Q2 2024 WK Kellogg Co Earnings Call and Business Update
Speaker Change: Good afternoon and welcome to the Q2 WK Kellogg Company 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 enter the queue for questions, you may do so by dialing star followed by one on your telephone keypad. In the interest of hearing as many of your questions as possible, we respectfully ask that you limit yourselves to one question and one follow up if needed. I would now like to hand the conference over to Karen Duke, Vice President of Finance and Investor Relations. Thank you. Please go ahead.
Operator: If you would like to enter the queue for questions, you may do so by dialing star followed by one on your telephone keypad. In the interest of hearing as many of your questions as possible, we respectfully ask you to limit yourselves to one question and one follow-up, if needed. I would now like to hand the conference over to Karen Duke, Vice President of Finance and Investor Relations. Thank you. Please go ahead.
Karen Duke: Thank you, operator. Good morning, and thank you for joining us today for a review of our second quarter results. I'm joined this morning by Gary Pilnick, our Chairman and Chief Executive Officer, and Dave McKinstry, our Chief Financial Officer.
Karen Duke: Thank you, Operator. Good morning and thank you for joining us today for a review of our second quarter results. I'm joined this morning by Gary Pilnick, our Chairman and Chief Executive Officer, and Dave McKinstry, our Chief Financial Officer.
Karen Duke: 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. However, actual results could differ materially from those projected.
Karen Duke: 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.
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 factors section. As we discuss our results today, unless noted as reported, we'll be referencing the respective non-GAAP financial measure, which adjusts for certain items included in our GAAP results. For periods prior to the spin-off, results are presented on a stand-alone basis; for periods after the spin-off, results are presented on and referred to 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 our earnings release and in the appendix to the slide presentation. I will now turn the call over to Gary.
Actual results could differ materially from those projected.
Speaker Change: 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 factors section.
Speaker Change: As we discuss our results today, unless noted as reported, we'll be referencing the respective non-GAAP financial measure, which adjusts for certain items included in our GAAP results.
Speaker Change: For periods prior to the spin-off, results are presented on a stand-alone basis.
Speaker Change: For periods after the spin-off, results are presented on and referred to 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 our earnings release and in the appendix to the slide presentation.
Speaker Change: I will now turn the call over to Gary. Thanks, Karen, and good morning, everyone.
Gary: Thank you for joining our second quarter call. Today, I will discuss our financial results, in-market business performance, and the announcement we made this morning regarding actions we are taking to advance our strategic priority to modernize our supply chain.
Speaker Change: I will provide detail regarding the scope of our investments, as well as how these actions are expected to make us a stronger, more reliable, and more agile company into the future.
Dave McKinstray: I will then turn the call over to our Chief Financial Officer, Dave McKinstray, who will provide additional detail on our Q2 performance and our supply chain modernization efforts.
Speaker Change: We'll close out the call with time for Q&A. What you will hear today is that we are delivering results and are on track for the year, even in light of the ongoing impact of inflation, which has led consumers to become more value conscious, creating a challenging business environment.
Gary Pilnick: Looking at slide four, you can see our financial results. Today, we reaffirmed net sales and EBITDA guidance and now expect net sales for the year to be at the lower end of our guidance range.
Speaker Change: Looking at slide four, you can see our financial results. Today, we reaffirmed net sales and EBITDA guidance and now expect net sales for the year to be at the lower end of our guidance range.
Dave McKinstray: For the quarter, net sales declined 2.7 percent, broadly in line with our expectations. And we delivered gross margin of 30 percent, which is a sequential improvement versus Q1, and one of the highest levels of gross margin achieved by this business in years.
Speaker Change: Our meaningful margin improvement continues to be driven by our emphasis on operational discipline across the enterprise, a key benefit of being a more focused company.
Speaker Change: It's important to note that we have improved our margin while at the same time increasing investment. We continue to be choiceful and targeted about these investments and remain focused on driving ROI.
Speaker Change: Evita margin was 11.6% in the quarter. Despite the decline in net sales, we were able to improve upon our Q1 performance.
Speaker Change: This demonstrates our team's strong execution and the resiliency of our business to improve our profitability.
Speaker Change: As we previously mentioned, in Q2 of 2023, we received one-time $16 million insurance proceeds related to the fire at our Memphis plant.
Speaker Change: Excluding the impact of that benefit, both gross margin and EBITDA margin improved more than 100 basis points year over year.
Speaker Change: Overall, our first half net sales and EBITDA performance has us on track for the year. While we expect the challenging business environment to persist, these market dynamics emerged and impacted our business in the second half of 2023. So we will begin to lap that impact in the back half.
Speaker Change: Importantly, we are excited about our plans in the back half of the year, including back-to-school, as well as the ongoing benefits associated with leveraging our transforming marketing, sales, and supply chain capabilities that are maturing every day.
Speaker Change: Given these dynamics, we expect volume to sequentially improve in the back half.
Speaker Change: Let's turn to slide 5 to discuss the category and how our portfolio performed in the quarter.
Speaker Change: The U.S. serial category, as measured by Nielsen XAOC, declined 2% in the quarter and is down 1.1% year-to-date, with volume declining low single digits.
Speaker Change: As expected in this environment, consumers are more discerning and trends continue to skew towards value-oriented channels which are delivering year-to-date dollar growth.
Speaker Change: This year, the majority of our portfolio has performed better or in line with the category. 9 of 11 brands are gaining or holding share year-to-date, with Frosted Flakes and Raisin Bran delivering dollar sales growth.
Speaker Change: Our overall performance is lagging the category, largely due to challenges in Special K, one of our largest brands, as well as Bare Naked.
Speaker Change: Despite these headwinds, we are maintaining our U.S. share at 27.6% year-to-date, which has remained consistent from Q4 of 2023, when we first launched as an independent company.
Speaker Change: All volume in the quarter was impacted by the challenged business environment and our PPA transition. On a unit basis, our volume is closer to flat in the quarter.
Speaker Change: In Canada, our team delivered another quarter of excellent performance and again grew share, extending our market-leading position.
Speaker Change: Year-to-date, our share position improved 160 basis points to 39%, led by the performance of our three largest brands in Canada, Mini Wheats, Frosted Flakes, and Raisin Bran.
Speaker Change: On page 6, you can see the performance of our U.S. portfolio.
Speaker Change: Our business is more easily understood if you look at it as follows. Our core six, the next core, and natural and organic. Our core six represents approximately 70% of our sales and includes our six largest brands which are depicted on the slide.
Speaker Change: The next quart contains iconic brands like Corn Flakes, Corn Pops, and Apple Jacks.
Speaker Change: And finally, natural and organic is represented by Kashi and Bare Naked. Year to date, our Chorus Six has benefited from the performance of Frosted Flakes, Raisin Bran and Rice Krispies, which share gains from both Frosted Flakes and Raisin Bran.
Speaker Change: Special K has been challenged. We are lapping a large innovation set resulting in lost TDPs and lower merchandising activity this year, which was further amplified by having less innovation in 2024.
Speaker Change: We're also lapping a large customer-specific activation in Q2. This resulted in share declining 40 basis points year to date.
Speaker Change: The team is responding to improve our performance and has new commercial activations underway. We recently launched a campaign called Special for a Reason, created through our new marketing model where we utilize digital assets and social platforms to drive increased relevancy.
Speaker Change: This new campaign highlights what makes this brand so special. Special K has a variety of delicious foods designed with a variety of specific nutritional benefits targeted to specific consumer cohorts.
Speaker Change: Our commercial team is also being agile and delivered a bold collaboration with celebrity chef Molly Baas, launching a new campaign in less than two weeks that received more than a billion impressions.
Speaker Change: We have more work to do and it will take time, but this is a good example of being a focused business which allows us to identify issues and opportunities and act quickly in an end-to-end matter.
Speaker Change: Excluding Special K, our Course 6 is up 10 basis points of share and grew dollar sales modestly year-to-date.
Speaker Change: Finally, Arkashi and Bare Naked Brands participate in a growing segment of the serial category.
Speaker Change: As we mentioned previously, these brands were managed separately, pre-spent.
Speaker Change: Kashi has had approximately flat dollar sales, and our performance in bare naked continues to be impacted by lost TDPs stemming from our granola-related supply chain challenges, which we are in the process of addressing.
Speaker Change: Slide 7 is the strategy slide we have discussed in the past.
Speaker Change: As you have seen in our performance, we are already making progress.
Speaker Change: This is a significant step in our journey as we continue to prioritize investments and consolidate production to ensure we have a reliable, resilient, efficient, and agile supply chain, and importantly, ensuring our business has the appropriate margin structure to compete effectively.
Speaker Change: We expect to incur approximately $110 million of cash one-time cost to execute the initiative. We are prioritizing and investing in more agile and efficient platforms and reducing our reliance on older, more rigid, and higher-cost platforms.
Speaker Change: By doing so, we plan to consolidate our overall network footprint, which would drive improved operating efficiency.
Speaker Change: We plan to close one of the oldest facilities in our network where we have aging infrastructure, older platforms, and less efficient building configuration. In addition, we no longer make the rice for Rice Krispie Treats since the spin.
Speaker Change: As a consequence, we are reducing production at another facility as we consolidate our rice production. Production would begin to move in late 2025 in both facilities, with completion expected in late 2026.
Speaker Change: These are necessary decisions made with thoughtful consideration to ensure our supply chain network is more reliable and allows WK to thrive into the future.
Speaker Change: and they are challenging as well as they affect our WK people.
Speaker Change: We recognize and appreciate the tremendous contributions of our WK teams at these facilities over the years, and we will ensure our employees are fully supported through the transition.
Speaker Change: I'll now hand it over to Dave who will provide more details on our Q2 results and our supply chain investment.
Dave McKinstray: Thank you, Gary. As a reminder, due to the spin, our second quarter results and future 2024 results are based on a comparison to our 2023 stand-alone adjusted results.
Dave McKinstray: which exclude intercompany sales and royalty arrangements with Kalanova that ceased to exist upon the spinoff.
Dave McKinstray: Today, our results are presented and referred to on an adjusted basis.
Speaker Change: We believe this provides the best comparable for our business. Further detail of these measures and reconciliations have been provided in today's press release and the appendix to this presentation.
Speaker Change: Now, looking at our results on slide 10, you will see that net sales for the second quarter were $672 million, a 2.7% decline versus the prior year period.
Speaker Change: Price realization for WK was positive 2.1% offset by volume decline of 4.8%.
Speaker Change: EBITDA for the second quarter was $78 million, an 11.4% decline versus the prior year quarter, driven by the lapping of the $16 million one-time insurance proceeds.
Gary Pilnick: Our performance is driven by productivity gains slightly offset by targeted commercial investments within the quarter. Our reported tax rate for the second quarter was 26.8%. And as a reminder, for 2024, we expect our full-year tax rate to be approximately 25%. And as a reminder, Q3 is typically a lower EBITDA quarter due to higher brand building spend in the quarter, resulting in a lower EBITDA margin.
Speaker Change: Turning to our year-to-date results, net sales declined 1.7% versus the prior year period, which reflects the partial year impact of lapping our last price increase.
Speaker Change: Year-to-date EBITDA of $153 million increased 1.3% versus the prior year period. Excluding the impact of the insurance proceeds, EBITDA increased 13%, reflecting our improved supply chain operations.
Speaker Change: Turning to slide 11, I will now focus on our operational highlights. Gross margin for the second quarter was 30%, a 100 basis point decline versus the prior year. Excluding the insurance proceeds, gross margin expanded over 100 basis points.
Speaker Change: Our underlying improvement is the direct result of our end-to-end focus and sustained improvements in our supply chain operations, including ongoing waste reductions.
Speaker Change: EBITDA margin Q2 was 11.6%, a 110 basis point decline versus last year. Excluding the insurance proceeds, EBITDA margin improved over 100 basis points.
Speaker Change: Looking at the below the line items, interest expense in Q2 was $8 million and other income was $4 million, both in line with our full year expectations.
Speaker Change: Our reported tax rate for the second quarter was 26.8%, and as a reminder, for 2024, we expect our full year tax rate to be approximately 25%.
Speaker Change: As we step back, the business is performing largely as we expected, and the underlying profitability momentum is offsetting top-line headwinds.
Speaker Change: Allowing us to maintain investment to drive ROI. We feel confident in our ability to offer the consumer the right product at the right price in the right place through our PPA and target investments, all of which is enabled by our improved supply position.
Speaker Change: Looking at slide 12, you can see our improved profitability.
Speaker Change: Our top line has been stable, which has been enabled by our improved supply reliability, which is fundamental to delivering our margin improvement. On gross margin, we have delivered consistent improvement due to the sustained productivity improvements within our supply chain operations.
Speaker Change: In Q2, we surpassed our strong performance in the first quarter.
Speaker Change: Finally, looking at EBITDA margin, we have maintained operational discipline and our gross margin improvements are flowing through to our profitability.
Speaker Change: The overall shape of our year is weighted towards the first half. Remember, Q3 is typically the period of our heaviest brand building where we execute back to school. In Q4, it's historically the lowest volume quarter for us, and the category is retailer's shift to general merchandise for the holiday season.
Speaker Change: We are executing our strategy and the early productivity achievements within our supply chain operations have yielded a positive impact on both the top line and profitability.
Speaker Change: Our year-to-date results put us on track to deliver our 2024 EBITDA guidance, and ultimately, our first rise and goal of approximately 14% EBITDA margin as we exit 2026. Now, let's review the details of our supply chain announcement on slide 13.
Speaker Change: As Gary mentioned, we told you last August that WK was an approximately 9% EBITDA margin business.
Gary: As you heard, we plan to close one plant and streamline another.
Gary: The expected net headcount reduction associated with that planned network consolidation is approximately 550 people.
Gary: with the rest of the spend occurring in 2025 and 2026.
Speaker Change: Second, cash one-time costs related to the startup and new lines, severance, and other one-time costs are expected to be approximately $110 million.
Gary: In addition to the cash outlay, we expect to incur non-cash charges related predominantly to asset write-offs of up to $190 million, largely resulting from the planned plant closure.
Gary: On slide 14, it shows our second quarter net debt position.
Gary: We ended the second quarter with $491 million of debt and cash equivalents of $44 million, resulting in net debt of $447 million.
Gary: This increase was driven by the planned investments to stand up the company and exit TSA agreements.
Gary: This initiative is still on track to spend $125 million as originally estimated. This is purely a timing shift into 2025.
Speaker Change: Incorporating the Supply Chain Initiative into our full year 2024 view of free cash flow, we now expect to have negative free cash flow of approximately $50 million.
Gary: Year to date, free cash flow is negative $10 million. Based on the time of our supply chain related cash outlays, we expect net debt to peak at approximately three times adjusted EBITDA in early 2026.
Speaker Change: And in Q4, we also expect to lap some one-time costs within net sales that we estimate to be worth approximately a point of growth within the quarter.
Speaker Change: We expect EBITDA growth in the range of 3 to 5 percent, which reflects dollar delivery of between $265 and $270 million.
Speaker Change: And as a reminder, Q3 is typically a lower EBITDA quarter due to higher brand building spend in the quarter, resulting in a lower EBITDA margin.
Speaker Change: These dynamics mean our total profit delivery is front half-weighted, while our profit growth is back half-weighted.
Speaker Change: And now I'll hand it back over to Gary to close out the call. We are six months into the year and we're executing our strategy, delivering results and investing for the future.
Gary: Despite a difficult business environment, we are on track for the year and delivering improved margins.
Gary: And today, we announce the blueprint for advancing our supply chain initiative, an important step in our journey to establishing the foundation from which we will build. And we look forward to sharing more updates with you in the future.
Gary: We are excited about the progress we're making transforming this business from marketing to sales to supply chain. One of our cultural pillars is to create and act boldly. We hope you are seeing that mindset coming through.
Speaker Change: I would like to thank our people for all we've accomplished together since we first introduced ourselves last August . I will now open the call to Q&A.
Speaker Change: Thank you. If you would like to ask a question, please dial star followed by 1 on your telephone keypad now. If you change your mind, please dial star followed by 2 to exit the queue.
Speaker Change: When preparing to ask your question, please ensure that your phone is unmuted locally. And finally, in the interest of taking as many as your questions as possible, please limit yourselves to one question and one follow-up if needed.
Speaker Change: And our first question today is from the line of Kenneth Goldman of JP Morgan. Please go ahead, your line is open.
Speaker Change: Hi, good morning, and thank you. Good morning, Ken. I wanted to ask... Hi.
Speaker Change: No, I think appreciate that, Ken. The way we look at it is the business is largely performing as we thought it might.
Speaker Change: You can already see our confidence and our ability to change the trajectory of our volume and sales by being able to reaffirm our guidance, and we said in the prepared remarks, we are going to see sequential improvement in the back half.
Speaker Change: in both volume and sales.
Speaker Change: So, in the front half, 9 of our 11 biggest brands are performing with or better than the category. We're very pleased with those activations. We're looking for the right returns in this environment. That's particularly important. But we think you start to see that in the back half, and that would be our view going forward as well, Ken.
Speaker Change: If you look at volume, one thing to keep in mind is, and we mentioned in the prepared remarks, PPA, and we've talked about RGM in the past and wanting to continue to realize price. And we're continuing to do that in the market. One metric we're also looking at is units. So as you're looking at the market data, I'd encourage you to also look at units and how they're progressing. We've seen them continue to trend higher. In fact, in the most recent data, we've actually seen units turn positive.
Speaker Change: You know, I appreciate the commentary and the efforts on special K certainly sounds like
Speaker Change: There's some interesting new commercial activation underway.
Speaker Change: [inaudible]
Speaker Change: I guess my question would be, you know, this brand has been a drag on the business for
Speaker Change: really as long as I can remember and there have been lots of different efforts over the years from you and
Speaker Change: The Kellogg Company previously
Speaker Change: to fix it in a lot of different ways.
Speaker Change: I'm just curious, is there anything really differentiated that you're doing now that kind of hasn't been tried before, you know, just in light of some of the challenges that the brand has had and kind of the efforts that have been made in the past? Thank you.
Speaker Change: When we think about Special K, that's part of the 9 of the 11, so the 9 growing at or with the category or better than the category. The other two were Special K, as you said, one of our largest brands.
Speaker Change: When you take a step back, let's sort of zoom into this year, Ken, and then we'll zoom out again if you don't mind. But this year in particular, we had a slower start to the year. We had less activation this year compared to a big activation last year. Just to give you a little bit of color there, in our innovation set, we had six launches last year to two this year. So that made a big difference as we started the year. And then we lapped.
Speaker Change: A specific customer activation in Q2.
Speaker Change: Now, you're asking, well, tell me more about the brand. We now have the full force of our integrated commercial team focused on this brand. We're doing that with Frosted Flakes and Raisin Bran, and you see the improvements there.
Speaker Change: We are confident in the ability of this team, now that we're a serial only company, to be focused on that. Now, in terms of the brand itself, Special for a Reason actually gives you something, some insight into the actual brand.
Speaker Change: It has a variety of foods, a variety of nutritional benefits, and now we have a campaign that gets to target cohorts in a specific way to get them, to get the message to them as to what they're actually looking for in our foods.
Speaker Change: An interesting thing about the brand is, and we're also in premium, it tells you about the relevancy of the brand. Special case zero, doing very nicely, a good example of a nutritional benefit to a specific cohort that is working even on the premium side.
Speaker Change: And, you're right, there's work to be done. The team is on it. We believe we have the team to do something special with Special K.
Speaker Change: Great, thank you.
Speaker Change: Our next question today is from the line of David Palmer of Evercore ISI. Please go ahead, your line is now open.
David Palmer: Thanks. Good morning. I really have a question about
David Palmer: Market share and you know, I think that
David Palmer: The interplay of that with promotion spending and gross margins, in particular.
David Palmer: So I'm wondering how you're thinking about what is going to happen in market share trend. Do you think that those you'll be able to stabilize market share in the second half? And to what degree will that involve?
Speaker Change: for promotion spending, and in particular, how are you thinking about your gross margin in the second half?
Speaker Change: Thanks for that, David. A couple of things about that. Let's first talk about market share. If you take a look at our market share performance, it has been quite stable since we've spun. We came out of last year around a 21.6, and we've hovered around that number each quarter since then. So it's stable.
Speaker Change: We would expect to see sequential improvement as we move forward, because that should move along with our sequential improvement in volume, as well as our top line.
Speaker Change: Now, you talked a little bit about promotion as well and how we're thinking about that. We like the way we're executing our promotional plan. The key thing about promotion is it's part of the equation when you're trying to drive value for your consumer.
Speaker Change: It's certainly an important part, but if it's just price, you're probably not going to get where you need to get to as a branded player. It needs to have an idea, you need to commercialize it with a campaign, maybe a collaboration with a partnership. Essentially what I'm doing is describing what we've done with Frosted Flakes.
Speaker Change: when you pull all that together you get the lifts you're looking for you're looking for you get volume growth you get sales growth as well so we like where we are with our promotional plan in our back half we have the fuel that we need
Speaker Change: A key thing that we do is we're always looking at returns.
Speaker Change: We want targeted investment.
Speaker Change: We want to make sure we're targeting the right brands and the right channels to the right customers and consumers.
Speaker Change: to make sure we're getting the lists we want.
Speaker Change: But for us,
Speaker Change: We like what we're doing in the front half. We like the plan we have in the back half. We're excited about that. And we have the fuel that we need.
Speaker Change: And I say that, you mentioned gross margin as well.
Speaker Change: We're very pleased with our gross margin performance. We were able to invest more and still deliver 30% gross margin. This business hasn't seen that in a while. It shows you the power of focus and discipline we have in the organization.
Unknown Speaker: David, how are you? Yeah, and I think I just know.
David Palmer: David, just on your question on the gross margin for back half and some of the sequencing, if you will, of the P&L or the shape of the P&L, I would say if you look at our first half gross margin delivery, you can kind of pencil that into the back half. Now, if you look at this slide, we had this slide in the prepared remarks of the overall shape of our margin trajectory, and then I'd remind you for the back half, if you think about EBITDA margin, our shape will look similar to that. Q3 would be kind of our EBITDA growth will be in line with our annual guidance.
David Palmer: For Q4, remember, we are lapping the incentive comp in Q4, so maybe a little bit of higher growth in Q4 versus Q3, but that'll just kind of give you an idea of how to shape the rest of the year.
David Palmer: Yeah, David, so for the $390,000, we send the prepared remarks. It'll be, you know, approximately $40 million in 2024.
David Palmer: Just from a sizing perspective, I'd say that the bulk of the majority will come in 2025. But we'll give you explicit detail on that exact number as we provide guidance for 2025 in Q1 of 2025. So just again, simple phasing, $40 million this year.
David Palmer: The bulk of the remaining and 25 would then sum into 26, but we'll give you more exact numbers as we give guidance next year.
David Palmer: Thank you.
Speaker Change: Our next question today is from the line of Peter Galbo of Bank of America. Please go ahead, your line is now open.
Speaker Change: Good morning, Peter. Hey, guys, good morning. Hey, good morning, Gary. Thanks for all the detail.
Peter Galbo: on the supply chain. I wanted to dig in a little bit there.
Peter Galbo: Maybe with a little bit of a two-part question. First, I think you mentioned maybe expanding some capacity at the remaining facilities and so, net-net, I guess at the end of 26, I think the assumption is that there isn't really an impact to total company sales as a result of kind of the closure.
Unknown Speaker: I think the assumption is that there isn't really an impact on total company sales as a result of the kind of closure. And then secondly, you know, Gary, maybe you can just dimensionize.
Peter Galbo: And then secondly, you know, Gary, maybe you can just dimensionalize.
Gary: From a capacity utilization standpoint, you know, where things kind of stand today across the five plants, and then at the end of the, you know, rationalization here, kind of where you think capacity utilization shakes out across the network.
Gary: In terms of utilization and capacity and what you were describing about the performance of our plants,
Speaker Change: Certainly, I think, helps.
Speaker Change: You know, you have a lot of your peers that are talking about, um...
Speaker Change: I think the question is, you know, with your story very much focused on that level of margin expansion, you know, why would it not be the same for you guys that you have to take again some of that margin upside and reinvest it back into the P&L to try and drive volume? Thanks very much.
Speaker Change: Yeah, Peter, I think I would tell you there's an and there. So we have a couple things going here. Number one, you just heard that we're reinvesting, we increased our investment in the second quarter, we said we have fuel in the back half as well.
Speaker Change: and give you even more confidence in our ability to create the flexibility so we can drive into the business.
Speaker Change: We need to make sure that we're getting the return back. We gave you a couple good examples in the prepared remarks where that's working well for us. As a maturing organization, we're gonna be able to do that more broadly across our portfolio.
Speaker Change: Good morning, Max. Hey, thanks for the question. Hey, thank you.
Max: the serial category could get a bit of a benefit given it is more on that value end of the spectrum. So I'm just curious why you think the serial category isn't doing better in the track channel data that we all track. Thanks.
Speaker Change: holding up well, and the category is actually performing as we would have expected. We talked about our assumptions, our planning assumptions coming into the year, and despite the macro environment, the price-volume gap continues to narrow. And then over the first half of the year, it was down a little over a point, and the last four weeks, a little bit under a point. So it's performing where we would expect it to perform.
Speaker Change: And, when a consumer is looking for more certainty, the innovation just is not performing as well as it has in the past. But what's interesting about that is, that means it goes to the core. So that innovation point was about the category and our performance.
Speaker Change: but where the consumers are going to our core. You look at Frosted Flakes, blue box. You look at Fruit Loops, you look at Redbox, that's doing better for us.
Speaker Change: Yeah, I'll repeat a little bit of what I said, but that's I understand the question innovation in general for the category is down Our innovation performance is down as well in terms of Special K
Speaker Change: That's just, as we were balancing out the portfolio, that was a decision that we made. We're thinking about what we want to do for next year. Remember, that innovation plan was created prior to the spin, now we move forward after the spin. This will be our first innovation set as an independent company. And when you talked about some of our innovations,
Speaker Change: This year, they're highly incremental, because they're doing the job of bringing new consumers into the category. What's interesting about that, when you do that at a time where the consumer is looking for more certainty...
Speaker Change: That's actually, there's a rub.
Speaker Change: But, at the same time, we feel good about the job that it's doing.
Speaker Change: We're going to keep doing that. And some of our innovations recently, like Special K0, that goes to the high end and adds nutrition to our portfolio. That's actually doing quite well as well. So
Speaker Change: We're looking at the overall innovation while it's down this year. We think that's more about the environment than about our plan, and we're excited about our 2024 plans as well as 2025.
Speaker Change: Great, thank you. As a quick reminder, if you would like to ask any further questions, please dial star 401 on your telephone keypad. And our next question is from the line of Scott Marks Jeffries. Please go ahead. Your line is open.
Speaker Change: Hey, good morning. Thanks for the question, guys. Good morning. I'm wondering if you could talk a little bit about cadence of margin expansion through 26. I know you're talking about exit rate of 14 percent, you know, leaving the year. You know, is that just a Q4 expectation and how should we think about it over the next couple of years?
Speaker Change: Hey, Scott. Thanks. So, as we think about and we've...
Scott Marks: Not really changed much from this standpoint back when we started talking in August , but I'll just kind of size it for you. You know, obviously, our guidance implies 3 to 5% growth this year. I'd say as we look forward to 2025, you can kind of expect similar. Now, that's not official guidance. We'll come back with an official number in Q1. But just from a sizing perspective, probably not all that dissimilar to 2024. 2026, you mentioned it, we've been explicit in saying exit. As we're exiting the year, we'll be at 14%, but that's not a full year number. So as you think about the growth from EBITDA in 2026, it'll probably be higher than 2025 and 2024, but it's not going to be the full run rate. You'll start
Scott Marks: getting the full run rate in the end of 26 as we exit and then carry that into 2027.
Unknown Speaker: Got it. And then just one more, as you kind of step into this, you know, CapEx cycle. I was wondering if you could just speak a little bit about some of the funding requirements, some of the debt. I know you have a drawdown feature on the term loan. I was wondering if you could give us a little bit in terms of timing of that, and you know, how much of that you expect to lean on.
Speaker Change: Got it, and then just one more as you kind of step into this.
Unknown Speaker: Unknown Speaker
Speaker Change: you know, CapEx cycle. I'm wondering if you could just speak a little bit to some of the funding requirements, some of the debt. I know you have a
Speaker Change: drawdown feature on the term loan. I was wondering if you could give us a little bit in terms of timing of that and you know how much of that you expect to lean on.
Speaker Change: Yeah. So...
Speaker Change: When we came out, we've said that we had a delayed draw feature on our term loan arrangement that we have with our partners. And so as we think about that, we're going to start drawing on that as we start spending those cash flows. I mentioned the cash flow for this year, approximately $50 million for a full year, because remember, it's not just a supply chain initiative. It's also that overall stand-up initiative that we have going through kind of the first half of 2025.
Speaker Change: So those two things combined is that we'll get to about three times adjusted EBITDA in early 2026.
Speaker Change: As we think about that, we have that funded through our current debt arrangements that we have with our lenders. They've been lockstep with us, understanding the cash needs, where it's going, how it's being spent, the returns we're getting for it. So we have all that funding committed to us, and we feel good about that.
Speaker Change: Got it. Thanks very much. I'll pass it on.
Speaker Change: Our next question today is from the line of Robert Moskow of TD Cowen. Please go ahead, your line is open.
Speaker Change: Good morning, Rob. Hi, thanks for the question. Good morning. I came on late, so pardon me if someone's asked this, but
Robert Moskow: It's always a tough decision when you have to close a plant. Can you speak to whether these plans have been contemplated as part of your most recent labor agreements?
Speaker Change: Are there any new big labor contract renewals coming up?
Speaker Change: And also, what kind of capacity change does this represent for WK overall? Is it a material reduction or is it kind of a small reduction? Thanks.
Speaker Change: Thanks, Robbie. Nobody asked that first question, so let me just do a full-throated answer to that one. I think what we would say is, in the plan we just announced, there's nothing in our arrangements with our union that prevents us from executing these plans.
Speaker Change: Now, you step back, and these are our people. This is an arranger we entered into with our people. Of course, we're going to honor the letter and spirit of the agreement. We've spoken to our people in the union this morning, but the agreement in place right now gives us the flexibility to execute on the plan that we announced this morning.
Speaker Change: In terms of the contracts, I think maybe what you're referring to is the master contract that we have with our plants. That expires in October of 2026, so that would be the next date that's probably quite relevant. I think that's what you were asking.
Speaker Change: In terms of capacity, I think what we would say is, we feel like we're in a very good position to supply our customers and deliver our targets after we modernize our supply chain and actually, of course, during the execution of this project as well. The best way to think about this is,
Speaker Change: We're shifting production from the oldest facilities to more efficient facilities and also from old platforms that are more rigid to newer, more agile technologies. So we feel good that we have the right capacity, the right ability to produce going forward as we execute on this project.
Speaker Change: Thanks for the color, Gary.
Gary: My pleasure.
Speaker Change: Thank you and we have no further questions in the queue at this time so I would now like to hand the call back to Mr Gary Pilnick for any closing remarks.
Gary Pilnick: Thank you for joining our call today. I hope you can see that we're on track and executing our strategy and we look forward to sharing our Q3 results with you in November. Thank you so much for joining us.
Speaker Change: This concludes today's conference call. Thank you for joining. You may now disconnect your lines.