Q3 2024 WK Kellogg Co Earnings Call

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Speaker Change: Good morning. Thank you for attending today's W. K Kellogg co Q3 earnings call. My name is telling me and I will be your moderator for today's call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question. Please press star one on your telephone keypad.

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Speaker Change: I would not to pass the conference over to your host Karen Duke Vice President of Finance and Investor Relations You May proceed.

Karen Duke: Thank you operator, good morning, and thank you for joining us today for a review of our third quarter results I'm joined this morning by Gerry Pulmonic, our chairman and Chief Executive Officer, and Dave Mckinstry, Our Chief Financial Officer.

Karen Duke: <unk> 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.

Speaker Change: Actual results could differ materially 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 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 standalone adjusted basis for periods. After the spin off results are presented on and referred to on an adjusted basis and compare to our 2023 stand alone adjusted results you can find definitions of.

Speaker Change: Each non-GAAP measure and GAAP to non-GAAP reconciliation within our earnings release and in the appendix to the presentation.

Speaker Change: I will now turn the call over to Gary Thanks, Karen and good morning, everyone. Thank you for joining our third quarter call today, I will discuss our financial results and guidance in market performance as well as our back half commercial Activations I'll, then turn the call over to our Chief Financial Officer, Dave Mckinstry, who will provide.

Speaker Change: Additional detail on our Q3 performance and outlook for the year will close out the call with time for Q&A.

Speaker Change: Let's start by looking at slide three it's fair to say that the business is performing largely as we expected for the quarter net sales increased 7% driven by a balance of improving volume and price realization.

Speaker Change: Last quarter, we told you we expected stronger second half sales performance due to improvements in our commercial execution and the lapping of the challenging environment that emerged in Q3 of 2023, Indeed, our sales trajectory did improve and was driven by quality commercial programming better back to school activation.

Speaker Change: Continued strength in Canada, and improved performance in non measured channels and our supply chain performance is improving as our team continues to deliver better levels of customer service, allowing retailers to replenish inventory to more normal levels, which positively impacted our shipments.

Speaker Change: Our topline performance along with continued operational focus and discipline led to another quarter of gross margin expansion for the quarter. We achieved gross margin of 29, 4%, a 90 basis point increase versus last year.

Speaker Change: This performance benefited EBITDA, which grew 27, 5% in the quarter versus prior year. Overall, we are pleased with how the team is executing and our ability to deliver on our financial commitments in this challenging environment. Our Q3 results puts us in a position today to reaffirm our 2024 net sales.

Speaker Change: Guidance and raise our full year guidance range on EBITDA, which is now expected to grow 5% to 6% lets turn to slide four to discuss category trends and our performance.

Speaker Change: The U S cereal category dollar sales as measured by Nielsen X Aoc declined one 4% in the quarter with volume declining low single digits.

Speaker Change: Both dollar sales and volume improved compared to last quarter shopping patterns for the quarter continue to lean towards value focused retailers and channels club and dollar again to a positive dollar consumption growth. This quarter, both were up approximately 3% driven by a mix of increased display activity and Tdp's interestingly.

Speaker Change: While consumers display value seeking behavior, the granola and premium segments of cereal continued to deliver strong growth each saw double digit dollar consumption growth to positive volume and positive price mix, demonstrating the breadth of affordability and overall value cereal delivers year to day.

<unk> dollar consumption for the category is down one 2%.

Speaker Change: <unk> has performed in line with our planning assumptions and is providing the stable backdrop to execute our strategy.

Speaker Change: In the U S. Our consumption performance measured by Nielsen X Aoc improved sequentially to down one 8% in the quarter due to increased merchandising with key customers and successful seasonal activations, which I'll talk more about in a moment.

We continue to maintain our share position at 27, 6%, which improved modestly versus last quarter. We saw share gains during the back to school period of August through early September on our participating brands, which we'll discuss in more detail.

Speaker Change: On volume in the quarter. We also saw sequential improvement in line with expectations and unit volume turn positive driven by our PPA strategy, which focuses on ensuring we are meeting the consumer with the right product in the right channel.

In Canada, our team delivered another solid quarter and outperformed the market benefiting from quality back to school execution and new product introductions. This is a good example of how our increase integration and the new ways of working at W. K, where there is fast and effective sharing of ideas across the business.

<unk> for the year, Canada has increased their market, leading position of 110 basis points to 38, 8%. Additionally, our Caribbean team is executing well and reached a 40% market share during the quarter, while the Caribbean is a smaller market for us the team's accomplishment is certainly noteworthy.

Speaker Change: On page five you can see the performance of our U S portfolio as we said last quarter. Our portfolio performance is more easily understood. If you look at it in three groups. Our core six the next core natural and organic as a reminder, our core six represents approximately 70% of our sales.

Speaker Change: And includes our six largest brands, which are shown on the slide. The next core contains iconic brands like corn flakes, corn Pops, and Apple Jacks and represents approximately 15% of ourselves and finally, Kashi and bear naked makeup our natural and organic group in the quarter five of our core six brands grew or maintained share.

This group continues to benefit from the performance of frosted flakes, and Raisin Bran, which remain two of the fastest growing brands in the category that said, we continue our work to improve the trajectory of special K, which consistent with its recent performance was down 40 basis points of share in the quarter.

While it will take time for the brand to perform to our expectations. The team has a more complete commercial plan for 2025, and we are already getting started with the launch of our new special for a reason campaign.

Speaker Change: Excluding special K, our core six was up 30 basis points of share in Q3 and is up 20 basis points of share year to date moving to our next core corn Pops and Apple Jacks were key brands during our back to school activation and delivered positive dollar consumption in the quarter. In fact, when you look year to date in corn.

Pumps and cornflakes have gained 10 basis points of share benefiting from improved supply.

Finally, our natural and organic group is showing signs of sequential improvement as we're starting to see the positive impact of innovation and our retail sales execution bear naked had improved supply in the quarter and so on nearly flat dollar consumption, along with positive unit and volume affirming that when the brand is on shell.

Speaker Change: It performs we spoke to you about improving supply of last quarter and we are pleased with the meaningful improvement in market continuing to build momentum in the growing <unk> segment is a big opportunity for W. K.

Year to date, the majority of our brands have held or gained share with many growing meaningfully ahead of the category. This performance driven by improved supply and maturing commercial and sales execution gives us confidence in our portfolio and our strategy.

Now, let's look at our back to school activity on slide six.

Back to school is an important time of year for cereal parents are transitioning to a new routine centered around the morning, and looking for our brands to help get the day started right. We are pleased with our first back to school programming as an independent company. Our teams designed commercial activations with the needs of parents and mind, ensuring we show.

First it enabled improved commercial activation, which you see it in our end market results.

And second it allowed retailers to maintain more normal levels of inventory, which improved our shipments in the quarter versus last year.

Additionally, our sales in Canada in non measured channels continue to trend positively.

EBITDA for the third quarter was $65 million or 27, 5% increase versus the prior year quarter, which was driven by top line performance and continued operational discipline.

Turning to our year to date results net sales were down 9% versus the prior year period. Despite the ongoing challenging consumer environment. Our sales performance is in line with our full year guidance.

Year to date EBITDA of $217 million increased five 3% versus the prior year period, driven primarily by improved operational efficiencies turning to slide 11, I will now focus on our operational highlights.

Gross margin for the third quarter was 29, 4%, a 90 basis point increase versus the prior year, which resulted from continued cost discipline and operational efficiency improvements EBIT margin in Q3 was nine 5% a 200 basis point increase versus last year, driven by gross margin improvement.

The timing of brand building spend.

We remain focused on identifying and investing in high ROI initiatives, which we believe is reflected in our results.

Looking now at or below the line items interest expense in Q3 was $7 million and other income was negative $2 million.

Overall, it was another solid quarter for W. K, which we believe puts us firmly on track to achieve our financial guidance for the full year.

We delivered topline growth driven by sequential volume improvement, while our revenue growth management initiatives generate positive price mix.

Operationally the team did a great job executing back to school and we saw strong performance across the majority of our brands.

Let's turn to slide 12 to cover our cash flow and balance sheet.

Year to date cash flow from operations was $98 million and year to date capital expenditures were $96 million, which includes investments in our supply chain and standing up our own infrastructure as we progress towards exiting our transition services agreements.

Additionally year to date, we have paid $41 million in dividends to shareowners.

Turning to the balance sheet, we ended the third quarter with $489 million of debt and cash equivalents of $47 million, resulting in net debt of $442 million, a decrease of $5 million versus last quarter.

This decrease was a result of core working capital favorability in the quarter.

Our leverage ratio measured by net debt to trailing 12 month EBITDA is currently one six times.

Consistent with what we've said previously we continue to expect free cash flow for 2024 to be approximately negative $50 million and we expect to exit 2024 with approximate leverage of one eight times as we accelerate spend associated with our supply chain initiative in Q4 of this year.

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As a reminder, we have fully secured debt commitments to fund our supply chain modernization investments and continue to expect leverage to peak at approximately three times in 2026, our strong base business cash flow, which converts at a very high percentage from net income along with our available debt capacity provides sufficient.

Capital to execute our strategic initiatives as we create significant long term value.

Let's turn to slide 13 to discuss our guidance today, we are reaffirming our 2024 net sales guidance, which we continue to expect to be at the lower end of a range of down 1% to up 1% versus prior year. Additionally.

Additionally, given our strong year to date profit delivery, we are raising our 2020 for EBITDA guidance.

We now expect 2020 for EBITDA growth to be between five and 6% up from our prior guidance range of 3% to 5%.

As a reminder, in Q4, we expect to lap some one time costs within net sales that we estimate to be worth approximately a point of growth within the quarter.

Q4 also tends to be a lower sales quarter as retailers shift display towards general merchandise for the holiday season.

In summary, we're proud of our team and our ability to execute our strategy and deliver financial results in line with our expectations I'll now turn the call back over to Gary Thanks, Dave as we close I'd like to pause and acknowledge two key milestones that took place this quarter with our team our communities and our retail partners.

Gary: First we celebrated our first birthday as an independent company on October two it has been a remarkable journey filled with several firsts for this iconic 118 year old startup I could not be more proud of our team across the W. K organization and how they are transforming this business.

Gary: And our second milestone demonstrates who we are as a company mission Tiger is our signature sustainable business program, our very own Tony the Tiger is on a mission to support Middle School sports by funding programs to supply new equipment improved facilities expand access and more he does this in <unk>.

Partnership with our local retailers and communities since launching in 2019, we have reached more than 3000 schools nationwide and created almost 2 million sports and play experiences for middle scores and in Q3, Tony reached another significant milestone. He has now invested in schools and all 50.

Gary: Rates.

Gary: By supporting Middle School Sports W. K Kellogg co is helping to build stronger communities and with frosted flakes being one of the fastest growing brands in cereal is a great example of how doing good is also good for business. It has been a year since we became an independent company and we are pleased with the results. We have delivered we're equally pleased.

Gary: With how we're delivering those results with that I will now open the call to Q&A.

Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star followed by one on your telephone keypad. If for any reason at all you would like to move that question. Please press star followed by two again to ask a question. Please press star one please limit yourself to one question and one five.

Blow up in the interest of time.

Speaker Change: Our first question comes from Kenneth Goldman with Jpmorgan you May proceed.

Kenneth Goldman: Good morning, Ken So it's a little early.

Speaker Change: But just curious are there any early directional tailwind headwinds, we should be considering for next year any.

Speaker Change: Outlook, you might have on the cadence of the top or bottom lines and I guess.

Speaker Change: Most importantly, and I realize again visibility is a little challenged.

Speaker Change: Right now but.

Speaker Change: Your guidance calls for flattish top line growth 24 through 26, youre not quite going to get there I think this year is there as you see things now just given some of your opportunities and offset maybe by macro challenges.

Speaker Change: You're going to be aiming for kind of flat top line growth next year.

Speaker Change: Thanks for the question, Ken excuse my voice pardon me.

Speaker Change: I think what we'd start is we're pleased with where we are delivering today for 2024, you've heard today that we're reaffirming guidance for our top line and actually raising guidance with respect to EBITDA. It.

Speaker Change: It is early you said that at the beginning of your question, but let me tell you what we're thinking about as we think about going forward I think what.

Speaker Change: You can consider is growth for next year being largely consistent with how we're growing this year. When we think about tailwind for the organization. We're delivering these results. This year, it's our first year as an independent company, while we're transforming our business and unplugging. It is a challenging environment as well.

Speaker Change: Next year those capabilities will continue to mature we liked the planning that were doing as a company. So we're pleased about the way we are executing which gives us that much more confidence for next year, but I think largely you can see our growth next year being consistent with this year as well, but again. We appreciate you, saying it's early we will come back in February with more.

Speaker Change: Detail Ken.

Speaker Change: Okay. Thank you for that and then quickly.

Speaker Change: The category.

Speaker Change: And I'm talking the larger sort of breakfast category here, because we're seeing certainly some shifts.

Speaker Change: When you guys are doing a great job with obviously a lot of your brands, but just from a macro level, we're seeing some shifts more toward beverages and other.

Speaker Change:

Speaker Change: Alternatives to serial still.

Speaker Change: In the broader breakfast aisle. So just curious how do you see the competitive landscape, just expanding beyond cereal and how rational or some competitors being in there.

Speaker Change: Yes, a couple of things about that when we think about the category. The way we would describe it is providing us the backdrop when it needs to deliver our overall value proposition take a look at cereal I know you asked about other categories, but if you just take a look at the cereal large durable category, we talked about that before tdp's.

Speaker Change: Our holding in displays look good as well as growth in the premium side of things. So when we look at the category. We think in this particular environment, we like how it's holding up in particular look at units as well now one thing that we look at is when we think about our category. We believe we have folks coming.

Speaker Change: Into our category consumers coming into our category when we look at PPA one of the things. We're finding is there are consumers were coming in maybe lapsed consumers new consumers coming into cereal. So when we look at this category, we like what we're seeing right now it provides us what we need to deliver on.

Speaker Change: Our model and going forward, we see that continuing as well into 2025 again, we do believe the challenging environment will persist, but we like what we're seeing right now.

Speaker Change: Great. Thank you.

Kent: Thank you Kent.

Kent: Thank you.

Speaker Change: The next question comes from Peter Galbo with Bank of America, You May proceed.

Peter Galbo: Hey, guys good morning.

Speaker Change: Good morning, Peter.

Speaker Change: David in your comments and Gary in your comments at the beginning I think you mentioned all of the factors.

Speaker Change: In terms of non tracked in Canada that were helping drive some of the positive variance in volume this quarter.

Speaker Change: Dave I think you did also mention that there's a.

Speaker Change: A little bit of of retailer inventory build benefit that was in the quarter. So just hoping you could kind of dimension that for us.

Speaker Change: I'm, assuming that doesn't continue into <unk>, but just wanted to make sure.

Speaker Change: Yes, Peter So just to reiterate what I said, a little bit is recall. This time last year, we had it we had a supply chain challenge and what that led to was a fairly not insignificant drawdown in retailer inventory solely due because we werent supply and product over the last year I think.

Speaker Change: The slide in the presentation really detailed the improvement that we've seen versus last year and we turned it better. So we didn't build inventory. This quarter, we are rather consistent on inventory levels from the end of Q2 to the end of Q3, but really it was the difference of lapping a draw because of that service deficit.

Speaker Change: We had last year. So that was the benefit we saw as you think about it you're right. We don't expect that to carry on of course, it's kind of a onetime thing, but I think as you look at our Q4 numbers.

Speaker Change: We anticipate the underlying business to continue to perform we've also mentioned that there is a one time benefit in investment we had in Q4 of last year.

Speaker Change: Will will play into net sales. So those two items will get us back into the guidance range that we had on net sales.

Speaker Change: Got it Okay. That's super helpful.

Speaker Change: And maybe just to follow up on Ken's question.

Speaker Change: Similar rates of growth for 25, I think is it seems seems reasonable at least at this point.

Speaker Change: Just any early read on any of the other items, whether thats inflation rate for next year. If you kind of happen early read or anything below the line would be helpful. Thanks very much.

Speaker Change: Yeah, we'll come back with full details on all the below the line items everything else.

Speaker Change: In February I would say a couple of things you know Gary mentioned that will be in line roughly on growth rates.

Speaker Change: From an overall inflation deflation or inflation deflation will get into some of those details later on so.

Speaker Change: Expect us to come back in February with all of that detail.

Speaker Change: Thanks very much.

Speaker Change: Thank you the following comes from Andrew Lazar with Barclays. You May proceed.

Speaker Change: Good morning, Gary and Dave.

Speaker Change: Good morning, good morning.

Speaker Change: Good morning.

Speaker Change: Special case, the one big brand of the sort of the core six that we can see and you talked about is kind of what's holding back sort of the share of those of those brands and the others. I think collectively are are gaining a little bit of share. So I was hoping you could talk about just more commercial activation and whatnot and Youre happy with the plans we have going forward, but it's a big brand and it's one that I know.

Speaker Change: So it has been.

Speaker Change: I struggled for really a bunch of years now I guess, maybe if you could just add a little bit more color around the plan there, maybe what's what's perhaps different or.

Speaker Change: Thats getting you sort of a little more confident that that brand from a share standpoint can start to stabilize a bit more.

Speaker Change: Yes, I think Thats very fair, Andrew you make the point that five or six core brands are growing faster or at the category rate.

Speaker Change: Special K is down 40 bps.

Speaker Change: Down 40 bps in Q2 as well so we would say its stabilizing but it's not performing where we would expect the brand to perform so let me give you a couple of little bit of detail that I think would be helpful. It starts with we do think Twenty's live will be different we feel good about the complete activation plan we have.

Speaker Change: We then start let's look at 2020 forward to begin with first there are some mechanical issues that we'll be lapping there were SKU calls we also changed distribution.

Speaker Change: Keep promotion with one of our retailers move from one brand to another so moved away from special K. That's in the base for 2020 for those mechanical issues will largely be gone in 2025, I think you can go to execution in the second thing. This brand, we know responds to display to feature to promotion to innovation.

Speaker Change: And we were pretty light in 2024 as you compare to 2023, we feel better about that for next year as well.

Speaker Change: The other thing you are pushing on and I think it's a very fair thing is the strategic piece of it we like where this brand as it is at the intersection of taste and health is well positioned for consumers. The key is how do we get to those consumers and we're not standing still we've already started with that when we think about special K.

Speaker Change: It provides offerings that match a variety of consumer needs. The key is how do you communicate that effectively to your consumers. So a couple of things. We've already started with the new campaign, we've talked about special for a reason you can understand why we're doing that because special K is special for the different reasons consumers are looking for.

Speaker Change: Early reads would say, we're getting some positive feedback on that but that's already in market, but that's the key thing we have to do that.

Speaker Change: That's the right messaging, we've got to use our new marketing muscle to reach our consumers. So what I've. Just described was mechanical issues that we're hoping are behind us execution, we hope to perform even better and strategically the team is on it already so not performing where we would hope or expect and the team is moving forward and we feel better about.

Speaker Change: 2025.

Speaker Change: Thank you for that and then.

Speaker Change: You've talked in recent recent calls about and you mentioned it again today consumers trading down to some of the smaller sizes that allow them to include maybe more of a serial product in their basket size and whatnot.

Speaker Change: I'm curious how.

Speaker Change: Your supply chain is set up to handle that type of flexibility that's needed for maybe smaller package sizes and also with the profitability picture looks like on some of those smaller sizes that might be might be a higher price per ounce right, but just smaller overall unit price what that means for margins if anything thanks, so much.

Speaker Change: Thank you Angie we talked to you about that a couple of months ago, and you're right. When you look at the public data, we talked about what's happening with units and you saw units were actually growing in Q3 part of that is our PPA now PPA does a variety of different things it expands your portfolio offerings.

Speaker Change: So we have folks coming in to get better price per pound lower sticker price and everything in between and we really like the work that the team is doing by the way PPA, it's hard to execute and the team has done it really isn't Lee now you asked about maybe smaller units.

Speaker Change: Set up well to do that because we are growing in this space our supply chain is all over it that's what we're working on right now and we like the economics as well if I can leave it there I hope you don't mind, but we like the economics across the portfolio that we're doing in PPA and for US what we like about PPA is it good for the category good for our consumers for variety.

Speaker Change: We have reasons to find the right pack in the right channel and also it's good for our business as well.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: As a quick reminder, if you would like to ask a question. Please press star one on your telephone keypad. The following comes from David Palmer with Evercore ISI you May proceed.

David Palmer: Thanks, Good morning.

Speaker Change: To ask a clarification on the earlier answer I think it was to Ken's question about how you're thinking about 25 on the top line at a similar to 24 is that does that mean roughly minus 1%.

Speaker Change: Is that what you meant there.

Speaker Change: So I think I'm going to go back to the other thing Ken gave US which is it's early so we're looking more at a higher level. If you don't mind, David will come back in February, but we're just saying generally speaking the growth rates, we've talked about before about what the algorithm looks like I think you can expect something similar to that I hope it's okay. If we leave it there.

Speaker Change: For now, but we'll come back and give you more in February.

Speaker Change: Yes fair enough.

Speaker Change: Just I'm wondering how you're thinking about maybe puts and takes because if you keep multiyear trends the same comparisons do ease into the first quarter you could credibly argue that the multiyear.

Speaker Change: The same could get you to positive organic sales in that first quarter.

Speaker Change:

Speaker Change: So I was going to ask you if that.

Speaker Change: Maybe what some offsets to that might be in your as you're thinking about the big picture, maybe you can answer that.

Speaker Change: I think what I would say as you heard us earlier talked about the complete commercial plan for 'twenty five we feel good about that as well.

Speaker Change: And I think we might leave it there because we'll talk more about 25, when we get to February we'll be able to give you a lot more detail, but at the very least we're happy to say we feel good about the growth rates going forward. The algorithm that we're on and I think what you're hearing is a level of confidence from us because what we're seeing inside the.

Speaker Change: <unk> is the ability to execute and drive the business or what our playbook as well as transforming our three key commercial commercial function capabilities as well as executing on our strategic priorities. We're doing all of that delivering on our commitments. So David I think that's why you're hearing a level of confidence for us.

Speaker Change: Us.

Speaker Change: Yeah, I mean, if I could just squeeze one last one I would just say ask maybe about the category from a <unk>.

Speaker Change: Trade up wellness group of brands I mean, you have Kashi and bear naked you said that there was some healing going on their special K remains a bit of a work in progress and those are some of.

Speaker Change: The wellness brands that you've.

Speaker Change: And partly I feel like wellness in this category, it's been sort of been elusive news.

Speaker Change: Trade up driver for the category for a while now.

Speaker Change: What are your thoughts about wellness within the category and the best messaging that you can do to sort of drive some of your premium brands going into 2025.