WK Kellogg Co's Strategy for Post-Separation Challenges
August 9, 2024
Note: We reveal investment insights through the quotes of top business leaders.
Key Takeaways
- WK Kellogg Co is focusing on driving operating profit growth through improved gross margins and productivity, while excluding separation-related costs for clearer financial performance.
- The company leverages a global footprint and diversified portfolio, benefiting from price increases in devalued currency markets and stronger commercial plans.
- Financial restructuring involves adjusting GAAP measures to exclude restructuring costs and separation transaction expenses, aiming for long-term profit growth and margin targets.
- Significant increase in free cash flow to $209 million due to lower capital expenditures and a $175 million distribution from the postretirement benefit plan.
- Enhanced innovation capabilities with plans for increased new product innovation and quality display activities to delight consumers and drive market performance.
Strategic Vision and Goals Post-Separation
WK Kellogg Co's strategic vision post-separation focuses on driving operating profit growth through improved gross margins and productivity, while investing in brand strength. Financial adjustments exclude separation-related costs, ensuring a clear view of underlying performance and strategic goals.
"Even if you exclude the impact of the year ago absence of transition services expense pass-through, our operating profit grew by more than 6% on this currency-neutral basis, remaining on our algorithm. This underlying growth was driven by an improving gross" --- (K, earning call, 2024/Q2)
"Even excluding the impact of year-earlier recast figures not incorporating the pass-through of transition service expenses, North America's operating profit grew at a double-digit pace, aided by productivity and absorbing increased investment behind our brands. Slide number 27 shows North America split between snacks and frozen foods." --- (K, earning call, 2024/Q2)
"• Adjusted: gross profit, gross margin, operating profit, operating margin, and diluted EPS from continuing operations: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the separation transaction, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, certain equity investments and certain foreign currency contracts, a gain on interest rate swaps, and other costs impacting comparability resulting in adjusted." --- (K, sec filing, 2024/Q1)
Market Positioning and Competitive Strategy
WK Kellogg Co's strategy focuses on differentiation, driving market performance, and delivering value. They leverage a global footprint and diversified portfolio, benefiting from price increases in devalued currency markets. Stronger commercial plans and competitive supplier terms further enhance their market positioning and competitive edge.
"Delighting consumers is never more important than it is right now, and we now have our full plan in the marketplace, which should help us continue to improve our end-market performance in the second half.On Slide number 6, we remind you of our strategy, differentiate, drive and deliver, which we continue to execute, helping us to deliver our near-term commitments, but also to build for a strong future and drive shareowner value.On Slide number 7, we remind you of our global footprint, diversification and exposure to faster-growing markets is a true point of differentiation for Kellanova." --- (K, earning call, 2024/Q2)
"Jeff, I'd like to ask about your ready-to-eat cereal segment. Measured channel data suggests you've experienced a bit more challenged market share dynamics at a time when promotional spend has increased at one of your competitors." --- (GIS, earning call, 2024/Q4)
"Our stronger commercial plans are taking hold with improving end market performance that is leading to improving volume performance and this improvement will continue." --- (K, earning call, 2024/Q1)
"Recently, we have benefited in part from our ability to raise prices significantly in markets where the currency has devalued sharply of late, but it is differentiated growth, differentiated from our peers and differentiated from our past, and it does reflect the benefits of our sharpened strategy and our more growth-oriented portfolio." --- (K, earning call, 2024/Q1)
"We periodically monitor our supplier payment terms to assess whether our terms are competitive and in line with local market terms." --- (K, sec filing, 2024/Q2)
Financial Restructuring and Stability
Kellogg's financial restructuring involves adjusting GAAP measures to exclude restructuring costs and separation transaction expenses, aiming for long-term profit growth and margin targets. Restructuring charges were $70 million in Q1 2024 and $69 million year-to-date by Q2 2024, indicating ongoing efforts to stabilize post-separation.
"• Currency-neutral adjusted: gross profit, gross margin, operating profit, operating margin, and diluted EPS from continuing operations: We adjust the GAAP financial measures to exclude the effect of restructuring programs, costs of the separation transaction, mark-to-market adjustments for pension plans (service cost, interest cost, expected return on plan assets, and other net periodic pension costs are not excluded), commodity contracts, certain equity investments and certain foreign currency contracts, other costs impacting comparability, and foreign currency, resulting in currency-neutral adjusted." --- (K, sec filing, 2024/Q2)
"Restructuring Programs We view our restructuring programs as part of our operating principles to provide greater visibility in achieving our long-term profit growth and margin targets." --- (K, sec filing, 2024/Q2)
"Restructuring Programs We view our restructuring programs as part of our operating principles to provide greater visibility in achieving our long-term profit growth targets." --- (K, sec filing, 2024/Q1)
"Charges incurred related to this restructuring program were $70 million during the quarter ended March 30, 2024." --- (K, sec filing, 2024/Q1)
"Charges incurred related to this restructuring program were immaterial during the quarter ended June 29, 2024 and were $69 million during the year-to-date period ended June 29, 2024." --- (K, sec filing, 2024/Q2)
Operational Efficiencies and Cost-Saving Measures
WK Kellogg Co has significantly increased its free cash flow to $209 million, primarily due to lower capital expenditures and a $175 million distribution from the postretirement benefit plan, highlighting effective cost-saving measures and operational efficiencies.
"Our free cash flow metric is reconciled to the most comparable GAAP measure, as follows: Quarter ended (millions) March 30, 2024 April 1, 2023 Net cash provided by operating activities $ 364 $ 276 Additions to properties (155) (203) Free cash flow $ 209 $ 73 Our non-GAAP measure for free cash flow increased to $209 million in the year-to-date period ended March 30, 2024, from $73 million in the prior year due primarily to the distribution from the Company's postretirement benefit plan of $175 million and lower capital expenditures. Investing activities" --- (K, sec filing, 2024/Q1)
"Investing activities Our net cash used in investing activities totaled $454 million for the year-to-date period ended June 29, 2024 compared to $344 million in the comparable prior year period due primarily to the purchase of marketable securities of $175 million in conjunction with the distribution from the postretirement healthcare plan partially offset by lower capital expenditures." --- (K, sec filing, 2024/Q2)
Innovation and Product Development
WK Kellogg Co is focusing on enhancing innovation capabilities, with plans for increased new product innovation and quality display activities. The company aims to delight consumers through innovation, not just in new products but also in core offerings and marketing strategies, similar to approaches seen in other food industry leaders.
"And so as we look ahead, I feel good about our innovation capability. You will see our percentage of new product innovation come up this coming year." --- (GIS, conference, 2024/05/29)
"And you're seeing that in the softness in both of those brands. But again, as I look at the back half of the year, I have every confidence in the plans that we have in place, including innovation, more innovation and more quality display activity coming to market." --- (K, conference, 2024/06/11)
"So, world class innovation, arguably a little bit different between a grocery business and snacking." --- (CPB, conference, 2024/06/13)
"And we talk about innovation many times just as in new products, but you can innovate on your core and how you're marketing." --- (GIS, conference, 2024/05/29)
"Getting back to delighting consumers through innovation is a key component of what we refer to as getting back to full commercial activity. Another good sign is shown on slide number 11." --- (K, earning call, 2024/Q2)