WK Kellogg Co

Hello, everyone, and welcome to the WKK Log, fourth quarter 2024 earnings call. My name's Lydia, and I'll be your operator today. After the prepared remarks, there'll be an opportunity to ask questions. If you'd like to participate in our Q&A, you can do so by pressing star followed by one on your telephone keypad. We kindly ask that you limit yourself to one question and one follow-up. I'll now hand you over to Karen Duke, Vice President of Finance and Investor Relations to begin. Please go ahead.

Thank you, Operator. Good morning, and thank you for joining us today for a review of our fourth quarter results. I'm joined this morning by Gary Pilnick, our Chairman and Chief Executive Officer, and Dave McKinstry, our Chief Financial Officer. Slide 2 shows our forward-looking statement disclaimer. As you are aware, certain statements made today, such as projections for the company's future performance, are forward-looking statements. Actual results could differ materially from those projected. For further information concerning factors that could cause these results to differ, please refer to the disclaimer slide in our earnings presentation, as well as the disclaimers and risk factors noted in our SEC filings. 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. For periods prior to the spinoff, results are presented on a standalone 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-GAAP measure and GAAP to non-GAAP reconciliation 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 our fourth quarter call. Today, I will discuss 2024, including our financial results and in-market performance. I will also provide highlights of 2025, including our progress on strategic priorities. I'll then turn the call over to our Chief Financial Officer, Dave McKinstry, who will provide additional detail on our 2024 performance and 2025 guidance. We'll close out the call with time for Q&A. Let's start by reviewing 2024 on slide three. As we all step back and reflect on our very first year as an independent company, we're proud of what we've accomplished. First, we're successfully progressing our strategic priorities through focused execution. For example, every day our dedicated sales force is in store selling our iconic brands and delivering our integrated commercial plan to win. The capabilities of the team are maturing and our connections with store managers and overall relationships with retailers are growing. We also launched our new marketing model and can already see the benefits of our enhanced capabilities through better return on investment. Another key strategic priority is modernizing our supply chain. During our Q2 call, we announced the details of our plan and, importantly, confirmed all of the economics that we provided at investor day in 2023. We're investing up to $500 million while expanding margin by approximately 500 basis points as we exit 2026. Execution of this strategic priority is on track and our supply chain performance is already improving. Second, we are investing to build a strong foundation for the future by creating our own operating infrastructure across the company. As part of the spin, we have been separating just about every aspect of our business from Calanova. Our business was highly integrated with CalOAD North America, and we are now close to completing the separation activities associated with becoming a standalone company. This has required investment and has been a major body of work, which has utilized resources from across the entire organization. Two of the key separation initiatives include transitioning to our own independent warehouse network, which is largely complete. We're also creating our own scalable IT infrastructure. This means we'll be able to utilize systems and tools that are fit for purpose and built to serve our unique business. We're pleased with the progress we've made to date and expect to exit all of the transition services by the middle of 2025. Finally, we accomplished all of this while delivering against our financial goals in a challenging environment. We delivered top line results broadly in line with our expectations, drove margin expansion, and grew Epidot ahead of our raised guidelines. Across the organization, we're focused and disciplined, and our teams are energized to continue our journey as we transform this business together. Now let's take a closer look at our performance for the year on slide four. For the year, net sales declined 1.1%, or 0.9% when excluding the impact of currency. During the fourth quarter, the Canadian dollar weakened considerably relative to the U.S. dollar, which negatively impacted our full year net sales delivery by 20 basis points. We're pleased with our commercial execution, improving our return on investment, while also ensuring we're delivering value for the consumer. We remain focused and disciplined, taking a balanced approach. The same focus and discipline are evident in our gross margin delivery. Gross margin for the year was 29.8%, an increase of 90 basis points. A key driver of our gross margin performance was improved supply chain operations. We drove better end-to-end execution in 24, becoming more efficient, reducing waste, and enabling our top line through improved customer service. This performance benefited EBITDA, which grew 6.6% for the year, exceeding our raised guidance expectations of 5-6% growth. EBITDA margin for the year was 10.1%, a 70 basis point improvement versus the prior year. A key element of our value proposition and strategy is expanding EBITDA margin from 9% to approximately 14% as we exit 2026. We are on track to deliver that target, even in a challenging operating environment, demonstrating the team's ability to execute and the earnings power of our business. Let's turn to slide five to discuss the category trends and our performance. The category in the US and Canada is providing the backdrop to execute the strategy I mentioned a moment ago. For the year, US serial category dollar sales, as measured by Nielsen XAOC, declined 1.3%, with volume declining low single digits. In the U.S., in-market dollar sales for WK, as measured by Nielsen XAOC, were down 2.8%, and we ended the year with a share of 27.4%, a decline of 40 basis points versus the prior year. We saw the challenging environment persist in Q4, with consumers continuing to seek value which resulted in increased levels of promotional activity within the category. That said, our promotional activity was similar to that of Q4 2023, which impacted our top line and share position for the quarter and the year. Despite that, we've broadly delivered against our financial goals and our strategy remains on track. Our plans assume that the challenging operating environment will persist in 2025. We will apply the lessons learned from 2024 and remain disciplined in our approach to driving demand through exciting innovation, brand building, and delivering consumers the right pack at the right price in the right channel. In Canada, our team delivered yet another solid quarter, holding share at 39.2%. For the year, Canada has increased their market leading position by 90 basis points to 38.9%. Additionally, our Caribbean team grew share 50 basis points for the year. Looking at slide six, you could see we improved our overall supply chain performance in a year where we made difficult decisions and announced the planned consolidation of our manufacturing network. We delivered a meaningful increase in customer service levels in 2024, driven by optimized planning and improved overall equipment effectiveness, or OEE. These improvements have been at the center of our margin improvement and EBITDA delivery in 2024. Notably, we've achieved these improvements before realizing the benefits of our capital investment. This improvement is coming for focus, integration, expanding capabilities, and driving better engagement. You can see how through our supply chain, we are already building a foundation that is stronger, a foundation from which we can build. You also know the importance of innovation in our category. Slide seven shows the breadth of our innovation plan for the first half of 2025. It is important to note the impact of what we like to call platforms. Let's start with Blaze, which is what we would call our very first food platform launch. This concept allows our R&D teams and growth teams to work together to create fantastic foods and then leverage our key brands such as Frosted Flakes, Apple Jacks, and Crave. Raisin Bran is a good example of how we activate brand platforms. Several years ago, Raisin Bran Crunch was developed, which is now even bigger than original Raisin Bran. Last year, we launched Frosted Bran, which includes our delicious Raisin Bran flakes without the raisins. And then this year, we take that chassis and launch Blueberry Bran Crunch. You could see the flexibility of this food form and how that brand can grow going forward. And we will continue to expand our format platforms with new on-the-go offerings, building upon our success in cups this year, and we're extending our granola platform, including launching bare naked oats and honey. Innovation is a key component of our plan, and we're very excited about 2025. Before I turn it over to Dave, let's turn to slide eight to review more of what's to come in 2025 as we execute our strategy and continue building for the future. Our commercial plan is enhanced, driven by the innovation we just reviewed. and our execution will be stronger as our new direct sales team is maturing and will leverage their experiences from 2024. The investment to modernize our supply chain continues with a significant amount of construction work scheduled to be completed this year. We will also finalize separating from Calanova. As I mentioned earlier, we expect to exit all of our transition services by the middle of the year. We also expect to continue to deliver against our financial goals. maintaining a stable top line and driving EBITDA growth of 4% to 6%. As we noted in our press release, our 2025 guidance does not include any impact from the potentially significant tariffs on Mexico and Canada, which could create an additional challenge for the business. Of course, we're undertaking a review of our operating plans, doing scenario planning to see how we might be able to partially mitigate an impact from those tariffs. I'll now turn the call over to Dave, and as I do, we hope you can see the strength of our execution and the focus of our team. We are confident that we have the right strategy and remain well-positioned to navigate through a dynamic operating environment.