WK Kellogg Co

Good day and welcome to the Q3 WK Kellogg Co earnings conference call. Today's call is scheduled to last one hour, including remarks by management and then a question and answer session. All lines have been placed on mute to prevent any background noise. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. I'd now like to turn the call over to Karen Duke, Vice President, Planning and Investor Relations. Please go ahead.

Thank you, Operator. Good morning and thank you for joining us today for a review of our third quarter results. I'm joined this morning by Gary Pilnick, our Chairman and Chief Executive Officer, and Dave McKinstry, our Chief Financial Officer. Slide number two shows our forward-looking statements disclaimer. As you are aware, certain statements made today such as projections for the company's future performance are forward-looking statements. 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 factors listed on the disclaimer slide, as well as those in our public SEC filings, including the risk factors in our registration statement on the form 10. 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 and which also are presented on a standalone basis. You can find definitions of each non-GAAP measure and GAAP to non-GAAP reconciliations within our earnings release and in the appendix to the slide presentation. I will now turn the call over to Gary.

Thanks, Karen, and good morning, everyone. Thank you for joining us today on our very first earnings call as WK Kellogg Co. We're excited to be speaking with you as an independent company and to have the opportunity to share our confidence in the strategy we presented at our Investor Day. Today, we will share more detail about how we will be running the business. As a quick overview for today's call, I will provide a reminder that of the underlying logic for the SPIN, discuss our strategic priorities, and discuss our recent performance. I will then turn the call over to our Chief Financial Officer, Dave McKinstry, who will provide additional detail on our performance and outlook. I'll then provide closing comments and open the call to Q&A. Turning to slide four, the key takeaway from our call today is that we're on track, and we're on track in a variety of ways. We're on track to deliver 2023 slightly ahead of the financial targets we provided at Investor Day. We have positive margin momentum in the business as we begin our journey and continue to recover from the fire and strike. Second, we are on track to deliver 2024. And this morning, we reaffirmed our financial outlook. To be clear, during Investor Day, we provided guidance earlier in the cycle than we plan to going forward. and we did so to give clarity ahead of the spin. Today, we are expressing our continued confidence by reaffirming that guidance. We will come back in February during what will be our normal cadence to further refine our financial outlook for 2024. Next, we are on track with key separation milestones. We've successfully executed the spin with minimal business disruption, and we continue to build plans to execute and then exit The transition services agreement, again, with a focus on minimizing disruption as we stand up our independent company. Last, we're on track with each of our strategic priorities that we outlined during Investor Day. While we have been an independent company for just a few weeks, we got off to a fast start. We've been executing on each of our strategic priorities, that is, driving an integrated commercial plan to win, modernizing our supply chain, and unleashing an energized and winning culture. On slide five, I would like to start by recognizing our team and the tremendous work that went into establishing WK Kellogg as a publicly traded company. For over a year, my leadership team has been developing our strategy, creating our organization, building our culture, and executing with the attitude and entrepreneurial mindset of a startup with the discipline and expertise fitting of our 117-year history. The entire W.K. Kellogg Co. organization was enrolled on August 1, the day we entered into what we call company and company, and we have been off to the races ever since. I could not be more proud of how our team is operating and the passion they show every day to drive our business forward. This opportunity is unique, as is the depth and commitment of our people. We are all ready to deliver on our purpose of inspiring great days and to capture significant value for all of our stakeholders. If we zoom out on slide six, this all started with the belief that the cereal business would be stronger as an independent company. By doing so, we would be able to direct our resources towards our unique strategy and unlock the full potential of our business. It certainly comes through in how we plan to run the company very differently, which in turn, we believe, will drive very different outcomes. You can see here our strategic priorities, which have been designed to have the collective impact of driving stable top line and share growth, delivering outsized margin expansion, and generating long-term value for our stakeholders. You have heard us highlight three key themes that cut across all of our efforts. That is focusing, integrating, and investing. For example, we will focus only on winning in cereal. We will integrate the business end-to-end to drive better execution. We will invest in capabilities, technology, and infrastructure, and we'll do so in a targeted, highly disciplined manner. And none of this would have occurred but for the spin, again, reinforcing why we believe W.K. Kellogg is stronger as an independent company. Now, let's look at how the strategy is coming to life. Slide seven. speaks to our strategic priority of driving an integrated commercial plan to win. You will see there are three pillars to this priority. The first pillar brings together the demand creating infrastructure, starting with combining five distinct businesses under the leadership of one commercial team. That is the running the business as one unit while preserving what is unique across the region and channels. This allows us to bring together brand and channel strategies across the business. And we're doing the same with data and analytics, harnessing the power of those efforts under this team. These businesses have already been joined up and we're operating under the new organizational structure. With this demand-creating infrastructure in place, our second pillar will be to drive our consumer impact. By executing our new marketing model, we will focus on delivering greater return through more effective and efficient commercial investments. all of which is underpinned by enhanced data and analytics to drive deeper consumer and customer understanding, the combination of which is intended to be a catalyst for winning in the marketplace. Our third pillar brings this to life in store, what we call the moment of truth. We will activate these ideas with a focused and dedicated sales force selling only cereal. As a reminder, the integrated Kellogg Company sales force was responsible for several categories, most of which were a higher priority than serial. The sales force has been operating since August 1 and has substantially the same customer coverage as did the Kellogg Company sales force with their time and efforts now fully dedicated to driving serial conversion for our customers. This is a place where we chose to put our investment as we designed our organization. Driving an integrated commercial plan to win will allow us to scale up big ideas, drive consumer demand, and more effectively execute with our customers. On slide eight, we'll discuss how integrated commercial strategy is already coming to life. Back in August, our sales force started showing up with customers as W.K. Kellogg and included everything from ordering to shipping to billing. Early feedback has been quite positive. This also allowed us to meet with customers and share our 2024 innovation that has been well received. That said, we aren't waiting for 2024 to win in the market. Here's just one example. Our newly integrated commercial team recently relaunched the Bare Naked brand, which was disproportionately hurt due to manufacturing complexities as a result of the fire and strike. The relaunch focused on increasing taste appeal and driving fun and took an end-to-end approach to enhance the eating experience, new packaging to highlight the food and brand, and new media campaign which surpassed our expectations. Now it's in the good hands of our dedicated sales force to drive merchandising, distribution, and overall performance. Next on slide nine, we outline our second strategic priority, how we will invest to modernize our supply chain. Our balance sheet flexibility will allow us to move from maintaining to modernizing our supply chain, leading to a much more efficient cost structure and agile system. This priority is the centerpiece of our plan to capture the 500 basis points of margin expansion we discussed at Investor Day. Again, there are three pillars to this strategic priority. First, we will be consolidating production, leveraging our more efficient and cost-advantaged facilities and platforms. As we said at Investor Day, there is an approximately 50% cost differential between our highest and lowest cost facilities. We have the ability to move and consolidate production across our network, and we have effectively implemented these types of changes successfully in the past. For example, we continue to expand our production capacity in our Belleville facility. In addition, we're already working with key stakeholders in certain locations to improve plant productivity and economics. Second, as we consolidate, we plan to invest in new infrastructure including adding significantly more flexible and efficient manufacturing and packaging capabilities. Third, we're implementing improvements in our plant operating practices to unlock further efficiencies, which I'll provide an example of in a moment. Consolidating production, investing in new equipment and infrastructure, and improving how we operate would result in a more agile, reliable, cost-effective, and modern supply chain. Looking further at our operating practices on slide 10, we are already taking actions to improve engagement and institute change. In addition to our supply chain investment, our goal is to drive end-to-end operating efficiencies through high performing teams to instill the right mindset and fully leverage our assets. Let me give you a recent example of how our new ways of working can expand capacity, reduce cost, and drive engagement. I wonder if our facilities are cross-functional team of subject matter experts, leverage data and analytics to reduce complexity and streamline processes, which decrease downtime and increase capacity. As you would expect, we are using this as a blueprint to implement these learnings across our network. While just an early example, it's a big change in the ways of working and demonstrates our holistic approach to modernizing our supply chain. Unleashing an energized and winning culture is our third strategic priority on slide 11. Again, three things worth mentioning. First, we recognize this is foundational to everything we do. Having the right culture alone can change the trajectory of a business. And this gives us even more confidence because of the hand-picked organization that the leadership team designed and created over the past year. Second, we will execute this priority like any other. with specific plans, goals, and performance measures to ensure we are executing this well given its significance to the business. And third, it's already coming through the organization. It's coming through our sales force, our manufacturing team, in the Caribbean, in Canada, at our Battle Creek headquarters, across the organization. Our people are engaged, empowered to make decisions, and are driving towards common goals. Turning to slide 12, you could see that we're delivering the consistent foundation that makes our financial model work. By holding our top line flat and executing our supply chain modernization, we will deliver outsized EBITDA growth. Let me provide some context, as there have been meaningful discrete events that have impacted the business the past few years. We relaunched the business in the second half of 2022 as we were coming out of the fire and strike. We had limited investment in the front half of 22, as we were reestablishing supply with our customers. We turned on our commercial activation in a big way in the second half, which included increased investment. We resumed more normalized commercial activity in 2023, where our investment was more evenly spread across the year. The good news is that it has resulted in the type of consistent top line we expect going forward. We started 2023 strong with the launch of our innovation executed pricing, and regained our footing from the fire and strike, all of which allow us to win in the marketplace. We have maintained our consistent delivery into Q3, even in the face of rising price elasticities and a challenged consumer. Now on slide 13, let's take a look at our brands and performance year to date. These brands have broad appeal across cohorts, are supported by proven marketing capability, and have a track record of successful innovation. In fact, WK owns nine of the category's top 20 brands across the US and Canada. This is core to what we bring to the table, a strong foundation from which WK will build. In the US, our share of the market is up 70 basis points this year. Our big six brands are performing well with share growth on Special K, Raisin Bran, and Rice Krispies. We have increased total points of distribution in the US on Frosted Flakes, Fruit Loops and Rice Krispies, and continue to build plans to gain more points of distribution. In Canada, share is up 180 basis points, driven by growth in Frosted Flakes, Rice Krispies, and Vector. The business is on track, and we're executing our plan as expected. Let's look now at how consistent top line is benefiting our profitability on slide 14. On a year-to-date basis, gross margin has improved almost 5%. full percentage points, with three points dropping through to EBITDA. Our improved cost structure reflects our underlying business momentum and our recovery from the fire and strike. We will continue to focus on winning in the marketplace and driving margin improvements. Now let's turn to slide 15 to bring it all together. From this point forward, everything we do is in service of Cereal. Our team wakes up every day focused on executing our strategic priorities. We're leveraging our integrated organization and demand-creating capabilities to drive our commercial plan to win in the market. We are relentlessly pursuing opportunities to unlock profitability and optimize our cash flow. We are not waiting. You already heard about focused initiatives we're implementing to drive better outcomes for this business. We mentioned a couple of examples of how we will operate differently to drive high return on our investments and unlock EBITDA margin growth. When you bring it all together, we plan to win in the market through the launch of our new marketing model, activated in store by our dedicated sales force, and enabled by a modern and reliable supply chain. We are just getting started. I will now hand the call over to Dave to take you through our financial results and outlook.