Kellanova

Q4 2023 Earnings Conference Call

2/8/2024

spk08: review of our fourth quarter results and a discussion of our outlook for 2024. I'm joined this morning by Steve Cahalan, our Chairman, President, and Chief Executive Officer, and Amit Banati, our Vice Chairman and Chief Financial Officer. Slide number three shows our forward-looking statements disclaimer. As you are aware, certain statements made today, such as projections for KELNOTA's future performance, are forward-looking statements. Actual results could be materially different from those projected. For further information concerning factors that could cause these results to differ, please refer to the third slide of this presentation as well as to our public SEC filings. A recording of today's webcast and supporting documents will be archived for at least 90 days on the investor page of .kelinova.com. As always, when referring to our results and outlook, unless otherwise noted, we will be referring to them on an organic basis for net sales and on a currency-neutral adjusted basis for operating profit and earnings per share. Included in our press release are financial results for the fourth quarter 2023, as well as the first three quarters and full years of 2023 and 2022, recasting WK KELOGCO in those periods as discontinued operations in accordance with applicable accounting guidelines. These recast financials will be the basis of comparison used in the -on-year growth rates we provide today for all items except free cash flow, which was not recast. Keep in mind that the accounting guidelines for discontinued operations are such that the recast financials for the periods prior to the spinoff include expenses related to providing transition services to WK KC, such as warehousing and IT-related expenses, but they do not include the reimbursement for those expenses, which KELONOVA is receiving from WK KC under a transition services agreement. For periods after the spinoff, that is from Q4 2023 on, both the expenses and the reimbursements will be included, which will impact -on-year comparisons. This also creates a difference from the carve-out financials that you would have seen WK KC as different accounting guidelines apply to carve-out financials. And now we'll turn it over to Steve. Thanks,
spk09: John, and good morning, everyone. It's a real pleasure to be able to present to you results for KELONOVA for the first time. Allow me first to point to you to slide number five and remind everyone of KELONOVA's more focused, more growth-oriented portfolio. And let me also remind you of our updated and sharpened strategy. This strategy, appropriately called differentiate, drive, and deliver, is shown on slide number six. This strengthened portfolio and sharpened strategy were in full force during our initial quarter as KELONOVA. We delivered another quarter of solid results as summarized on slide number seven. We began the quarter with our transformational spinoff, which we executed successfully from a transactional, financial, and operational perspective. We did not let this transformational transaction distract us from the task at hand, delivering results. In the quarter, we delivered results for net sales, operating profit, and EPS that all were better than the guidance ranges we provided back in November. Our organic net sales growth remained at a rate that is above our long-term algorithm, even in spite of challenging industry conditions marked by rising elasticities in our categories around the world. Importantly, the strength of our diverse emerging markets was again evident. We continued to restore profit margins that had been pressured by last year's soaring input costs and rampant supply impediments. And this led to operating profit growing at a rate that exceeded our long-term algorithm as well. Meantime, we delivered more free cash flow than we had anticipated, further strengthening our balance sheet and financial flexibility, which was used to opportunistically accelerate share repurchases. Importantly, we have shifted our focus back toward demand generation after a few years of having to focus more on supply. And we solidified our plans and assumptions for 2024 accordingly, as outlined on slide number eight. We are affirming the 2024 guidance we gave back in August at our Day at K Investor event, underscoring the dependability we intend to continue to exhibit as Kelenova. While it could take a couple of quarters before these negative industry trends abate, we are confident that our return to a full commercial plan will gradually stabilize and improve our volume as the year progresses. Our innovation is bigger and better than last year's supply-related pullback. Our highly differentiated brands are fully supported with A&P investment, and we are back to normal levels of merchandising. We are also confident in our sustained momentum in emerging markets, another point of differentiation for Kelenova. Meantime, we also expect margin expansion in all four regions in 2024. The result is an outlook for an on-algorithm net sales and operating profit growth and free cash flow generation that is strong enough to incrementally invest in future growth and future margin expansion. This investment in future growth includes incremental capital expenditures for adding much-needed capacity for Pringles in our emerging markets, as we've discussed previously. But we're investing in margin expansion, as shown on slide number nine. Consistent with our long-term plans to optimize our global supply chain network, we have commenced two optimizations of production facilities, one in our North America frozen foods business and one in our European cereal business. These are high-return projects that require very little cash up front and will start delivering savings by late this year. All of this is contemplated in our guidance. And even after some of the savings into growth-oriented investments, particularly behind snacks in emerging markets, these actions enable us to get to our medium-term operating profit margin of 15% by 2026, a little earlier than we had previously indicated, while also progressing on our strategy's ambition to deliver -in-class service through agile, flexible supply chain. Our focus is also on growing the right way, and slide number 10 shows some of the ways our better today's Promise program manifested itself during the fourth quarter. We unveiled new, more ambitious targets for Kelenova, sustained our legacy of helping our communities, and linked these activities to our commercial endeavors. And we continue to be recognized for our efforts. So now let me turn it over to Amit, who will walk you through our financials, before I come back and discuss each of our businesses in more detail.
spk05: Thanks, Steve. Good morning, everyone. Slide number 12 summarizes our results for the fourth quarter and full year for Kelenova. As John indicated, the -on-year growth rates are based on recast results for the four quarters of 2022 and the first three quarters of 2023. As you can see, our results for the quarter came in above the guidance we had provided, and they complete a full year in which we maintained our focus on delivering consistent on algorithm results, even amidst the incremental work of executing the spin-off. Net sales increased by about 7% on an organic and recast basis in quarter four, featuring decelerating volume declines and price mix growth that is moderating as we lap significant revenue growth management actions in the prior year. For the full year, Kelenova's organic net sales growth was about 8%, well above our long-term growth target. Operating profit in quarter four increased by 30% on an adjusted and currency-neutral basis and comparing against a recast 2022. This was driven by the solid top line growth as well as by a restoration of our underlying gross profit margin and reimbursement for expenses related to transition services we're providing to W.K. Keller Company. For the full year, Kelenova's operating profit increased by 18% on the same recast basis. Even taking into account the -over-year impact of expense reimbursement for transition services provided to .K.C. in quarter four 23, which did not exist in the year earlier quarter, our -on-year growth in operating profit was still in double digits for the quarter and the year, well ahead of our long-term target. Earnings per share on an adjusted and currency-neutral basis increased by about 19% -on-year in quarter four and by 7% -to-date as strong operating profit performance more than covered significant headwinds from macroeconomic factors that drove up interest expense and pulled down pension income. Finally, free cash flow came in higher than we had expected in quarter four, finishing the year at $968 million. Free cash flow is not recast for discontinued operations, so the decrease from last year solely related to one-time outlays related to the spin-off and the absence of North America serial cash flow in the fourth quarter. Now let's take a look at each metric in closer detail, starting with our net sales growth on slide number 13. As expected, price elasticities continue to rise around the world in quarter four, putting pressure on volume, though this volume again came in better than projected due to better performance in our emerging markets. Price mix continue to moderate sequentially from recent quarters as expected as we lapped some of our largest revenue growth management actions last year. The result was another quarter of elevated organic net sales growth, though to be clear about half of that came from our Africa joint ventures where substantial pricing is needed to cover a devaluing currency and shipments were unusually strong. That said, even excluding that business, we sustained organic growth that was in line with our long-term target. Moving across to the non-organic drivers of net sales, the divestiture of our Russia business, which occurred in July, clipped about a percentage point from our overall net sales growth in quarter four, just added as it did in quarter three. Foreign currency translation was a headwind of about negative six percentage points in quarter four and about negative four percentage points for the full year. This reflected primarily the Nigerian Naira, which continued to devalue during the fourth quarter and was only partially offset by strength in the Euro, Pound sterling, and Mexican peso. While we don't provide guidance on foreign exchange rates, if today's rates held for the year, we would likely experience an impact on net sales that is similar to the impact that we saw in quarter four. Now let's discuss our profit margin recovery starting with gross profit on slide number 14. In quarter four, we continue to grow gross profit and restore gross profit margins. As in the previous quarters, this restoration of margins was aided by revenue growth management, productivity, and improved supply and service levels. In addition, the other half of the quarter's margin expansion was driven by reimbursement of expenses related to transition services provided to WKKC, which did not exist in the year ago quarter. You'll notice that at 34% in quarter four, Kelenova's gross margin is structurally higher than Kellogg's company's margin and it continued to come in higher than we had anticipated. We expect to continue to improve gross margin in 2024. Turning to slide number 15, we see that in quarter four and the full year, we also grew operating profit driven by growth in net sales and the higher gross profit margin. Meantime, operating profit margin improved year on year in quarter four and the full year. Remember, the 12.3 margin you see for 2023 is recast for discontinued operations, so it does not include reimbursement for transition service expenses during the first three quarters. We expect our operating profit margin to reach 14% in 2024. Moving down the income statement, slide number 16 shows how our adjusted basis earnings per share growth in 2023, even on a recast basis, felt the year on year effects of macro related headwinds within our non-operating below the line items. These below the line pressures were expected and were experienced year on year in quarter four and the full year, even comparing to a recast 2022 and for all the reasons we have discussed previously. Foreign currency translation was modestly positive to earnings per share in 2023, including quarter four, as strengthened European and Mexican currencies more than offset what is a relatively small impact from Nigerian Naira at the EPS level. Recall that due to our partnership structure, while the Naira had a large impact on net sales, its impact on operating profit and EPS is much smaller. Turning to slide number 17, we are pleased with our cash flow generation and balance sheet. Noting that we have not recast free cash flow for discontinued items, we finished 2023 only modestly below 2022, despite the absence of the spun-off North America cash flows for a quarter and despite one-time cash outlays related to the spin-off. In fact, the combination of these spin-off factors amounted to about $300 million of negative impact. If you added that back, you can see that our free cash flow would have come in above 2022 levels. Our balance sheet after the transfer of net debt to WKKC remains solid, with debt leverage remaining well below our targeted ratio of net debt to trailing EBITDA of three times. Now let's discuss our 2024 guidance shown on slide number 18. The 2023 base is recast for discontinued operations and because these figures may differ from WKKC carve-out figures and our internal management figures, we've chosen to continue to provide you with absolute dollar guidance for operating profit and earnings per share in 2024. After all, 24 is what is really important as it is the first full year in our current P&L structure. Let's go through each metric. For net sales, we affirm our guidance for growth within our long-term targeted range, specifically calling for 3% growth or better in 2024. Across most of our businesses, price mix growth will moderate as we continue to lap prior actions and industry-wide elasticities will fade gradually during the year. The exception is Nigeria, where currency influence pricing actions will likely continue, which we assume produce meaningful elasticity impact on volume. Organic growth, of course, excludes currency translation, which based on today's exchange would be a headwind of 5 to 6%. For adjusted basis operating profit, we continue to provide absolute dollar guidance because -on-year growth rate can be impacted by discontinued operations accounting. We are forming the range of $1.85 to $1.9 billion. This incorporates a negative impact from currency translation, which based on today's exchange rates would be approximately 22%. Versus recast 2023 figures, this implies growth in operating profit in the mid-teens. After taking into account the -over-year impact of expense reimbursement for transition services provided to WKKC for four quarters in 2024 versus only in the fourth quarter in 2023, this -on-year growth is still in the mid-single digits solidly on our long-term target. Our guidance implies continued margin expansion as an improving gross profit margin more than offsets a strong increase in brand investment. We expect to reach a 14% operating margin in 2024. Adjusted basis earnings per share is still expected to be in the range of $3.55 to $3.65. We make no change to our previously communicated expectation for an increase in our effective tax rate to 23%. Our outlook for interest expense is about $310 million and we expect other income to be around $50 million. And we are forming our outlook for free cash flow of approximately $1 billion with -on-year growth driven by operating profit partially offset by capital expenditure temporarily elevated for expanded Pringles capacity in emerging markets and modest cash outlays related to our two network optimization projects. These network optimization projects are addressed on slide number 19. At our Day at K Investor event in August, we cited network optimization as one of the drivers of our margin expansion and we are now ready to discuss specific initiatives. The two projects we are announcing today are both high return projects. Only about half of the project's upfront costs are cash even before asset sales and the projects collectively become cash neutral by 2025. In 2024 specifically, upfront costs will amount to about $160 million with less than $40 million of that in cash and this has been incorporated into our cash flow guidance. Savings for the project start very quickly with a small portion of the overall $75 million coming as soon as the second half of 2024 and this too is incorporated into our guidance. In fact, this is a contributor to our operating profit margin expanding to 14% this year as implied by our operating profit guidance. Importantly with this announcement, we can also now be more specific about the timing of our medium term goal of a 15% operating margin. We expect to reach that margin in 2026. So let's summarize our financial condition on slide number 20. In what was our debut quarter as Kelenova, our fourth quarter results came in as guided from net sales to earnings per share. The business remains in good shape with margin restoration proceeding ahead of pace and volume performance on a path of gradual improvement. Consequently, we have affirmed our guidance for 2024 even amidst challenging industry and macro economic conditions. Our medium term goal of attaining a 15% operating profit margin has been accelerated to 2026 as ongoing margin expansion drivers are now augmented by network optimization initiatives which get started this year subject to consultation. And we continue to generate strong free cash flow that along with our deleverage balance sheet gives us financial flexibility. This flexibility has been on display in the form of opportunistic share buybacks during quarter four and in our decision to elevate capital investment to expand capacity for our rapidly growing Pringles business. So we enter 2024 in a strong financial condition. Let me now turn it back to Steve for a run through of our businesses
spk09: around the world. Thanks Amit. Slide number 22 splits our portfolio into category groups to help remind you of their relative sizes and growth rates. This view shows you how much each category group contributed to our strong organic net sales growth in the quarter and for the full year. Now let's review each of our regions which are our reporting segments. We'll start with Kelenov in North America and slide number 23. North America's fourth quarter results continued to show the impact of rising elasticities across all of our categories. Recall that we entered 2023 with low service levels due to economy wide bottlenecks and shortages and therefore we elected to launch less innovation and to return to merchandising only after we were strongly confident that service levels had returned to normal levels. This in conjunction with category elasticities suddenly and rapidly rising negatively impacted our volumes particularly in the second half. Despite lapping an unusually strong year earlier period, North America's operating profit grew strongly year on year in the fourth quarter. Even accounting for the reimbursement of expenses related to transition services provided to WKKC in this year's quarter four, North America's operating profit grew in the mid single digits year on year continuing to restore underlying gross profit margin and operating profit margin by more than projected. So in spite of slowing categories and amidst the organization undergoing significant change related to the spinoff, North America again delivered financially. Within its key category groups we can see the deceleration and top line growth caused by the rising elasticities. Slide number 24 shows our North America snacks business which experienced slowing category growth rates during the year. Volume growth rates in our categories did not worsen in the fourth quarter though elasticities continued to edge higher. We continued to feel the impact of less innovation year on year particularly in crackers and this will be addressed in 2024 when we return to a full innovation launch calendar. And we did see year on year increases in display activity and our return to merchandising and improving quality of displays will continue to gain traction as we head into the new year. It was a similar story in frozen foods shown on slide number 25. Along with the frozen breakfast category, Eggo's consumption turned to a decline in the fourth quarter on rising elasticities. Morningstar Farms continued to gain share but in a declining veg vegan category. We believe these conditions are transitory for both categories and expect better performance in 2024. So let's talk about what to expect from North America in 2024 indicated on slide number 26. First with supply impediments well behind us we are returning to full commercial activity in 2024. This starts with a full slate of innovation launches and it includes a full year of robust merchandising and display activity. We will also continue to support our focus brands with increased brand building investment. The results should be improved in market performance and a gradual return to volume growth. And if you have been watching the Pop Tarts bowl and Cheez-It bowl as well as the upcoming Pringles activation for Sunday's big game are good examples of how we plan to show up in 2024. Now let's turn to Kelenova Europe and slide number 27. Here we finished the year with another strong quarter yet again delivering organic net sales growth on top of year growth. In a market that is extremely price sensitive we were again able to realize double digit price mix growth through effective revenue growth management actions though elasticities did rise impacting volume. Our organic net sales growth was 10 percent in the quarter and 9 percent for the full year. Europe delivered strong operating profit growth in the fourth quarter and full year. Granted this was lapping a sharp year ago decline but it did feature strong top line growth and better margin recovery than expected getting its operating profit margin back to flat for the full year. On slide number 28 you can see that snacks which represent over half of our sales in Kelenova Europe continue to lead our growth in this region. Our double digit organic growth in net sales both in the quarter and for the full year was across all of our major sub regions. Revenue growth management actions drove the growth while volume declines remained relatively modest. The salty snacks category has slowed but remained in high single digit growth across key markets and Pringles in the fourth quarter was tracking the gain share led by the UK and Spain. In portable wholesome snacks we have managed to outpace the category in the UK and Italy. In cereals shown on slide number 29 you can see that we grew net sales organically in the quarter. This too was led by revenue growth management actions while elasticities have been running higher in this category than in our snacks categories. We finished 2023 with organic net sales growth of about 1 percent. Slide number 30 points to some elements to watch for in Europe in 2024. We expect to deliver a seventh consecutive year of organic growth. The growth will be led by snacks with Pringles continuing to be supported with innovation and brand building and portable wholesome snacks in key markets notably Pop Tarts and Rice Krispies Squares. We're also excited about launching Cheez-It in key European markets in the second half. In cereal our focus will be on optimizing our cereal portfolio in conjunction with the manufacturing network optimization that we're commencing this year. Now let's look at our emerging markets region starting with Latin America on slide number 31. In the fourth quarter Latin America's net sales grew 5 percent on an organic and recast basis with volume declines moderating even in spite of sizable impact from our SKU rationalization and price pack architecture initiatives. The region finished the year with strong 8 percent organic net sales growth. Operating profit declined in the fourth quarter against a substantial year earlier gain. But despite some incremental investments and transitory cost pressures it finished the full year with 8 percent growth on an adjusted and currency neutral basis. Slide number 32 shows that our snack sales were flat on an organic basis in the fourth quarter comparing against a notably strong year earlier period. Pringles continued to perform well. In market data show sustained double digit category growth for our major salty snacks markets with Pringles gaining share in Brazil and holding share in Mexico. And we continue to outpace the portable wholesome snacks category in Mexico though we did see rising elasticities in cookies in Brazil. Our Latin America snacks business finished the full year with 7 percent organic net sales growth. In Latin America's cereal shown on slide number 33 our organic net sales growth was strong in the quarter and for the full year. Specifically sales grew 10 percent in the quarter and finished the full year with 9 percent growth. Cereal category consumption growth has held up in the mid to high single digits across much of the region and we gained share in Mexico. As we look to 2024 a few things to watch for in Latin America are shown on slide number 34. We expect a seventh straight year of organic net sales growth. The growth should be led by snacks particularly behind Pringles innovation and distribution expansion. And we also expect good growth in cereal. Margin should improve reflecting price pack architecture and other RGM initiatives and operating efficiencies as as moderating input cost pressures. Slide number 35 shows the financial performance of our AMIA region. This region sustained its strong momentum in the fourth quarter when organic net sales growth re-accelerated to 22 percent on a combination of price mix growth and volume growth led by Africa. For the full year our organic net sales growth was 17 percent. Now obviously a large portion of this currency-neutral growth came from Nigeria where currency devaluation necessitated significant pricing actions. Nevertheless the rest of AMIA posted solid growth in the quarter as well. Margins continued to recover year on year and operating profit grew 25 percent in the quarter on an adjusted and currency-neutral basis in spite of substantially higher brand investment and despite lapping strong prior year growth. Its operating profit increased by 20 percent for the year. Within AMIA we see on slide number 36 that snacks grew organically at a double-digit pace in the fourth quarter and for the full year. This growth was led by Pringles in emerging markets across Asia, Africa, and the Middle East as well as in more developed markets like Australia, Korea, and Japan. Pringles continued to gain share overall principally due to outperformance in Thailand, Australia, and Japan. In serial shown on slide number 37 we sustained organic growth posting four percent growth in the fourth quarter and six percent growth for the full year. This was led by emerging markets in Africa, the Middle East, and Asia. And we finish with noodles and other shown on slide number 38. Revenue growth management actions continued to be taken in Nigeria as we try to keep up with weakened currencies but volume also grew in the double digits in the fourth quarter reflecting the strength of our brands and our execution as well as timing of shipments. Meanwhile we also continue to expand our Kellogg's noodles business outside of Nigeria and this also contributed to our volume growth in the quarter. We expect AMIA to sustain momentum into 2024 as discussed on slide number 39. To deliver the region's 17th straight year of organic net sales growth we expect to see strong growth if moderating from 2023 rates in noodles and other. We expect to see sustained momentum in snacks led by Pringles and we expect to sustain growth in cereal led by emerging markets. Margin expansion should continue led by our businesses outside of Nigeria. In those markets input cost pressures are finally moderating and productivity and leverage continue to contribute positively. So let me summarize with slide number 41. Simply put the Kelenova era is off to a good start. We've executed well the spin-off and the -spin-off operations including transition services and we delivered our initial quarter ahead of our expectations. We're now shifting back to a focus on demand generation after a few years of supply focus. We're very excited about our 2024 commercial plans which feature a return to a full complement of innovation, brand building, merchandising, as well as sustaining momentum and scale building in our emerging markets. We're also pleased with our progress and plans for restoring and expanding profit margins which has proceeded faster than we had anticipated. Our outlook for 2024 first shared with you as far back as last August remains intact calling for another year of on algorithm sales and profit growth and we're not sitting still. We're already creating the future. For instance we are adding much needed capacity for Pringles in emerging markets. The international expansion of Cheez-It continues with launches coming in Europe and we are commencing network optimization initiatives that will both expand margins and fuel growth investments. In sum we are on track and ready to deliver as Kelenova and the future certainly is bright. Of course none of this would be possible without the grit and skill of our supremely talented Kelenova employees all of whom are as determined as ever to differentiate drive and deliver and now we'd be happy to take your questions.
spk01: Thank you. We will now begin the question and answer session with publishing analysts. Analysts may enter the queue by pressing the star key and the number one on your telephone keypad. As a courtesy to your colleagues please limit yourself to one question. Thank you. Our first question for today comes from Peter Galbo of Bank of America. Peter your line is now open please go ahead.
spk02: Hey guys good morning thanks for taking the question. Maybe just first a comment hopefully the edible pop tart is going to make his way down to Cagney. I think a lot of people would enjoy that.
spk09: Peter he didn't survive the bowl game in the game.
spk02: We'll
spk09: have to find another
spk02: one. Just to clarify your comments on the guidance understanding organic sales that's the plus three and I think you said it current rates ahead went to five to six percent on top line from FX. The operating profit range though the dollar range did I hear you correctly that that included a two-point hit or is that in addition so we should be taking that consideration on the dollar range. Thanks very much.
spk05: Yeah Peter yeah that does include the operating profit does include the currency headwind so just confirming that. Like I mentioned you know it's approximately around two percent at today's rates so that two percent is built into the dollar numbers that we've given. Great
spk02: and
spk05: that's
spk02: the
spk05: same
spk02: on EPS as
spk05: well the
spk02: two percent?
spk05: Yes EPS is very much slightly later yeah perfect thank you.
spk01: Thank you our next question comes from Robert at Moscow of TD Cohen. Your line is now open please go ahead.
spk03: Hey thank you for the question. As Steve you called out you know a return to stronger innovation in North America and normal merchandising activity. Can you give us a sense of the phasing throughout the year like the retail tracking data you know looks looks very very weak in the U.S. Is that due to a comparison to the prior year or does it just going to take a while for for your innovation and and merchandising to get you back to your your normal growth rate?
spk09: Yeah it's going to Rob thanks for the question it's going to be throughout the year really you know we started with displays coming back to prior years you know better than prior year in the fourth quarter in the first quarter we're going to see the quality of those displays improving that will continue into the second quarter as well and just to remind you know 2023 was a year of pullback on innovation culling of SKUs clearly focused on supply and making sure that we could you know we could have that supply in the market. In the U.S. though for example we've got Pringles Harvest blends which we brought in the second half of 2023. We've got Cheez-It innovations, Cheez-It crunchy which is hitting now. We've got Pop-Tarts, Crunchy Poppers. We've got innovations around Nutri-Grain. We've got Rice Crispies treats with peanut butter. You know we've got just got many more innovations than we've had prior years and that will roll throughout the year. We've also got distribution growing where it had been declining so you should see momentum growing you know really starting now and picking up all through the year and that gives us you know really good confidence in the top line guide that we gave. The other thing I had Rob is a higher brand building investment as well which you know we we phased into the first half of this year as well you know to really drive that quality display that quality merchandising.
spk03: So when you think we'll see like the top line growth really show up in the retail tracking is it going to be like you know third quarter kind of thing or could it happen as early as 2Q?
spk09: You know there's not really an inflection point per se. I think you need to see a cumulative improvement with probably the third quarter being you know the one where it'd be most notable and then we'll exit the year with lots of momentum. So it'll be cumulative throughout the year and you know and growing from the second into the third quarter. Okay
spk03: thank you.
spk01: Thank you. Our next question comes from Chris Curry of Wells Fargo. Chris your line is now open. Please go ahead.
spk07: Hi good morning. Thank you for the question. So I just wanted to
spk00: touch
spk07: on this innovation and merchandising comment again and just try to contextualize 2023. Can you maybe just help understand 2023 market share performance between say some of your brand or some of your extensions, innovations say your base business relative to innovations that you had done through the year that perhaps received less support or less merchandising. Really just trying to understand is it the core where you start to see some of the share erosion or was it some of the the newer products that you had launched in 2023 that perhaps didn't get as much support and going to 2034. Those are really the opportunities for you to kind of recapture some of the relative share momentum.
spk09: Yeah thanks Chris. So it really it's not it's much less the core than it is some of the innovations that we really didn't support with quality display merchandising. And so if you look at Cheez-It you know the Snapped and Puffed and you look at you know the cases on for those dramatically down as we focused on you know the core supply. And we have owned it you know we returned to merchandising later than our competitors. We were more conservative when it came to you know that merchandising you know overly focused on making sure that we had you know high 90s fill rates before we returned to merchandising. So that's what you see in the share. We don't see any deterioration in our brand health. In fact we see our brand health really at very high watermarks across Cheez-It, Pringles, Pop-Tarts, Rice Krispies, Treats. And so that gives us the confidence to talk about the quality merchandising returning and our share performance improving as we go throughout 2024. Again coupled with more brand investment in the first half of the year. When you look at our brand investment we never we didn't pull back in 2023. You know we we publish advertising only on a full year basis. You'll see advertising up in 2023. That's going to continue to 2024.
spk07: Okay so really we should be looking at the strength of additional innovation adding to market share performance with maybe the base business thing a little bit of an uplift as well. Okay and
spk09: then yeah that's right because I mean the comparisons are going to be against a year where we really didn't innovate and now we're getting back to kind of pre-COVID levels of innovation.
spk07: Right right okay and then you know just just from a competitive standpoint can you maybe just you know give any give any context for you know what you're seeing in the environment from a pricing and promotion standpoint and then I think one of the categories where you know promotion or excuse me competitive activity is especially Wade has been on the business so maybe you can just provide a higher higher level thoughts on on competition and maybe you know just you know drill down on that specific business. Thanks.
spk09: Yeah so you're probably asking about the U.S. the frequency of promotions continues to return to pre-pandemic levels so 2019 levels. You know the depth of those promotions is is really kind of back to approaching those levels off a higher base and so I'd say you know the whole market is pretty benign and stable you don't see you know I've heard some of the noise around because volumes are down as they're going to be you know high levels of discounting and you know increased frequency of promotion. We're not really seeing that you know for us we're getting you know we're trying to get back to the pre-2019 levels as I've mentioned a couple of times now in terms of frequency to drive quality promotional displays but not seeing anything other than that really.
spk01: Okay thank you. Thank you our next question comes from Tom Palmer of Citi. Tom the line is now open please go ahead.
spk12: Good morning and thanks for the question. I wanted to maybe just kick off on on operating profit. At the investor day you'd laid out some dollar expectations by segment obviously you know several months have passed and some segments have maybe done better or tracking better than you'd anticipated and some maybe not quite so maybe just an update there are there any changes as I think as we think about kind of the operating profit distribution across those segments versus what you had laid out?
spk05: Yeah you know at the day at K we had kind of given you the absolute dollar guidance just to kind of help set up your models. I think you know we don't intend to provide regional guidance going forward on an ongoing basis but that said I would say that all the regions for 24 you know we'd expect them to be within their long-term algorithms growth rates that we had shared at day at K.
spk12: Okay thank you and then on the reorganization announcement today for the frozen and serial businesses what drove the decision to make these changes? I mean presumably neither linked directly to the serial spinoff but was the timing at all related to kind of increase bandwidth now that the spin's been wrapped up?
spk09: You know there's a little bit of that but really it's more if you think about what we've been through as an industry you know focused on supply focused on getting through the pandemic focused on bottlenecks and shortages you know the ability to really dedicate resources towards you know effectiveness programs and efficiency programs like this was challenging and so we're through that right now and we see good opportunities in the frozen business you know so we you know we'll be closing a plant and moving production to our more efficient plants in the UK subject to consultation you know we've got our Manchester plant which is a very large plant which is underutilized we can move that production into two facilities so straightforward you know programs in terms of the type of efficiencies they'll drive we're confident that you know it's they're terrific programs but it's really a matter of having the bandwidth pre or post pandemic post bottlenecks and shortages that will allow us to ongoing look for programs like this to continue to drive effectiveness and efficiency. Thanks.
spk01: Thank you our next question comes from Robert Pickerson of Jefferies. The line is now open please go ahead.
spk10: Great thanks a lot. This is you know first question you know I heard you mention you know increased global distribution in certain you know power brands let's call them some in Europe this year maybe in some other cities in Asia. Could you just kind of you know briefly discuss as in color as to like you know what what could be the opportunity there with a brand like Cheez-It and kind of what the timing is of that kind of non-US distribution?
spk09: Yeah Rob you know we get asked a lot why is Cheez-It primarily a US brand you know why why not you know expand it 10 years ago and I think it's a fair question you know the company was very busy expanding Pringles around the world and you see you know obviously now it's a global brand growing all around the world recognized everywhere and that's the long-term ambition for something like Cheez-It which is the next out of the gate but you start with seeds and you know we launched in Canada we launched in Brazil and Mexico and this year the back half of the year we'll be launching in major markets in Europe and so it's a long-term play it's in our guidance it's not going to be a material driver of top line but you know five years from now it's going to be a much bigger brand internationally than it is today and that's you know that's really the plan we learned from the Canada launch we applied those learnings to Mexico to Brazil then to Mexico and we've got a terrific plan for the back half of the year in Europe and so it's a long-term play then you look at the rest of our portfolio Rice Krispies Treats is already a multi-country brand growing nicely in Europe growing nicely in Australia New Zealand you look at Pop Tarts there's potentially you know room for that to be an international brand down the road so we look at our portfolio we like what we see in terms of international expansion but we're going to do it in a very prudent and pragmatic and practical way to drive long-term growth.
spk10: All right Super and maybe just a very simple quick follow-up you know I heard you say you could expect gross margin to improve for the year could you just maybe provide us with kind of you know how you're viewing your the the cost side of the equation in way just COGS inputs is that deflationary and then you know kind of given some of the commentary around you know maybe more positive volumes the back half you actually be expecting also maybe a little bit better gross margin back half year year relative to first half year thanks.
spk05: You know gross margins have come in better than expected and so I think you know the supply chain is performing well we're seeing costs come out of the supply chain that had gone in in the last couple of years you know in quarter four first quarter of Kelenova our gross margin came in at 34 percent and we'd expect that in 2024 we'd be 35 percent so you know that's kind of the outlook for the year so pleased with the with the progress that we are making and you know certainly the progress that we're making in the gross margins is ahead of what we had shared at day at K you know that's allowed us to to to continue to be on our guidance on an operating profit basis. I think in terms of the drivers you know you'll obviously have the benefit of wraparound pricing and some continued revenue growth management into into this year. The input costs I would say are deflationary on commodities a couple of commodities continue to be inflationary net net slightly deflationary you know you look at labor and other parts of a supply chain where there is inflation overall I'd say costs are broadly neutral so you know that combination should drive continued progress on gross margin. And I think you know it will be fairly balanced across the quarters you know we'd expect our ANP to be more front-loaded as we get back to full innovation but you know the gross margin progress should be fairly balanced across the quarters.
spk10: All right super that's great thanks so
spk01: much. Thank you our next question comes from Max Gumport of PMP Barabar. Your lines are open please go ahead.
spk11: Hey thanks for the question with regard to the the comment about all regions being within their long-term algo in 2024 was that just on operating profit or does that apply to organic net sales too?
spk05: I think to do organic net sales as well. Oh okay
spk11: then as a follow-up so for North America that would be lowest single digits in mid single digits can just walk through the drivers of what's getting North America to organic sales growth in 24 particularly given the the decline we just saw in 4q and the weakness you know that was addressed in the in the scanner trends that we're seeing thanks.
spk05: Yeah North America I'll just that range so probably more low single digit but you know as Steve elaborated you know it's returned a return to merchandising innovation all of that should result in low single digit growth in in North America.
spk11: Got it and the last one for me the shipment timing in AMIA that you called out should we expect that to reverse at all in one queueing can you just go over what happened there in terms of the African noodles shipment benefit? Thanks.
spk05: Yeah so a couple of things driving the strong volume growth in in in in AMIA and you know it was all in in our Africa JVs. One is you know we're expanding our noodles business across the continent in South Africa as well as in Egypt so we're seeing strong volume growth and you know that expansion is seeing good traction you know in terms of share and you know leading share positions in in in in South Africa as well as in as well as in Egypt so that's the source of volume growth and that will continue in 2024. I think in Nigeria specifically you know we've had to take a lot of pricing given what's happened with the currency and the elasticities have been pretty pretty good and better than expected. There has been some ordering by our customers you know at older prices so you know you were seeing acceleration of the orders you know to take benefit of the of the old pricing and in an environment where you're taking successive price increases you kind of see that timing of shipments play through. Hard to kind of predict when that would unwind because as you know the currency is we'd expect that to you know to adjust during the course of 2024.
spk11: Great thanks very much.
spk01: Thank you our next question comes from Michael Lavery of Piper Sadler. The line is now open please go ahead.
spk06: Thank you good morning. I wanted to start on margins. So on slide 15 you show the progression to the 15% but the starting point for 2023 you have as 12 that similar slide and investor day was it at 13. I guess first it was did that just strain the costs from the recast because I think WK Kellogg's margins would have been lower so you know is it a strain of cost that drives that or is there something else that pushed the starting point down on and then conversely with obviously you being just as confident or more in getting to the 15 and maybe sooner is the network optimization the key piece of that or are there other puts and takes we should keep in mind as well.
spk05: Yeah so just on the 12 versus the 13 at day at K they are on different bases so the 12 that you see right now is on the discontinued operations basis which is you know we've now done that work and that's what we'll be reporting against. The 13 which we had given at day at K was an internal management estimate and really the difference is the 12 does not include reimbursement for you know for the first nine months the TSA reimbursements for services that we're providing to WKKC that's the way the discontinued operations accounting works so that's really the difference between the 12 and the 13 and I think you know like I said we expect in 2024 to be at 14 margin so you know you know very pleased with that obviously and I think you know that's structurally higher than where we were as Kellogg's and I think it's just a proof point of a higher growth and a higher profit portfolio that we have in in Kelenova and then I think you know to our confidence in getting to to the 15 margin by 2026 yes the network optimization projects are a contributing factor and you know we'll continue to look at further opportunities but you know all the other drivers you know advantage brands you know our top five brands have higher margins they're 50 percent of expect them to grow faster you know scale in emerging markets getting back to a full productivity program in our supply chain you know some continued revenue growth management all of those would also be contributing factors to get to that 15 percent okay
spk06: great and you mentioned the transfer services agreement as a key piece of how to think about 2024 ebit can you give us a sense of how much that's got a fixed component versus variable or just a little bit of how that might be structured
spk05: yeah so it's about 40 to 50 million a quarter right so you know it'll show through all of 2024 I think you know as we stop providing those services to WKKC and as WKKC contracts for those you know for those services directly those costs will drop from Kelenova and the reimbursement will drop off as well so the vast majority as this thing kind of concludes right as we as we step down from the from the TSAs we'd expect the cost to stop and the reimbursement to stop I mean you know I think a good example you know of that is warehousing right now you know the warehousing you know we are providing the warehousing so we are incurring the costs and then WKKC is reimbursing that to us once the TSA is done they'll have their own warehousing and they'll pay for the warehousing cost directly so you know the cost will stop the reimbursement will stop is it a is it a 100 percent -to-one no but I think you know the vast majority of that is variable there is a small fixed element and I think you
spk06: know that's really helpful color I just want to make sure I understand it when you were talking about the 1850 to 1900 evict guide and and the comparisons that that would fall within that it sounds like some of the the TSA drove I think you said about a mid-teens growth rate where without it be about mid single digit so is that 40 to 50 is there margin on that or how does it hit how does it contribute to even if it's just a reimbursement
spk05: I think it's just timing because you know the growth rate so when you look at 2024 right we are getting reimbursement for all four quarters in 2023 we got reimbursement only in quarter four because that was when the spin so the reason why it's in the teens growth rate is in 24 you've got four quarters in 23 you've got one quarter so it's purely because of the way you know the timing of the spin and and and the and the difference are coming from there
spk06: and a portion of the comparison in the recast numbers not have it okay that's perfect thank you so much
spk05: yeah yeah
spk01: thank you our next question comes from Ken Goldman of JP Morgan the line is not open please go ahead
spk04: hi thank you um I just wanted to make sure 100% because I think I'm still getting some questions about this um and you mentioned Amit that the uh the operating profit number the one uh the 1850 to 1900 does include the headwind of 2% from FX in the press release it does say though that these impacts and you're talking about -to-market adjustments and foreign currency translation are not included in the guidance provided am I just misinterpreting one of those or they seem to be in conflict with each other but I'm sure I'm just missing something
spk08: yeah Ken it's sorry it's just that um our guidance is typically on growth rates which are currency neutral so the table just has that always but we've elected to go with absolute dollars just to help you model so ignore the labeling there is a little bit of that currency impact that I'm going to talk about in those absolute figures
spk04: perfect thank you for that clarification and then not to harp too much on the reimbursements but um is it and I know you're not going to talk explicitly about 2025 yet but it would seem that if you're getting a I don't know roughly 140 million dollar um benefit in 2024 um that some of that you know kind of goes away because you didn't have and again it's not exactly maybe that much we could depend on the timing of everything but is it fair to say you'll have some kind of headwind in 25 as those roll off again with the caveat that it's too early to really discuss specifics
spk05: yeah I think you know there are costs which we're getting reimbursed so I won't characterize it as a benefit we're incurring the costs on behalf of WKKC as part of the services we're providing them and they're reimbursing us for those expenses that we are incurring we would expect those expenses to drop off and uh and uh and you know there's no markup on the service uh so we would expect those expenses to drop off and then the reimbursement to drop off now is it a -to-one not completely but uh you know I'd say the vast majority of those and I think you know like I mentioned in the warehouse example you know that warehouse right now you know we're paying for it and we get reimbursement once they drop off they'll pay for it directly
spk04: no I get that I think and I'll ask this offline I think I'm more asking about the growth percentage I'll ask it offline I'd have a clarification later the growth percentage
spk05: is related to the timing
spk04: yep no I'll ask later it's not worth holding it up the call for it thank you
spk01: thank you I will now pass back to John Renwick for any concluding remarks
spk08: okay well that is up to 10 30 if you do have follow-up questions please do not hesitate to call us and thank you thank you everyone for your interest
spk01: thank you for joining today's call you may now disconnect your lines
spk08: if you do have follow-up questions please do not hesitate to call
Disclaimer

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Q4K 2023

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