Q4 2024 WK Kellogg Co Earnings Call and Business Update
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Lydia: Hello everyone and welcome to the WK Kellogg fourth quarter 2024 earnings call. My name is Lydia and I'll be your operator today.
Lydia: After the prepared remarks, there will be an opportunity to ask questions.
Lydia: If you'd like to participate in our Q&A you can do so by pressing star followed by one on your telephone keypad.
Speaker Change: We kindly ask that you limit yourself to one question and one follow-up. I'll now hand you over to Karen Duke, Vice President of Finance and Investor Relations to begin. Please go ahead.
Karen Duke: Thank you, operator. Good morning, and thank you for joining us today for a review of our fourth 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 2 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.
actual results could differ materially from those projected.
Karen Duke: For further information concerning factors that could cause these results to differ, please refer to the disclaimer slide in our earnings presentation, as well as the disclaimers and risk factors noted in our SEC filings.
Karen Duke: 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.
Karen Duke: For periods prior to the spinoff, results are presented on a stand-alone basis.
Karen Duke: For periods after the spinoff, results are presented on, and referred to on, an adjusted basis and compared to our 2023 standalone adjusted results.
Karen Duke: You can find definitions of each non-GAP measure and GAP-to-non-GAP reconciliation within our earnings release and in the appendix to the slide presentation. I will now turn the call over to Gary.
Gary: Thanks, Karen. And good morning, everyone. Thank you for joining our fourth quarter call. Today, I will discuss 2024, including our financial results and in-market performance. I will also provide highlights of 2025, including our progress on strategic priorities.
Speaker Change: I'll then turn the call over to our Chief Financial Officer, Dave McKinstray, who will provide additional detail on our 2024 performance and 2025 guidance. We'll close out the call with time for Q&A.
Let's start by reviewing 2024 on slide 3.
Speaker Change: As we all step back and reflect on our very first year as an independent company, we're proud of what we've accomplished.
Speaker Change: First, we're successfully progressing our strategic priorities through focused execution. For example, every day, our dedicated sales force is in-store selling our iconic brands and delivering our integrated commercial plan to win.
Speaker Change: The capabilities of the team are maturing, and our connections with store managers and overall relationships with retailers are growing.
Speaker Change: We also launched our new marketing model and can already see the benefits of our enhanced capabilities through better return on investment.
Another key strategic priority is modernizing our supply chain.
Speaker Change: During our Q2 call, we announced the details of our plan and, importantly, confirmed all of the economics that we provided at Investor Day in 2023.
Speaker Change: We're investing up to $500 million while expanding margin by approximately 500 basis points as we exit 2026.
Speaker Change: Execution of this strategic priority is on track and our supply chain performance is already improving.
Speaker Change: Second, we are investing to build a strong foundation for the future by creating our own operating infrastructure across the company.
Speaker Change: As part of this spin, we have been separating just about every aspect of our business from Calanova. Our business was highly integrated with Callag North America, and we are now close to completing the separation activities associated with becoming a stand-alone company.
Speaker Change: This has required investment and has been a major body of work which has utilized resources from across the entire organization.
Speaker Change: Two of the key separation initiatives include transitioning to our own independent warehouse network, which is largely complete.
Speaker Change: We're also creating our own scalable IT infrastructure. This means we'll be able to utilize systems and tools that are fit for purpose and built to serve our unique business.
Speaker Change: We're pleased with the progress we've made to date and expect to exit all of the transition services by the middle of 2025.
Speaker Change: Finally, we accomplished all of this while delivering against our financial goals in a challenging environment. We delivered top-line results broadly in line with our expectations, drove margin expansion, and grew Yippee-Dah ahead of our raised guidelines.
Speaker Change: Across the organization we're focused and disciplined and our teams are energized to continue our journey as we transform this business together. Now let's take a closer look at our performance for the year on slide four.
Speaker Change: For the year, net sales declined 1.1% or 0.9% when excluding the impact of currency.
Speaker Change: During the fourth quarter, the Canadian dollar weakened considerably relative to the U.S. dollar, which negatively impacted our full-year net sales delivery by 20 basis points.
Speaker Change: We're pleased with our commercial execution, improving our return on investment, while also ensuring we're delivering value for the consumer. We remain focused and disciplined, taking a balanced approach.
Speaker Change: The same focus and discipline are evident in our gross margin delivery. Gross margin for the year was 29.8%, an increase of 90 basis points.
Speaker Change: A key driver of our gross market performance was improved supply chain operations. We drove better end-to-end execution in 24, becoming more efficient, reducing waste, and enabling our top line through improved customer service.
Speaker Change: This performance benefited EBITDA, which grew 6.6% for the year, exceeding our raised guidance expectations of 5-6% growth.
Speaker Change: EBITDA margin for the year was 10.1%, a 70 basis point improvement versus the prior year.
Speaker Change: A key element of our value proposition and strategy is expanding EBITDA margin from 9% to approximately 14% as we exit 2026.
Speaker Change: We are on track to deliver that target, even in a challenging operating environment, demonstrating the team's ability to execute and the earnings power of our business.
Speaker Change: Let's turn to slide 5 to discuss the category trends and our performance.
Speaker Change: The category in the U.S. and Canada is providing the backdrop to execute the strategy I mentioned a moment ago.
Speaker Change: For the year, U.S. serial category dollar sales, as measured by Nielsen XAOC, declined 1.3 percent, with volume declining low single digits.
Speaker Change: In the U.S., in-market dollar sales for WK, as measured by Nielsen XAOC, were down 2.8 percent and we ended the year with a share of 27.4 percent, a decline of 40 basis points versus the prior year.
Speaker Change: We saw the challenging environment persist in Q4 with consumers continuing to seek value, which resulted in increased levels of promotional activity within the category.
Speaker Change: That said, our promotional activity was similar to that of Q4 2023, which impacted our top line and shared position for the quarter and the year. Despite that, we broadly delivered against our financial goals and our strategy remains on track.
Speaker Change: Our plans assume that the challenging operating environment will persist in 2025.
Speaker Change: We will apply the lessons learned from 2024 and remain disciplined in our approach to driving demand through exciting innovation, brand building, and delivering consumers the right pack at the right price in the right challenge.
Speaker Change: In Canada, our team delivered yet another solid quarter, holding share at 39.2%. For the year, Canada has increased their market leading position by 90 basis points to 38.9%.
Speaker Change: Additionally, our Caribbean team grew share of 50 basis points for the year.
Speaker Change: Looking at slide six, you could see we improved our overall supply chain performance in a year where we made difficult decisions and announced the planned consolidation of our manufacturing network.
Speaker Change: We delivered a meaningful increase in customer service levels in 2024 driven by optimized planning and improved overall equipment effectiveness or OEE.
Speaker Change: These improvements have been at the center of our margin improvement and EBITDA delivery in 2024. Notably, we've achieved these improvements before realizing the benefits of our capital investment.
Speaker Change: This improvement is coming for focus, integration, expanding capabilities, and driving better engagement. You can see how through our supply chain, we are already building a foundation that is stronger, a foundation from which we can build.
Speaker Change: You also know the importance of innovation in our category. Slide 7 shows the breadth of our innovation plan for the first half of 2025.
Speaker Change: It is important to note the impact of what we like to call platforms. Let's start with Glazed, which is what we would call our very first food platform launch.
Speaker Change: This concept allows our R&D teams and growth teams to work together to create fantastic foods and then leverage our key brands such as Frosted Flakes, Apple Jacks, and Krave.
Speaker Change: Raisin Bran is a good example of how we activate bran platforms. Several years ago Raisin Bran Crunch was developed which is now even bigger than original Raisin Bran. Last year we launched Frosted Bran which includes our delicious Raisin Bran flakes without the raisins.
Speaker Change: And then this year, we take that chassis and launch Blueberry Brand Crunch. You could see the flexibility of this food farm and how that brand can grow going forward.
Speaker Change: And we will continue to expand our format platforms with new on-the-go offerings, building upon our success in cups this year, and we're extending our granola platform, including launching bare naked oats and honey. Innovation is a key component of our plan and we're very excited about 2025.
Speaker Change: Before I turn it over to Dave, let's turn to slide 8 to review more of what's to come in 2025 as we execute our strategy and continue building for the future.
Speaker Change: Our commercial plan is enhanced, driven by the innovation we just reviewed. And our execution will be stronger as our new direct sales team is maturing, and will leverage their experiences from 2024.
Speaker Change: The investment to modernize our supply chain continues, with a significant amount of construction work scheduled to be completed this year.
Speaker Change: We will also finalize separating from Calinova. As I mentioned earlier, we expect to exit all of our transition services by the middle of the year.
Speaker Change: We also expect to continue to deliver against our financial goals, maintaining a stable top line and driving EBITDA growth of 4 to 6 percent.
Speaker Change: As we noted in our press release, our 2025 guidance does not include any impact from the potentially significant tariffs on Mexico and Canada, which could create an additional challenge for the business.
Speaker Change: Of course, we're undertaking a review of our operating plans, doing scenario planning to see how we might be able to partially mitigate an impact from those terrorists.
Speaker Change: I'll now turn the call over to Dave, and as I do, we hope you can see the strength of our execution and the focus of our team. We are confident that we have the right strategy and remain well positioned to navigate through a dynamic operating environment.
Dave McKinstray: Thank you, Gary. Before reviewing our results, I'd like to highlight that our GAAP results this quarter include charges related to our Supply Chain Modernization Initiative.
Dave McKinstray: Quantification of the business portfolio realignment and restructuring costs that have been incurred through the fourth quarter are included in the appendix of our presentation and in the earnings release.
Dave McKinstray: As we said in the past, due to the spinoff, our 2024 results are based on a comparison to our 2023 standalone adjusted results, which exclude intercompany sales and royalty arrangements with Calinova that ceased to exist upon the spinoff.
Dave McKinstray: Similar to previous presentations, and as Karen mentioned at the beginning, our results are presented and referred to on an adjusted basis.
Dave McKinstray: We believe this provides investors with increased transparency and improves comparability across periods.
Dave McKinstray: Further detail of these non-GAP measures and reconciliations to the most directly comparable GAP measure have been provided in today's press release and the appendix to this presentation.
Dave McKinstray: Now, looking at our results on slide 10, net sales for the fourth quarter were $640 million, down 1.8% versus the prior year period.
Dave McKinstray: Our net sales performance was driven by price realization of 3.8%, offset by volume decline of 5.6%.
Dave McKinstray: Net sales in the quarter were impacted by the significant weakening of the Canadian dollar relative to the U.S. dollar.
Dave McKinstray: This unfavorable impact from the foreign exchange translation drove a 40 basis point headwind in the quarter.
Dave McKinstray: As Gary mentioned earlier, the category saw increased levels of promotional activity in the quarter, while our activity remained consistent with the prior year. This impacted our in-market performance.
Dave McKinstray: Recall, guidance for net sales was to be at the lower end of our guidance range, which was down 1%. Despite the challenging operating environment, we remained focused and disciplined, ensuring we broadly delivered our financial guidance on the top and bottom line.
Dave McKinstray: Similar to previous quarters, we continued to deliver strong performance in Canada in non-measured channels and saw a slight increase in retailer inventory levels.
Dave McKinstray: Turning to profit, EBITDA for the fourth quarter was $57 million, a 7.5% increase versus the prior year, which was driven by continued operational discipline across our supply chain.
Dave McKinstray: Full-year EBITDA of $275 million increased 6.6% versus a prior year, exceeding our guidance range, and was primarily driven by improved operational efficiencies.
Dave McKinstray: Stepping back, the category is providing the stable backdrop we need to deliver our margin improvement.
Dave McKinstray: We're pleased with our financial delivery and know that we can continue to drive value.
Dave McKinstray: In 2025, we will continue to invest behind our brands and drive innovation. We continue to focus on ROI as we pursue the right investment opportunities to drive the right outcomes for our business.
Dave McKinstray: Turn to slide 11. I will now focus on our operational highlights.
Dave McKinstray: Gross margin for the fourth quarter was thirty and a half percent, a 130 basis point increase versus a prior year, which resulted from continued cost discipline and operational efficiency improvements.
Dave McKinstray: EBITDA margin in Q4 was 8.9%, a 70 basis point increase versus last year, driven by gross margin improvement.
Dave McKinstray: Full year gross margin was 29.8 percent, a 90 basis point increase versus a prior year. An EBITDA margin for the full year was 10.1 percent, a 70 basis point increase versus a prior year.
Dave McKinstray: Looking at below the line items, interest expense in Q4 was $7 million and other expense was $2 million.
Dave McKinstray: Our full-year profit delivery gives us confidence in our strategy and our ability to drive further margin improvement as we modernize our supply chain and progress towards our goal of approximately 14% EBITDA margin as we exit 2026.
Dave McKinstray: Let's now turn to slide 12 to cover cash flow and the balance sheet.
Dave McKinstray: Full year 2024, net cash flow from operations were $100 million and capital expenditures were $129 million, which includes investments in our supply chain and standing up our own infrastructure as we exit our transition services.
Dave McKinstray: We ended the year with free cash flow of negative $29 million, which came in ahead of our expectation and was primarily driven by the timing of core working capital.
Dave McKinstray: Additionally, we paid $55 million in dividends to shareholders throughout the year.
Dave McKinstray: We remain focused on optimizing our cash flow across the organization, and you can see that reflected in our results.
Dave McKinstray: Turning to the balance sheet, we ended the fourth quarter with $535 million of debt and cash equivalents of $40 million, resulting in a net debt of $495 million.
Dave McKinstray: This was an increase of $53 million versus last quarter and was driven by the increasing levels of investment in our strategic initiatives.
Dave McKinstray: As a result, we ended the year with leverage of 1.8 times, and we continue to be well positioned as we begin to increase spend on our supply chain modernization initiative.
and Gary Pilnick. Thank you.
Let's turn to slide 13 to discuss our 2025 Outlook.
Speaker Change: As Gary mentioned earlier, our outlook does not include the impact of the potential Canadian and Mexican tariffs.
Speaker Change: Quantifying any potential impact would depend on the timing, duration, and magnitude of the terrorist.
Speaker Change: For the year, we expect full-year organic net sales to be down approximately one percent. We are moving to organic net sales, which is on a currency neutral basis due to the increased foreign exchange volatility.
Speaker Change: Our net sales guidance also excludes the impact of the 53rd week, which occurs at the end of 2025, and represents approximately 1.5 percentage points of net sales growth on the year.
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Speaker Change: Due to the carryover impact of PTA and RGM initiatives, we expect to realize price in the low single digits and for volume to decline, low single digits.
Speaker Change: For EBITDA, we expect full-year adjusted EBITDA growth to be four to six percent, which includes the impact of the 53rd week. However, the incremental EBITDA associated with the 53rd week will be reinvested back into our brands during the course of the year to drive the long-term health of our business.
Speaker Change: This guidance is consistent with our prior commentary of EBITDA growth in 2025 being similar to 2024 and reflects dollar delivery of $286 to $292 million.
Speaker Change: And while we don't give quarterly guidance, from a phasing perspective, it's important to note that Q1 2025 net sales and profit delivery, when compared to 2024, will be negatively impacted by shipment timing.
Speaker Change: given that Easter is later in the year and by the lapping of a large retailer promotion.
Speaker Change: We expect this to negatively impact net sales in the first quarter by an additional 1.5% to 2.5% versus our full year guidance.
Speaker Change: Given this impact and the impact of the 53rd week and the reinvestment in earlier quarters, we expect our EBITDA growth to be more back half-weighted when compared to previous years.
Speaker Change: In summary, our 2025 outlook is consistent with our financial algorithm, maintaining a stable top line so we can deliver significant value through margin expansion.
Speaker Change: We're excited about our 2025 plan, which is supported by more robust and balanced innovation, continued operational discipline, and continued focus on maximizing our return on investment.
Speaker Change: Finally, let's turn to slide 14 to discuss our capital investments for 2025.
Our 2025 capital plan includes investing in our strategic initiatives.
Base Business CapEx
and funding our dividend.
Speaker Change: which will be supported by a strong base business cash flow and available debt capacity.
Speaker Change: Our underlying cash flow sufficiently covers our dividend and base business CapEx needs, while our strategic initiatives will be funded via debt.
Speaker Change: We expect 2025 capital and one-time costs related to our supply chain modernization to be approximately $200 million.
Speaker Change: And we continue to look for opportunities to further optimize our cash outlays on this project.
Speaker Change: It's been related to exiting our transition services agreement is expected to be approximately 60 million
Speaker Change: Base Business CapEx is expected to be $70 million, which represents approximately 2.5% of net sales.
Speaker Change: All of these estimates are consistent with our prior outlook and planning assumptions.
Speaker Change: Due to the timing of supply chain modernization spend, we expect cap backs for the year to be more back half-weighted.
Speaker Change: As we announced last week, the Board of Directors declared a dividend increase of 3%, which on an annualized basis represents $0.66 per share.
Speaker Change: This increase reflects our confidence in the execution of our strategy, our commitment to return capital to shareholders, and our focus on improving the cash flow of the company.
I'll now turn it over to Gary for closing remarks.
Gary: Thanks Dave. On slide 15, as we close, I hope you can hear how we are executing our plan and delivering our value proposition.
Gary: Maintaining a stable top line and driving outsized margin growth is how our near-term model works and we're firmly on that path.
Gary: We deliver 2024 broadly in line with our expectations, while also building for the future by prioritizing our work, focusing the organization, and executing with excellence.
Gary: Our 2025 plan is robust, and as we take a step back, we are delivering what we promised at Investor Day before this event.
Gary: Our top line is stable and we're on track to deliver outside margin expansion as we exit 2026.
Gary: I'm extremely proud of the team across the WK organization and how they are transforming this business. They worked diligently in 2024 to deliver the right outcomes, and I'm confident we will do the same in 2025. With that, I'll open the call to Q&A.
Speaker Change: Thank you. Please press star followed by the number one if you'd like to ask a question and ensure your device is unmuted locally when it's your turn to speak. A kind reminder to please limit yourself to one question and one follow-up.
Speaker Change: Our first question comes from Andrew Lazar with Barclays. Please go ahead, your line is open.
Thanks so much. Good morning, Gary and Dave.
Speaker Change: Good morning Andrew. First thing I'm curious what your 25 top-line guidance is sort of embedding from a category performance and a market share performance for WK.
www.microsoft.com.ca
Speaker Change: Oh, it's a good start. So let's talk about the plan, and I think what you're hearing, Andrew, from the prepared remarks is that we have growing confidence in our ability to execute, but if you take a step back,
Speaker Change: It starts with the category, and we believe our category is providing us the backdrop we need to execute on our strategy.
Speaker Change: We talked way back when, in Investor Day, that for planning purposes, we would assume that the category would perform at pre-COVID levels, down single digits, 1 or 2 percent.
Speaker Change: and that's also our planning assumption for our 2025 plan. So that's the first part of it. When you think about the rest of the program.
Speaker Change: We are very confident in our abilities to execute because of the way our team is executing and the way we executed in 2024. This being our second year, the maturing capabilities that we have.
Speaker Change: We've transformed most of our demand-creating infrastructure, that's marketing, that's sales, supply chain. This being year two gives us the ability to have that much more confidence in the way we're going to execute the overall plan. And the last thing I'll say, Andrew, and I know you have a follow-up.
Speaker Change: This is the very first commercial plan that's been developed by WK and sold in by WK after the spin. That makes a big difference for us and we feel very good about what we're about to deliver.
www.microsoft.com.ca
Great, thank you for that.
Dave, Gross Margin Expansion in a quarter.
Speaker Change: was certainly quite a bit better than we had modeled, even with volume being down nearly sort of 6% in the quarter. I guess, any way to sort of quantify how much of an impact that volume deleverage had on gross margin? I'm really just trying to get a sense of maybe what margins would have looked like if volume was not as much of a drag, just to kind of understand maybe some of the underlying progress.
Speaker Change: Yeah, Andrew, I'd step back by saying that as we look at our delivery in Q4, it's broadly in line with what we said on our Q3 call, right? And so as we look at it, the volume declines. One big thing that we'll talk about and we talked about throughout the year was our PPA execution.
Speaker Change: So, as we progress through the year, we've been executing PPA. So, we had a little bit of a price dynamic that just kind of
Speaker Change: happened through our P&L, right? So, as we go into next year, one dynamic that we think about is...
Speaker Change: We're going to continue to realize price through the first half of the year. As we get to the back half of the year, we'll have started to fully lap that PPA activity, and we should see the volume start to normalize. So, as we think about our gross margin expansion,
Speaker Change: That was all considered in there, and it's part of our overall margin expansion play that we've had really and talked about since 2023.
Thank you so much.
Speaker Change: and Gary Pilnick. And thank you for watching. I'm Gary Pilnick.
Speaker Change: Our next question comes from Peter Galbo with Bank of America. Your line is open.
Speaker Change: Good morning, Peter. Hey, guys. Good morning. Good morning, Gary. Good morning, Dave. Dave, just one question that we've gotten this morning from a few folks. If you could help bridge, I think, some of the
Speaker Change: Just the organic sales growth relative to the scanner data in the quarter. I think you had a kind of a favorability on a trade accrual from last year that would explain some of it. But, you know, scanner was implying something down like mid single digit, you know, sales growth, and obviously, you know, you
Speaker Change: You posted the minus two. So just helping to bridge us the rest of it would be very helpful.
Speaker Change: Yep, you hit on a component of it, and we mentioned the Q3 call, the lapping of the one-time investment that we had in 2023, so that was a natural benefit. We've talked about our non-measure channel performance in prior calls. We've continued to see that play out. I also mentioned here on the call an inventory build into the end of the year. Now, we expected that. We always see an inventory build as we head into a new year, one of the big dynamics.
Speaker Change: that we have is we're shipping in innovation. And versus last year, we had a much bigger innovation plan. So we expected our inventory levels to go up as we head into the end of the year because of that innovation, because of the commercial plan that Gary alluded to. So really, as you work down the list, it's the investment dynamic, the non-measured channels, and then the difference in the inventory shift or build, if you will, in 2023 and then in 24.
Speaker Change: Thanks for that. And Gary, you know, in your comments, you've mentioned obviously that the tariffs are not included in the in the base guidance.
Speaker Change: But, you know, just given some of the action plans you've taken around optimization, you know, the expansion at Belleville and Ontario.
Cheers
Speaker Change: wondering if you can kind of help us quantify it at all, you know, size or even just directionally kind of where you're sourcing into from those two plants, the one in Ontario and the one in Mexico. Thanks very much, guys.
Speaker Change: We appreciate it. I think it's fair to say that the situation right now is quite fluid and dynamic and that's why it's difficult to provide reliable estimates.
Speaker Change: When we think about what we're doing as a company, just a modern supply chain has flows of raw, packed, whipped. The inputs just move across borders very naturally. We make most of our food in the U.S. for the U.S.
Speaker Change: But I think the larger point you might be getting after is the way we're, the strategic priority in terms of modernizing our supply chain. We expect to continue executing our plan.
Speaker Change: We began designing this plan literally a year before the Spence, maybe two and a half years ago with the objective of making sure we have the network for our long-term future in mind.
Speaker Change: And recall, we have significant investments in the U.S. as well, so we know that's the right plan for us and the right thing for our business longer term.
Kenneth Goldman: Our next question comes from Kenneth Goldman with J.P. Morgan. Please go ahead.
Hi, thank you.
Speaker Change: Just to continue a little bit if I could the conversation about shipment versus consumption timing
Speaker Change: I do appreciate the help you gave us in terms of understanding the fourth quarter and also in terms of
modeling out the first quarter.
Speaker Change: Can you help us understand a little bit how to think about after the first quarter? It's just an important point, I think, for a lot of people on the call, because...
Speaker Change: you are somewhat of a single category company and so we really do rely a little bit more on Nielsen and Circana for some of the, you know, the forecasting. Just should we still expect, I guess, is the main question.
Speaker Change: your shipments to generally be ahead of what we see in measured channels for the rest of the year, just considering the non-measured momentum that you've had in the business for a little while now.
Speaker Change: Yeah, Ken, good question. So I think I'd start with Q1 just to reiterate a couple of the points that we made in the remarks. So we would expect our net sales to probably deliver slightly below the scanner data in Q1, and that's really a product of
Speaker Change: The Easter timing shift. So again, not to get into too much detail on normal inventory flows for us, but Easter moving out has an impact on it. So for Q1, expect our net sales to be below our scanner data.
Speaker Change: As we move through the year then, to get to our overall guidance of Down 1 for the year, think about that pretty evenly distributed across the remaining quarters.
Speaker Change: And then as you think about that, I would expect our scanner data, there'll be nuances and we'll update you as the year goes on as things move. But I would expect our scanner data to start moving more.
Speaker Change: closely with our net sales in those back three quarters of the year, but again, there may be nuances that come up through the year that we'll update you as we progress.
understood that's clear and thank you for that and I
Speaker Change: with the understanding we're just beginning 2025. I think your guidance as you laid it out
Speaker Change: and in the initial investor day was for EBITDA growth rates to be somewhat similar in 24 and 25, and it's great to see that that's coming in, you know, as planned, but then accelerate into 26. And I'm just wondering, is that still the plan that we should think about as we look ahead in our forecasting?
Speaker Change: No, I'm glad you asked that, Kent. And the answer is yes, that's the way you should plan that. If I take a step back, what we had talked about was a stable top line will allow us to then, as we expand our margins, the EBITDA then drops to the bottom line. And you have it exactly right. We thought that 25 would look a lot like 24, and then we would be exiting 26.
Speaker Change: with the expanded margin. As a reminder, we said we'd be going from 9% to 14%, 500 basis points of margin expansion. That is still the plan that would be exiting the year at those levels.
Thank you.
Thank you for watching. See you next time.
Speaker Change: The next question comes from Max Gumport with BNP Paribas. Your line is open.
Speaker Change: Thanks for the questions. I just wanted to follow up on cadence to make sure I understand what you're signaling correctly. The first part would be for one cue is it simply take what we're seeing in Nielsen or Shikata and then say there's a point and a half
Speaker Change: to two and a half points of headwinds, primarily from Easter inventory, but also from a promo lap that we should be keeping in mind as well. Do I have that right? And if so, why wouldn't the promo lap already be?
Speaker Change: put in, or why wouldn't we be seeing it in Nielsen?
Speaker Change: Yeah, to be clear, Max, that 1.5 to 2.5 points I referenced in the prepared remarks would be versus our full-year guidance of Down 1. So as you think about our Q1 net sales...
Speaker Change: As I answered Ken's question earlier, what that should result in or what we would expect it to result in is that net sales that I just went over to be below our scanner data in Q1. So you're right, the promotional activity would be reflected within the scanner data. Really, the only difference would be that Easter timing shift.
Gary Pilnick
people.
Speaker Change: Okay, and then we would see some benefit from that Easter timing in 2Q. Would that be the correct way to think about that?
Thank you.
Speaker Change: I kind of answered it Ken there, what I would expect in Q2 through Q4 would be our net sales to be relatively uniform across those quarters to get us back to the down one. So, without giving specific quarterly guidance, I'd expect.
Speaker Change: Q2 through Q4 to be relatively uniform from a net sales delivery to get us back to that down one from the Q1, which is a little bit behind that pace.
Speaker Change: Okay, got it. And I'll just end with, for 2Q through 4Q, and it seems to me like...
Speaker Change: the numbers we're seeing in Nielsen right now for your business, like a minus two. It would seem like we're going to need to see that get much better.
2Q through 4Q.
Speaker Change: is that largely driven by some of what you've talked about and I think most notably your innovation plan for 25 being much bigger than it was in 24. I'm just trying to get a sense for what's going to drive that improvement in underlying trends in 2Q through 4Q. Thanks very much.
Speaker Change: It's a terrific question. I think the way we would answer that is we would speak to our 2025 plan.
Speaker Change: We just started February. When we think about the actual plan, I'll go back to a little bit of what I said before and then add a bit to it. But number one, the category is providing us the backdrop we need.
Speaker Change: We don't need a change in the trajectory of our category in order for us to deliver on our strategic goals. That's a big deal for us and that might not be the same in other categories right now just given the challenging environment that we're in.
Secondly, we just talked about our execution.
Speaker Change: Year two is a big deal for us versus year one. Just our ability coming out of the gates in year two, a more seasoned organization, the ability with our matured capabilities in sales, marketing, and supply chain, and that reliability in our supply chain makes a difference for us.
Speaker Change: to drive our top line. But then you get to the commercial plan. With our commercial plan, we like the activation that we have in market. We like the plans that we have. We have the firepower to invest in our brands. We also, the innovation that we have out there this year, Dave talked about it being more broad-based, so we think that's going to be a tailwind for us throughout the year.
Speaker Change: Then a couple other things I'll mention, one, there are green shoots in the category itself.
Speaker Change: at Natural & Organic. We have the brands that could play there. We're gonna be leaning in even more. There's also white spaces.
Speaker Change: That is, there are underpenetrated parts of our category that we're not participating in very much.
Speaker Change: CUPS was a good example from last year. There are others.
Speaker Change: When you pull all that together, we feel good about our overall plan and the guidance made sense. Dave, anything else you want to add to that? Yeah, I think just one small thing. Don't overlook the non-measured channels. We talked about that a couple times. So I know we're all looking at the Nielsen data weekly and seeing how that's going to play out. But just a small thing is, you know, we have a business in Canada that's performed quite well for us. We have a business in the Caribbean that's performed well. And then we have a business in that non-measured channel. So while we all follow that Nielsen very closely.
Gary Pilnick
Speaker Change: Our next question comes from Matthew Smith with Stiefel. Your line's open.
Thank you.
Hi, good morning. Thank you for taking my question.
Speaker Change: If we think about the $200 million of supply chain modernization spending in 2025, are you able to give an outline of what you would expect from a CapEx versus cash costs for the year, and if that's still in development, kind of the puts and takes around what could shift it one way or the other?
Thank you very much. Thank you. Thank you.
Speaker Change: Yeah, so the $200 million is our total cash outlay with the project in the calendar year.
as we think about what's going to be CapEx versus...
Cash, the large majority will be on the CapEx side.
Speaker Change: you know, I'd say that, call it 90 plus percent will be on the CapEx side of things. So think about it this way, the 200 million is all the cash in this year.
Speaker Change: of the 500 million that we've talked about, or up to 500 million, and the large majority of that will be against CapEx.
and Gary Pilnick. Thank you.
Speaker Change: Thank you for that. And as a follow-up, if we go back to the commentary around promotion phasing through 2025, can you just talk about your
Speaker Change: what your expectation is for the overall level of promotion? You mentioned it was a bit more competitive in the fourth quarter than I think you had anticipated. Do you expect the category to remain, you know, at an elevated rate of promotional activity as we move through 2025?
Speaker Change: think about your commercial plan relative to your expectation around the category. Thank you.
Speaker Change: Oh, thanks for that. One thing about when we talk about promotion, we tend to like to look backwards rather than forwards. That's just an important part of the way we think about our business.
Speaker Change: But we understand the importance of the commentary. The way we would think about it is, when we think about promotion, it's just one of the many levers that we need to pull in order to drive the category and also drive our business.
Speaker Change: So when we think about that, we need to make sure we have the right food, the right innovation, the messaging needs to get to our consumers.
Speaker Change: tie-ins and partnerships, but also the right price, the right pack, and the right place. So we understand how critical it is to get that equation right. We also recognize with our consumer, value is important. So we are focused on making sure we deliver value, and as a branded company, we do that through pulling all those different levers. So when you look back with our Q4, we talked about our spend was general, the same activity that we had the previous year.
Speaker Change: our overall commercial plan and our ability to make sure we have the right investments in our brands. And at the same time, making sure that we're focusing on return because that's the key thing that we do. We focus on return with the brands and our channels to make sure we're doing the right thing for the business, but also delivering value for our consumers.
Speaker Change: Our next question comes from David Palmer with Evercore ISI. Please go ahead.
David Palmer: Thanks, good morning guys. I wanted to ask you about PriceMix. I think you mentioned that you expect
David Palmer: recently, and if you look at your data or the category data.
Speaker Change: We see Kellogg's down 3.5% or so in price mix in the last 4 weeks, down a couple percent in the last 12 weeks. The category is tracking similarly, as you noted, it's a promotional category right now. So I'm wondering, what is the plan to get price mix positive?
Speaker Change: You know, is it a mixed thing from some of the innovation? Any plans to get that into the positive category would be helpful.
and Gary Pilnick. Thank you.
so
Speaker Change: Dude, I think for us, we do see positive price mix, both in market and through our P&L. And as we talked about, in my response to Andrew on the first question, a lot of that is mechanically coming through our PPA activity.
So, we've been executing PPA throughout the calendar year.
Speaker Change: We've now completed that. As we move into next year, we'll pick up the lapping benefit of it in the first half.
Speaker Change: As we move to the back half of next year, I would expect our price and volume to move rather lockstep with one another.
Speaker Change: One data point that we've talked about in the past is we've executed this PPA activity.
Speaker Change: One new data point we're looking at, I shouldn't say new, but maybe not as talked about data point, is the units.
Speaker Change: So we're looking at our unit performance in relation to price, in relation to volume. And you can measure that as we move forward as well. I would expect all three of those.
Speaker Change: volume, units, and dollars to converge as we move towards the back half. Now, there might be some small nuances with mix. We've talked about cups. We've talked about some other things, but I wouldn't expect it to have a material impact on the overall.
Speaker Change: So if we are seeing down low single-digit price mix in the scanner data you know all year long
Speaker Change: That would be consistent with low single-digit positive price mix and you're reported I mean what how could we possibly you know if we're tracking from home so to speak in terms of the scanner data How would we possibly adjust for what we're seeing to what it would translate in terms of reported price mix?
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David Palmer: Sorry, David. I think we're saying the same thing. So our volume is declining at a higher rate than our dollars are declining. That's what we've seen throughout 2024, specific to WK.
David Palmer: As we move forward into early next year, both in the P&L and the scanner data, we would expect our volume to decline at a higher rate than our dollars would decline in the first half of next year.
David Palmer: As we move forward into the back half, I kind of shaped what our expectation of net sales is. We would expect volume and dollars to move much more closely in line in the back half of next year.
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Speaker Change: That's interesting because in Circana data your your units are tracking above your sales.
Speaker Change: with price mix and this is units in the Circona data which I guess includes Amazon and Costco so that's I don't know if that does that make sense to you or
Speaker Change: Yep, yep. So that's what I was saying. Our units are moving ahead of volume, right? So volume declining.
Speaker Change: Dollars declining at a less rapid rate and units kind of closer to dollars than volume a little bit ahead. The units moving ahead because of the PTA activity and because of the mix we've talked about in the past.
Speaker Change: I see. And then as I said, if we move to the back half, the three of those will converge.
Speaker Change: And then one of the things, do you think, does your plan contemplate these market share trends continuing at this level? You know, right now we're seeing, it looks like a category where the big...
Speaker Change: the biggest brands are losing share to little brands, a little bit to private label. Is there any, how do you plan this year to go in terms of market share through the year? Do you contemplate market share stabilizing through the year and how do you plan on that? Thank you.
and Gary Pilnick.
Speaker Change: Thanks for that, David. When we think about market share, obviously that's an important metric that's determined the health of a business, health of a category.
Speaker Change: The thing for us is, it's important to make sure we remember what makes our model work. And what makes our model work is a stable top line. So as we're expanding margin, allowing the EBITDA to drop through.
Speaker Change: the P&L. That's the key thing for us. Now, when you think about share, look back to last year. Remember, we gained share in the Caribbean and in Canada. If you look at the other brands that we have, we've talked about a large percentage of them are actually
Speaker Change: performing consistent with, or actually slightly better than the category. Special K is the outlier. As we look forward, we're thinking the brand should continue to work well for us. We like our activations. We like the way the plans work, but the key thing for us is making sure that we maintain that stable top line. But rest assured, market share is something that the team focuses on quite a bit.
Speaker Change: Our next question comes from Robert Dickerson with Jeffreys, please go ahead.
Great, thanks so much.
Speaker Change: I guess maybe just going back to that TLS comment on Special K.
Speaker Change: you know, Andrew's question on category growth and kind of just the overall commercial plan.
Speaker Change: It does seem like, clearly, certain brands may be resonating a little bit better than other brands in the portfolio. So, I guess, very simplistically, as we think about 25, even as we get through the back half of 25,
Speaker Change: You know, are the commercial plans kind of set, you know, in place such that, you know, there is clearly more activity or maybe more innovation coming from certain brands you can speak to relative to maybe some of the brands that just are underperforming in the overall portfolio?
Speaker Change: No, it's a great point. In fact, I think what you're doing for us is highlighting the power of our portfolio.
Speaker Change: because the breadth of our portfolio from taste to wellness allows us
Speaker Change: And if you look at what we did in 2024, our very biggest brand is the fastest growing brand.
Speaker Change: investors going big brand in the category. So you're right. So we would then spend more time and money on that because we think there's more opportunity there.
Speaker Change: Then you think about the green shoots I talked about earlier, the green shoots in natural and organic. We have Kashi and Bare Naked. We know that those brands could do something special. Bare Naked was, back in the day, the number one granola brand. It's now being managed by the team led by Doug Vandevelde. He's never had those brands before, so we're excited about what he could do with those brands.
Speaker Change: So the answer is certainly. The way we design our overall plan, it's about the brands, it's about the channels, it's about the opportunities in the market, and it's one of the many reasons we think we have a competitively advantaged portfolio.
Speaker Change: Okay, got it. And then I guess just back to your comment early on around
around the pre-COVID.
Speaker Change: kind of trajectory of the category, right? I think you said, you know, down one to two percent.
Speaker Change: and that's where you discussed with the investor today. As we think about, you know, the cadence through the year coming out of that, you know, a little bit more pressure Q1 for nuance reasons, get back to the, you know, let's say we're in Q4 and
Speaker Change: let's just say you're flat for sake of argument. Are you implying that's because of...
Speaker Change: what you've done with the business and the activation plans and the commercial plan, what have you, or like, is there a point at which...
Speaker Change: Let's say the category actually just does stabilize, right? I mean volumes clearly have been down for some time not just for you, but overall
Thank you.
and maybe just kind of broader U.S., you know.
into perpetuity or that's kind of for now.
Three shots.
Thank you.
Speaker Change: No, Rob, my thoughts would be, I think that's a very fair way of describing the way what we said in our prepared remarks and what I said before, but let me just.
Speaker Change: fine-tune that just a little bit. What we talk about for planning purposes...
Speaker Change: We would assume the category would behave like it did pre-COVID, so down low single-digit 1 or 2 percent. That gives us everything we need in order for us to deliver on our longer-term financial commitments, even our nearer-term financial commitments.
Speaker Change: That said, given what we're doing, we're the originator of the category. We're not focused only on cereal. We think there's even more. I think there's even more. I'm optimistic about this category, but the point that we'd like to make is...
Speaker Change: If the category continues to perform the way it's been performing, it's providing what we need in order for us to create unique value for our stakeholders.
Speaker Change: Okay, okay. Yeah, I was talking more about consumption and volume. Maybe at some point I would think it becomes an issue of volumes.
Speaker Change: are continuing, you know, to decline, this sort of retail perspective, but maybe, if you have what you need,
Speaker Change: and I'm not really hearing this today or seeing the slides, but could there be innovation plans put in place that are still leveraging the brands, but maybe aren't selling cereal?
I don't know if that's in the foreseeable future.
Speaker Change: It's an interesting question because actually we're looking at each other here. We've talked about that before. We've talked about, if you go back to investor day, Rob, it's a good reminder for everybody. We talked about two different horizons.
Speaker Change: We talked about the first horizon being all about optimizing serial. We talked about a stable top line allows us to expand our margins. You could just do the math about how much value that could create. There's a lot to play for there.
Speaker Change: At the same time, we know there's another future out there. So as we are now executing our strategic priorities, we're doing in a way that we're creating what we would call scalable infrastructure.
Speaker Change: that would allow us in the future, as we continue to optimize serial and drive real value out of that category and that portfolio, we do think there's a future. We have something that no one else has, which are our brands. And we know our brands travel.
Speaker Change: You combine that with an infrastructure like a Salesforce or a new distribution system that is scalable, you can see that there's real opportunity. But rest assured, right now,
Speaker Change: We're focusing on optimizing our serial for two reasons one. We know there's significant value there I hope you can see 24 was a first step 25 will be the next step
Speaker Change: But it also helps us while we're doing that, get ready for that next horizon.
Speaker Change: because our sales force is maturing, our distribution system will be able to operate and we'll be able to work through any optimize the distribution system and all the other things that will allow us to scale in the future. Right now we're focused on serial to drive that value.
Robert Mosko: Thank you and our next question comes from Robert Mosko with TD Securities. Please go ahead.
Hi, thanks for the question.
Speaker Change: You know, Gary, I just wanted to ask you to evaluate the market share loss in 2024. The investment thesis of the spin was that execution would improve, you know, with increased focus.
Speaker Change: And why do you think market share was down, just taking a step back? And was it transitory factors? Are there things that will reverse that in 2025?
Speaker Change: And secondly, I wanted to ask about, you know, the plant closures in Omaha and Memphis.
Speaker Change: the closures won't take place for a long time. And I wanted to know, is that a positive because people have plenty of time to adjust and therefore that mitigates the execution risk as opposed to something quick? Maybe comment on that, thanks.
Speaker Change: No, thanks for that. So a couple things about this. So as I talk about market share, if you don't mind, let me just sort of put that into a little bit of context for us.
Speaker Change: because you talked about what we first talked about back at Investor Day.
Speaker Change: and what we discussed there was a variety of different commitments and getting through 2024 as we finish up our first year I think we would say.
Speaker Change: We've delivered on those commitments. You start with our financial commitments, with our net sales, bottom end of the range, but within the range. And then EBITDA, we over-delivered EBITDA actually ahead of our raised guidance.
Speaker Change: You look at our margin, both on gross and EBITDA margin, and you heard Dave talk about cash coming in even better than expected. And importantly for us is executing on our strategic priorities.
Speaker Change: That is the supply chain modernization program you just mentioned. I'll come back to that in a second, but also separating effectively from Kellinova. That is a bespoke body of work that many companies, most companies, do not have.
Speaker Change: We're doing that because of the spin and working closely with our cousins at Kellinova, and the team has just done an extraordinary job of doing that while operating in what has become a more challenging environment, Rob, than when we were first talking about this in Investor Day.
Speaker Change: So then you move forward and you say, okay, let's look at your market share
Speaker Change: I think when you zoom out again, I think you know the Caribbean and Canada had nice years for us gaining share. In the U.S.
Speaker Change: It's Special K. We were down 40 basis points for the year. You look at all the other brands, our other core brands, Frosted Flakes.
Speaker Change: We have a variety, the Frosted Flakes did really well for us. We know Mini Wheats, we know Fruit Loops, Rice Krispies.
Speaker Change: Those brands, five of the six of our core brands, either held or gained share.
Speaker Change: and our core brands represent 70-80% of our business. And even on the next core, Corn Flakes, Corn Pops, Apple Jacks, again, holding our modestly improving share. So we feel good overall about the portfolio.
Speaker Change: You're raising the point. I think it's a fair one about Special K And we're not happy with the way that brand has performed particularly since it's our second largest brand So you see the outsized impact that that has so I would say you talked about execution. I think the team's executing beautifully
Speaker Change: and we need to do better with Special K and we need to continue the momentum behind our other brands.
Speaker Change: and as we look at our 25 commercial plan, we feel good about that. We feel, we would say, we believe Special K is gonna have a better year in 25 than it did in 24, but it does take time to make sure that we get the brand back and resonate the way we want it to resonate.
Speaker Change: Now, Rob, if it's okay, I was going to go to your supply chain question. Is that okay?
Please. Yeah, thank you.
Speaker Change: Okay. Yeah, in terms of supply chain, you heard us back in Q2.
Speaker Change: We reiterated all the economics from that plan. We said we're going to spend $500 million, we're going to expand our margins by 500 basis points, and we would come out of 2026.
Speaker Change: moving our EBITDA margin from 9% to approximately 14%. We said that on Q2. We said it in today's prepared remarks. That's meaningful as because as time goes on the team is executing. And for us it's not a big surprise given even though the
The initiative is so complex.
Speaker Change: It's because the team is focused, we've got the right leader working through this, the planning and execution is really impressive as we watch them execute on this overall plan.
For us,
Speaker Change: The timing was based on the best way for us to organize and the best way for us to execute on the overall program. That's the reason we said we're going to take the time, we're going to plan it. We have eight different distinct initiatives. We've got planning across each of those. We make sure that each of those
Speaker Change: priorities do not interfere with the commercial agenda so we integrate that work with the way we're running the business. This is the right amount of time for us to make sure that we are executing well and so far so good. We're really pleased with the way the team is executing.
Thank you.
Thanks guys. Thank you.
You got it.
Speaker Change: Thank you, we have no further questions so I'll turn the call back over to Gary Pilnick for any closing comments.
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Speaker Change: Thank you for joining our call today and we look forward to sharing more with you at Cagney next week. Thanks so much for joining.
Speaker Change: This concludes today's call. Thank you for joining. You may now disconnect your line.
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