WK Kellogg Co

Morning. Thank you for attending today's WK Kellogg Co Q3 earnings call. My name is Tamia and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to your host, Karen Duke, Vice President of Finance and Investor Relations. You may proceed.

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 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 differ materially from those projected. For further information concerning factors that could cause these results to differ, please refer to the factors listed on the disclaimer slide, as well as those in our SEC filings, including the risk factors section. 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 gap results. For periods prior to the spinoff, results are presented on a standalone adjusted basis. For periods after the spinoff, results are presented on and referred to on an adjusted basis and compared to our 2023 standalone adjusted results. You can find definitions of each non-gap measure and gap to non-gap reconciliation within our earnings release and in the appendix to the presentation. I will now turn the call over to Gary.

Thanks, Karen, and good morning, everyone. Thank you for joining our third quarter call. Today, I will discuss our financial results and guidance, in-market performance, as well as our back half commercial activations. I'll then turn the call over to our Chief Financial Officer, Dave McKinstry, who will provide additional detail on our Q3 performance and outlook for the year. We'll close out the call with time for Q&A. Let's start by looking at slide three. It's fair to say that the business is performing largely as we expected. For the quarter, net sales increased 0.7%, driven by a balance of improving volume and price realization. Last quarter, we told you we expected stronger second half sales performance due to improvements in our commercial execution and the lapping of the challenging environment that emerged in Q3 of 2023. Indeed, our sales trajectory did improve and was driven by quality commercial programming, better back-to-school activation, continued strength in Canada, and improved performance in non-measured channels. And our supply chain performance is improving as our team continues to deliver better levels of customer service, allowing retailers to replenish inventory to more normal levels, which positively impacted our shipments. Our top line performance, along with continued operational focus and discipline, led to another quarter of gross margin expansion. For the quarter, we achieved gross margin of 29.4%, a 90 basis point increase versus last year. This performance benefited EBITDA, which grew 27.5% in the quarter versus prior year. Overall, we are pleased with how the team is executing and our ability to deliver on our financial commitments in this challenging environment. Our Q3 results puts us in a position today to reaffirm our 2024 net sales guidance and raise our full year guidance range on EBITDA, which is now expected to grow 5% to 6%. Let's turn to slide four to discuss category trends and our performance. The US serial category dollar sales, as measured by Nielsen XAOC, declined 1.4% in the quarter with volume declining low single digits. Both dollar sales and volume improved compared to last quarter. Shopping patterns for the quarter continue to lean towards value-focused retailers and channels. Club and dollar again saw positive dollar consumption growth. This quarter, both were up approximately 3%, driven by a mix of increased display activity and TDPs. Interestingly, while consumers display value-seeking behavior, The granola and premium segments of cereal continue to deliver strong growth. Each saw double-digit dollar consumption growth through positive volume and positive price mix, demonstrating the breadth, affordability, and overall value cereal delivers. Year-to-date, dollar consumption for the category is down 1.2%. The category has performed in line with our planning assumptions and is providing the stable backdrop to execute our strategy. In the U.S., our consumption performance measured by Nielsen XAOC improved sequentially to down 1.8% in the quarter due to increased merchandising with key customers and successful seasonal activations, which I'll talk more about in a moment. We continue to maintain our share position at 27.6%, which improved modestly versus last quarter. We saw share gains during the back-to-school period of August through early September on our participating brands, which we'll discuss in more detail. On volume in the quarter, we also saw sequential improvement in line with expectations and unit volume turned positive, driven by our PPA strategy, which focuses on ensuring we're meeting the consumer with the right product and the right channel. In Canada, our team delivered another solid quarter and outperformed the market, benefiting from quality back-to-school execution and new product introductions. This is a good example of how our increased integration and the new ways of working at WK, where there is fast and effective sharing of ideas across the business. For the year, Canada has increased their market leading position 110 basis points to 38.8%. Additionally, our Caribbean team is executing well and reached a 40% market share during the quarter. While the Caribbean is a smaller market for us, the team's accomplishment is certainly noteworthy. On page five, you could see the performance of our U.S. portfolio. As we said last quarter, our portfolio performance is more easily understood if you look at it in three groups, our core six, the next core, and natural and organic. As a reminder, our core six represents approximately 70% of our sales and includes our six largest brands, which are shown on the slide. The next core contains iconic brands like Corn Flakes, corn pops and apple jacks, and represents approximately 15% of our sales. And finally, Kashi and Bare Naked make up our natural and organic group. In the quarter, five of our core six brands grew or maintained share. This group continues to benefit from the performance of Frosted Flakes and Raisin Bran, which remain two of the fastest growing brands in the category. That said, we continue our work to improve the trajectory of Special K, which, consistent with its recent performance, was down 40 basis points of share in the quarter. While it will take time for the brand to perform to our expectations, the team has a more complete commercial plan for 2025, and we are already getting started with the launch of our new special for a reason campaign. Excluding Special K, our core six was up 30 basis points of share in Q3, and is up 20 basis points of share year to date. Moving to our next core, Corn Pops and Apple Jacks were key brands during our back to school activation and delivered positive dollar consumption in the quarter. In fact, when you look year to date, Corn Pops and Corn Flakes have gained 10 basis points of share, benefiting from improved supply. Finally, our natural and organic group is showing signs of sequential improvement as we're starting to see the positive impact of innovation and our retail sales execution. Bare Naked had improved supply in the quarter, and saw nearly flat dollar consumption along with positive units and volume, affirming that when the brand is on shelf, it performs. We spoke to you about improving supply last quarter, and we are pleased with the meaningful improvement in market. Continuing to build momentum in the growing N&O segment is a big opportunity for WK. Year to date, the majority of our brands have held or gained share, with many growing meaningfully ahead of the category. This performance, driven by improved supply and maturing commercial and sales execution, gives us confidence in our portfolio and our strategy. Now let's look at our back to school activity on slide six. Back to school is an important time of year for Serial. Parents are transitioning to a new routine centered around the morning and looking for our brands to help get the day started right. We are pleased with our first back to school programming as an independent company. Our teams designed commercial activations with the needs of parents in mind, ensuring we show up for consumers in feature and on display. Our end-to-end approach included three elements. First, our new marketing model ran multi-brand campaigns for in-store and digital shoppers, highlighting our back to school brands and what we call our feeding reading promotion, which includes free children's books with the purchase of our products. Next, During the key weeks of back to school, our retail sales force brought this idea to life in store through increased display with key retailers, which drove increased dollar and unit share. And finally, this was enabled by improved supply. Improvement in overall equipment effectiveness, which we refer to as OEE, and customer service are allowing us to return to full commercial programming and execute successfully in store during this meaningful time of year. We believe this is helping us build trust with our retailers. On the Q2 call, we spoke about our back half innovation and tapping into seasonal excitement. On slide seven, let's take a look at how we brought these ideas together with our Halloween innovation Wednesday, a spinoff of the Addams Family story, and the most watched show ever on Netflix. Seasonal offerings play an important role in the category, and Halloween is one of the largest seasonal activations for cereal. Offering such as Wednesday drive category engagement and have become a part of how consumers connect to the holiday. Add to that, these types of purchases are 70% incremental to everyday items and most often bought on impulse, so it's critical to have the right display. In the third quarter, Wednesday was the highest velocity innovation item in the category and had the highest percentage of sales from display, clearly delivering what shoppers are looking for. This is a great example of how we can drive demand when we bring a differentiated offering to the market and deliver value to our consumer. Let's turn to slide eight and look at our supply performance, which makes all of our commercial activations possible. We have consistently spoken to you about investing in and enhancing our supply chain. We know that improved product supply is a key enabler of our integrated commercial plan, and we saw that play out this quarter. Our team delivered a meaningful increase in service levels in Q3 when compared to 2023, driven by optimized planning and improved OEE. This near-term performance is an example of the type of impact our focus and engagement can deliver, while at the same time, we're progressing our longer-term strategic priorities. As a reminder, last quarter, we provided more details about our supply chain modernization journey the plan for our capital investment and network consolidation to drive longer term, sustainable advantage in our business. Supply chain is the foundation of many consumer product companies, and a key strategic priority is strengthening our foundation so we can build into the future. We look forward to providing further updates as we advance this strategic priority. I will now pass the call over to Dave.