Q1 2025 WK Kellogg Co Earnings Call - Q&A
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Harry: Hello, and welcome to W. K Kellogg codes to report first quarter results May six my name is Harry and I'll be your operator today. All lines are currently in a listen only mode and there'll be an opportunity for Q&A. After management's prepared remarks, if you'd like to enter the queue for questions. Please tell staff by one on your telephone keypad and.
Harry: In the interest of taking questions from as many of you as possible. We respectfully ask that you limit yourselves to one question and one follow up per person and then reenter the queue.
Carol: I would now like to hand, the conference over to Carol <unk>, Vice President of Investor Relations. Thank you. Please go ahead.
Carol: Thank you Harry and good morning, everyone. Thank you for joining us today for W. K Kellogg co 's first quarter 2025 earnings Q&A session. I hope everyone has had the chance to read our press release and listen to our prerecorded management remarks, both of which are available on our website. In addition, we have posted a trend.
Carol: Script of our pre recorded remarks. Please note that during today's Q&A session. We may make forward looking statements that are subject to various risks and uncertainties. Our actual results could differ materially from those projected or implied by these forward looking statements for further information concerning factors.
Carol: So that could cause our results to differ please refer to the disclaimer slide in our earnings presentation as well as the risk factors disclosed in our most recent Form 10-K filed with the SEC.
Carol: Finally, please note that we may refer to certain non-GAAP measures that we believe provide useful information for investors definitions of these non-GAAP measures and reconciliations to the most directly comparable GAAP measure are included in this morning's press release and in the appendix to the slide presentation.
Speaker Change: I'm joined this morning by Gerry Pilnak, our chairman and Chief Executive Officer, and Dave Mccann Street, our Chief Financial Officer with that I will turn the call over to the operator for our first question.
Speaker Change: Thank you. Our first question will be from the line of Andrew Lazar with Barclays. Please go ahead. Your line is open.
Andrew Lazar: Great. Thanks, so much Gary.
Andrew Lazar: How are you.
Andrew Lazar: So maybe start off you mentioned in the prepared remarks, several times the sort of rapid acceleration in consumer interest in health and wellness brands within the cereal category in the quarter. I know this has been a longer sort of burning trend overtime, but it does seem like something.
Andrew Lazar: Flipped a switch sort of flipped if you will on this in the quarter itself and I'm trying to get a sense of what you think drove that that sort of recent rapid acceleration.
Speaker Change: It's a great question, we've been talking about that internally, if you don't mind I'm going to use the words, a little bit Andrew we do think it's been accelerating we've been watching this for a while it's the reason why we're able to pivot so quickly and the SEC you heard what we're doing in there where our plans are in the back half of the year. The reason for that is.
Speaker Change: Because we saw this coming we actually think it's quite a good thing for the category a good thing for us and that's why we were prepared with not just new foods like the Kashi relaunch, but campaigns across our many of our mainstream brands regarding fiber. So we were prepared for this.
Speaker Change: If we sit back and say why do we think this might be happening well, we're looking at what the what's happening within the consumer.
Speaker Change: Sentiment is obviously down we're all seeing the same information. So there is continuing interest and focus on value we understand that at the same time in our category. What we're also seeing is some of our consumers are also willing to pay more.
Speaker Change: And interest in health and nutrition I think that's going to continue I think this is simply the continuation of a trend that we saw coming that at some point and started to accelerate and Conversely, maybe this was just how it would naturally happen, but we don't expect it to slow. We think this is something that is more than a fad, it's a trend going forward.
Speaker Change: That's why we're already prepared and we're doing things with our food and our promotion and again. We think this is quite a good thing for our category and for us because as folks are focusing on a combination of value on health. Those two things were a terrific destination for that because we know we can provide that in the category.
Andrew Lazar: Okay. Thanks for that and then just one for Dave just trying to get a better sense of the magnitude of sort of gross margin contraction expected in the second quarter and I guess do you think one quarter's enough to sort of rightsize finished goods inventory with sort of the revised demand forecast. Thank you.
Speaker Change: Yeah.
Speaker Change: Yeah, Andrew Good question I mean, you can see we've adjusted our top line estimate for the year. So our demand outlook. We think is commensurate with what we're seeing in the category. The dynamics, we're seeing in the consumer's home, which Gary just alluded to.
Speaker Change: As well as then the actions and activities that we're enhancing in the back half of the year I am sure you listen to the prepared remarks that went through all of that we can go through that more detail as well, but our demand forecast and what we have.
Speaker Change: Now guided to.
Speaker Change: <unk> all of that and now what we've done is we've adjusted our manufacturing plan, that's commensurate with that we feel good about that we feel good about where that's tracking like you said that will.
Speaker Change: Mean that we have the largest impact to Q2 as we make those adjustments to our manufacturing plan, but as we move to the back half of the year, we should come out of Q2 right sized at the right levels of inventory, we need to operate our business and that will set us up them for a more stabilized gross margin performance in the back half.
Speaker Change: Thank you. Our next question will be from the line of Ken Goldman with Jpmorgan. Please go ahead. Your line is open.
Ken Goldman: Hi, Thank you hi, guys. Thanks, so much.
Speaker Change: Wanted to ask a little bit.
Speaker Change: The comments.
Speaker Change: The prepared remarks was that the category in the U S and Canada continues to provide a stable backdrop do you need to execute your strategy.
Speaker Change: I know that you did support the 500 basis points of growth.
Speaker Change: By the end of 2006 today, but I was just curious you know to circle back a little bit towards the part of the strategy that.
Speaker Change: It talks about flattish sales growth right and then.
Speaker Change: Maybe positive sales growth after 2006, I think thats sort of what the initial outlaw.
Speaker Change: Outlook was anyway, so just trying to get a sense in light of kind of some of the challenges you are facing today.
Speaker Change: Do you think about or how you define stable backdrop, just so we kind of understand that for us a little bit.
Speaker Change: No I think Thats very fair Ken I appreciate the question and when we think about what's happening in the category of the reason we said in the prepared remarks is providing that backdrop because the way. It's performing right now is consistent with our planning assumptions and what we need to deliver our model. If you take a look in the U S down about 80 basis points sequential improvement on both.
Speaker Change: Sales as well as volume and.
Speaker Change: Tdp's displays the fundamentals of the category are solid right now the key for US is as we are seeing a shift in the category, we need to shift with it.
Speaker Change: And we believe we could do that we're confident we can do that so if you take a look at what's happening. We know that there is continued interest in value and continued interest in and growing interest in health and wellness. That's the place that we're going to go I talked about that a moment ago. During Andrew's discussion. So we do we still continue to drive a business that focuses on a <unk>.
Speaker Change: Stable topline.
Speaker Change: Minus one plus one in that range, we've talked about that and then that allows us to then deliver the outsized margin growth over the long term and I. Appreciate you mentioning the supply chain program. That's the restructuring we're doing you reach all the way out that's what delivers a significant amount of margin for us and most of that is mechanical.
Speaker Change: As you know as you get closer in where also we are also always looking for ways to drive our profitability and we have a variety of things that are in sight right now and then if you go to the top line, where you were describing in our prepared remarks, we did talk about the trajectory changing in the back half and.
Speaker Change: You heard us talk about very tangible things that we've already done for example distribution gains in channels that are winning right now they are coming online now theyre going to come online in the back half of the year, we talked about incremental investment in our brands. We know that when we do that properly the topline response to it Dave <unk>.
Speaker Change: A lot about return on that investment. The good news is that has been improving and then you also heard what we're doing with respect to the launches associated with different health and nutrition brands, but don't misunderstand. Our mainstream brands also were getting a lot of attention. We simply we realize we just finished up filming I'll give you a secret.
Speaker Change: We just finished filming spot with Tony Hawk.
Speaker Change: Skateboarder, we associate Tony with Frosted flakes that happened a while back we are bringing them back into the franchise and we're excited about that so those are the reasons why the tangible reasons why we do think our trajectory will change in a positive way and we do need a stable top line to deliver that model and we feel good that we can deliver on that.
Speaker Change: Alright, Thanks for that and then quick follow up.
Speaker Change: It was mentioned that the higher promotions.
Speaker Change: Reflects a strategic reallocation.
Speaker Change: Of the 50 <unk> week profit I think it was mentioned that you are redirecting from some other brand investments is it as simple as you're maybe not going to be spending on air as much.
Speaker Change: Just wanted to kind of get a better sense of which brand investments are not being de emphasized but are sort of feel.
Speaker Change: Feeling a little bit of that reallocation.
Speaker Change: Yeah, Ken Good question, so I'd start with saying, it's not that we're deemphasizing brand investment we're more strategically shifting that investment and we're trying to get closer to where the consumer is so.
Speaker Change: As we think about that we've talked a lot about rois over the last 18 months one of the things that we focused on specifically in our consumer facing investments was our return on those investments over the last 18 months, we've done a really nice job of enhancing the returns on those investments over the last 18 months and.
Speaker Change: That gives us confidence that that's going to.
Speaker Change: Provide better returns for us both in the short term, but also in the long term as consumers continue to interact with our brands pick it up off the shelf or in.
Speaker Change: They are online retailers. So that's how we're thinking about it Ken is more just a shift of activity, it's not less brand interaction, but really just how the consumers interacting with it a little bit differently.
Speaker Change: Thank you as a quick reminder to ask a question. Please dial star one on your telephone keypad. If you change your mind up much like to exit the Q3 style stopped to when preparing to ask your question. Please ensure you will focus on muted locally and finally, please limit yourselves to one question and one follow up and then reenter the queue if needed.
Speaker Change: The next question will be from the line of making Clap with Morgan Stanley. Please go ahead. Your line is open.
Speaker Change: Hi, good morning, Thanks, so much.
Speaker Change: Maybe I could just follow up on Ken's first question there.
Speaker Change: <unk> continues as you mentioned to perform in line with your expectation.
Speaker Change: Sorry about your market share performance.
Speaker Change: It's nice to hear you've identified some fixes, but I guess, if we look at the balance of the year. It does seem to imply.
Speaker Change: Are you expecting to get back in line with what the how the category is performing so how confident are you in that.
Speaker Change: In terms of the fixes that you've identified that you can get back to performing in line with the category. This year.
Speaker Change: Yeah.
Speaker Change: Yes. Thanks for the question I'd start with saying, it's not going to happen overnight. We've said that we will sequentially improve kind of each quarter into the back half. So as we think about that and you think about the <unk>.
Speaker Change: Call. It the building blocks that we have in the year to go.
Speaker Change: Some of those things are happening now Gary just mentioned it more picking up distribution gains and a key channel as we speak that just happened starting really kind of the middle of <unk>. Four. So that is is just getting into market, we have more of that coming.
Speaker Change: As we move into Q3 more coming in Q4. So it is kind of sequenced out that first piece of distribution gains we talked about the strategic investment allocation will have dollars working harder in the marketplace. Both in Q3, and then in compared to a year ago in Q4 as well so.
Speaker Change: Think about it like that as we'll have a little bit of sequential improvement throughout the quarters as the year goes on the Kashi relaunch. We're excited about that we think that that food is going right, where the consumer is.
Speaker Change: So that will be happening call. It right around the end of Q2. So again these things arent just a big Bang here immediately theyre going to be kind of staged and as the year goes in and as we think about 2026 all of those distribution gains will wrap into next year, obviously, the Kashi relaunch will will wrap into next.
Speaker Change: Year, and we're continuing as we talked about at Cagny and the spoons framework, we're continuing that activity and enhancing our health proposition both from a health and wellness and emphasizing the health benefits of our mainstream brands into 2026.
Speaker Change: Okay, great. Thanks, Dave that's helpful. And then maybe just as a follow up.
Speaker Change: Can you help us understand between in the balance of the year, how the topline guide is changing as it relates to volume and price I think previously you talked about kind of low single digit pricing realization in 'twenty five.
Speaker Change: Is that still how youre thinking about it was the change more on the volume or was it kind of equal between pricing and volume. Thank you.
Speaker Change: Yeah, Megan so just as a reminder, we executed our second wave of PPA around.
Speaker Change: The middle of last year. So as we finish out Q2, we will have fully lapped that second wave of PPA in the marketplace. So we would expect to realize price in the low single digits here in Q2 call that about the same rate, maybe a little bit less than we did in Q1.
Speaker Change: And then as we move into the back half, we would expect that price realization to flatten out. So we would expect our pounds and dollars to move relatively in line in comparison to a year ago.
Speaker Change: Both in Q3 and Q4.
Speaker Change: And then as we move into 2006, we would expect similar similar movement.
Speaker Change: Thank you. The next question is from the line of Pizza Galbo with Bank of America. Please go ahead. Your line is open.
Pizza Galbo: Hey, guys. Good morning, Thanks for taking the question.
Speaker Change: Gary I wanted to step back.
Speaker Change: A little bit on the commentary you gave reiterating.
Speaker Change: Reiterating the 500 basis points of EBITDA margin expansion still exiting 2006, and just based on the commentary both for the quarter today, and what we're probably going to see through the rest of the year.
Speaker Change: With gross margins being flattish I'm just curious if the.
Speaker Change: The complexion of how you are still planning to get to that 500 basis points has changed and what I mean by that is I think previously we had kind of all expected that it would be a 500 basis points of or close to 500 basis points of gross margin expansion.
Speaker Change: And based on just some of the commentary both for the quarter and for year to go today I'm just wondering if that again if that complexion.
Speaker Change: From the gross to EBITA margin line has kind of changed in your thinking.
Speaker Change: No. It's a fair push so let me start with them and I'll back it up we're not changing our view on that so the view is the 500 basis points would be coming through gross margin, let me explain.
Speaker Change: Back up a little bit at Cagny Sherry talked about the program being on schedule and our budget. She mentioned, how we're doing it the way we're executing it we have eight separate initiatives by the way two of the eight work streams are now completed so the focus continues and you heard today, we reiterated again that the program is on schedule.
Speaker Change: On our budget and for us our ability to talk about the same economics today than we did almost two years ago tells us we're on the right path now when we talked about it we did talk about it being primarily a mechanical impact to our P&L because of what's happening within the consolidation of our supply chain network.
Speaker Change: That continues.
Speaker Change: That's about 300 basis points or so give or take we already delivered about 100 basis points and then the other 100 basis points comes as well and we believe primarily through group gross margin. So none of that has changed the only thing for US is as time moves on as we continue to execute as we continue to make commitments.
Speaker Change: Walk in capital expenditures and the investment we're making.
Speaker Change: Our confidence in the overall program grows.
David: And David Yes, yes.
David: Yes, Peter I think just to elaborate a little bit more as Gary said in the upfront 500 basis points, mostly through gross margin everything we said remains intact now as we think about this year's profit delivery obviously.
We just took down our outlook for 2025, but as we think about 2026, we're actively working on how we continue to think about that profit is being delayed into 2026, and so just kind of start of how you can think about that I kind of overview, the topline and some of that wrapping benefit into 2010.
David: Six well that's going to be.
David: Benefit into next year, but beyond that our cost structure. We're currently identifying ways.
David: To further enhance our margin and that's both in gross margin and EBITDA margin.
David: We've talked about the fact that we are largely now unplugged from Kelly, Nova So we have all of our own now SG&A that we are looking to.
David: Optimize as we move forward think about over the last 18 months, we've been standing up all of our own distribution centers those have been staggered over 18 months again now we're fully separated we're going to look to optimize that similar in manufacturing, we're always looking at ways to further enhance our efficiencies so.
David: These are all opportunities and I'll give you a proof point in the past we came into last year and we talked a lot about waste reduction that was an area. We identified and we're able to go after and get good wind. So we're continuing to identify areas like that that will further bolster our 2026 delivery and into 2002.
David: 97.
Speaker Change: Okay. Thanks for that guys. That's helpful context, and Gary maybe just a second there's obviously been a lot of reporting on the competitive dynamic on cereal you know you have a large competitor.
Speaker Change: Who's who is reducing capacity as well and I guess I'm just.
Speaker Change: I'm trying to understand kind of the perspective is on again the longer term prospects for the category and in light of some of the.
Speaker Change: Actions that are being taken relative to your long term guidance.
Speaker Change: What that could mean topline vis vis what profitability could look like going forward again, if we are going to be in a scenario, where the industry is reducing capacity. Thanks very much.
Speaker Change: No very fair and I think you've heard from Dave just a moment ago about our confidence in terms of our profitability. We talked to we already have a massive restructuring going on right now in that supply chain modernization again on budget on schedule. So we feel very good about our ability to drive that going forward.
Speaker Change: Also on the line of sight that I think you just heard from Dave about additional areas. We can go now that were stood up now that we're 18 months in we're past the TSA, we got our distribution setup or our ERP system has been.
Speaker Change: Been cut over so we have even more opportunity to optimize the organization and our company going forward in terms of the top line I'll go back to what we said earlier about what's happening within the category and the category is holding in and its shifting and again, we will shift with it we believe that this shift as it continues when if it is.
Speaker Change: Consumers are looking for value. They are looking for health and wellness Theyre looking for joy in taste and the consumer is not a model. It. It's a combination of those things and some want more value than they want more than somewhat more nutrition.
Speaker Change: No matter what the combination is the cereal category is a tremendous destination for those consumers. If we had a write out what we would want the consumer sentiment to be to actually to improve our category to drive our category. This would be it because we know price per pound, we show up very nicely compare favorably in.
Speaker Change: Terms of nutrition, we talked about our spoons concept those are the health credentials relating to our category that large ago.
Speaker Change: Nord or unrecognized or misunderstood those are things that we can get after and Thats why what's happening right now with the consumer and we're always behind the consumer we think while it has some pressure in the first quarter undoubtedly it as a long term tailwind for this business for.
Speaker Change: For the category for this business and for W. K.
Speaker Change: Okay.
Speaker Change: As a reminder for any further questions. Please dial star one on your telephone keypad.
Speaker Change: Question is from the line of Robert Moskow with TD Cowen. Please go ahead. Your line is open.
Speaker Change: Hi, Thanks.
Speaker Change: Hey, Gary I didn't see anything in here about the plan for special K to try to stabilize it and and given that this was a brand that really did have strong health and wellness credentials for a long time.
Speaker Change: It would seem that there's some kind of pent up equity there.
Speaker Change: You didn't mention it in the front of pack labeling that you plan to do for those for the other brands.
Speaker Change: Can you give an update on that.
Speaker Change: I'm glad you mentioned it and Youre right. This has significant health credentials.
Speaker Change: You also saw in the public data that it did we did not have a good quarter, we lost 40 basis points.
Speaker Change: And at the same time, we are optimistic about this brand and I go back to what's happening with the consumer. This brand is at the intersection of taste and health and likely hasnt been as hard hitting on health as we should have been.
Speaker Change: Now this trend is now here and what we're starting to do now is stronger focus on the food stronger focus on let's say nutrient density, but also the upcoming comms that youre going to see more food focused stronger claims on pack, what youre going to see is with respect to this trend in health.
Speaker Change: We have a multi brand fiber campaign, that's coming we're also launching a special K protein granola.
Speaker Change: No we have in the marketplace right now a special cases zero now that food is getting restaged relaunched it has zero added sugar and 18 grams of protein. So I think you have it exactly right that this should be a tailwind for us and for the brand we need to announce starts shifting more into the health or.
Speaker Change: Orientation of what the brand stands for and that's up to us, but I. Appreciate the way you asked the question. We do think Theres real tailwind here in this equity should stand up well and respond well to where consumers are going.
Speaker Change: Okay, and then a follow up.
Speaker Change: The.
Speaker Change: Gory, where there is growth.
Speaker Change: It's in a lot of small emerging brands I think a lot of them are very protein forward.
Speaker Change: Do you have any ability to acquire brands like that or is your response to those brands.
Speaker Change: Improve the marketing on your existing portfolio to defend.
Speaker Change: My answer to that is in and so we like the portfolio that we have we do believe the entire cereal category should be perceived better from a health perspective.
Speaker Change: And if you go to a health and wellness brands, we talk about Kashi Restaging. It bear naked you just made the point about special K. So we believe we have the Arsenal here, we need to go focus more on that it's up to US now at the same time, while there are smaller brands in the market that are winning we can do that too and youre going to start seeing.
Speaker Change: That in the marketplace as well, but we have.
Speaker Change: Remember what happened with the spin we have access to every piece of intellectual property that existed prior to the spin and thats any of it from around the globe. That's what we get to use exclusively perpetually non royalty its royalty free we get to use it at our discretion.
Speaker Change: So we're able to then go fight that fight the way exactly what you just said and I have great confidence in the team that we have that we can go do this and do this well and then you added to the current portfolio.
Speaker Change: How we pushed Kashi forward are restaging that the special K point that you made as well as our mainstream brands, but we could do it too.
Speaker Change: And we're excited about that.
Speaker Change: Thank you and as a reminder for any final questions. Please dial star one on your telephone keypad now and will pulsate briefly for any final questions to come in.
Speaker Change: With no further questions on the line I would now like to hand, the call back to character will make some closing remarks.
Speaker Change: We appreciate you joining our call today, you could see how we're moving quickly to improve our 2025 plan executing what was already in the plan and reinforcing things that will resonate with our consumer a very challenging and dynamic environment, but you can hear the confidence we have with the plan as we go forward.
Speaker Change: Importantly, our strategic priorities remain on track and we are confident in the actions that we're taking to drive the business and create value over the long term very much appreciate your time.
Speaker Change: With that we will conclude today's conference call. Thank you to everyone who joined US today you may now disconnect your lines.
Speaker Change: Okay.