand Broadway.
Robert Frederick Dickerson: Had a great Q1 gross margins better.
Robert Frederick Dickerson: Why not raise the EBITDA guide? Well, there's some one-off, okay, maybe Q2, but then is there anything else we should be thinking about in the back half? So a lot in there is trying to gauge kind of the cadence of EBITDA and why not raise the guide.
Robert Frederick Dickerson: Why not raise EBITDA guide well there is some one off okay. Maybe Q2, but then is there anything else, we should be thinking about back half.
Robert Frederick Dickerson: So a lot in there just trying to gauge kind of the.
Robert Frederick Dickerson: The cadence of EBITDA and why not raise that got it.
Gary H. Pilnick: No, it's a terrific question, Rob. And the way we're thinking about it is this. This is the very first quarter of our very first full year. It's certainly early days.
Speaker Change: No. It's a terrific question Robin and the way we're thinking about it is this this is the very first quarter of our very first full year. It's certainly early days, we're pleased with the way the business is performing.
Gary H. Pilnick: We're pleased with the way the business is performing. In fact, it is performing the way we thought it would perform. So our view is that it feels prudent right now to say, hey, we're going to reaffirm our guidance. We're pleased that we could do that. It's also fair to say that when we were confident saying that at our Q4 call, we're that much more confident saying it now because we have a quarter under our belt. So that's really the way we're thinking about it. But I appreciate your question. All right.
Gary H. Pilnick: It performed the way we thought it would perform so our view is just prudent right now to say hey, we're going to reaffirm our guidance were pleased that we can do that it's also fair to say when we were confident saying it at our Q4 call were that much more confidence, saying it now because we have a quarter under our belt. So that's really the way we're thinking about it but I appreciate you.
Robert Frederick Dickerson: All right, fair enough. Thank you.
Robert Frederick Dickerson: Question.
Robert Frederick Dickerson: Alright fair enough. Thank you.
Operator: As a reminder, for any further questions, please press star 1 on your telephone keypad. We have no other questions on this call, so I'll pass the floor back to Gary Pilnick to conclude.
Robert Frederick Dickerson: As a reminder for any further questions. Please press star one on your telephone keypad.
Gary H. Pilnick: We have no other questions in the call. So I'll pass the floor back to <unk> to conclude.
Gary H. Pilnick: Thank you for joining our call today. I hope you heard that we're on track. I hope you heard that we're executing our strategy, all of which gives us confidence for the business going forward. We look forward to sharing our Q2 results with you in August.
Gary H. Pilnick: Thank you for joining our call today I Hope you heard that we're on track Hope you heard there were executing our strategy all of which gives us confidence for the business going forward. We look forward to sharing our Q2 results with you in August thanks for joining us.
Operator: This concludes today's conference call. Thank you all very much for joining us.
Speaker Change: This concludes today's conference call. Thank you all very much for joining.
Operator: Yeah.
Operator: August. Thanks for joining us.
Operator: So in August thanks for joining us.