The operator welcomes everyone to Kellanova's Fourth Quarter 2023 Earnings Call and introduces the speakers, John Renwick, Steve Cahillane, and Amit Banati. Renwick reminds listeners of the forward-looking statements disclaimer and mentions that the webcast and documents will be archived for 90 days. He also notes that the results and outlook will be presented on an organic and currency-neutral adjusted basis. The press release includes financial results for the fourth quarter of 2023 and recasts W.K. Kellogg Co as discontinued operations in previous periods.

The recast financials will be used as the basis for year-on-year growth rates, except for free cash flow. The accounting guidelines for discontinued operations include expenses related to transition services but do not include reimbursements from WKKC. This creates a difference from the carve-out financials from WKKC. Kellanova's portfolio is more focused and growth-oriented, and their updated strategy is called "differentiate, drive, and deliver." The company had a successful spin-off and delivered solid results for net sales, operating profit, and EPS, which were all better than the guidance provided in November.

The company saw strong organic net sales growth and exceeded their long-term algorithm despite challenging industry conditions. They were able to restore profit margins and generate more free cash flow than expected, allowing them to accelerate share repurchases. The focus is now back on demand generation and they have solidified their plans for 2024. They are confident that their return to a full commercial plan will stabilize and improve volume as the year progresses. The company also expects margin expansion in all four regions in 2024, with strong net sales, operating profit growth, and free cash flow generation allowing for future investment and margin expansion.

In the fourth quarter, the company is investing in future growth by expanding capacity for Pringles in emerging markets and optimizing production facilities in North America and Europe. These actions are expected to result in a 15% operating profit margin by 2026 and align with the company's Better Days Promise program. The financial results for the fourth quarter and full year of Kellanova are shown on Slide Number 12, with year-on-year growth rates based on recast results for the four quarters of 2022 and the first three quarters of 2023.

The company's results for the quarter exceeded their guidance and completed a successful year with consistent and strong performance despite the challenges of executing a spinoff. Net sales increased by 7% and operating profit increased by 30% in the quarter, with even higher growth for the full year. Earnings per share also saw a significant increase, while free cash flow exceeded expectations for the quarter and the year.

The decrease in net sales from last year was due to one-time expenses related to the spin-off and the absence of North America cereals cash flow. Price elasticities rose in quarter four, putting pressure on volume, but volume still performed better than expected due to strong performance in emerging markets. Nonorganic drivers, such as the divestiture of the Russia business and foreign currency translation, had a negative impact on net sales growth. However, the company saw a recovery in profit margins, with gross profit growing and margins being restored in quarter four.

In the fourth quarter, Kellanova's margins improved due to revenue growth management, productivity, and reimbursement of expenses related to transition services. Their gross margin is higher than Kellogg Company's and is expected to continue to improve in 2024. Operating profit also grew in the fourth quarter and the full year, with an expected margin of 14% in 2024. Adjusted basis earnings per share for 2023 fell due to macro-related headwinds, but foreign currency translation had a modestly positive impact.

The company is pleased with their cash flow and balance sheet, despite a negative impact of $300 million from the spun-off North America cereal cash flows and one-time cash outlays related to the spin-off. Their balance sheet remains solid with debt leverage well below their targeted ratio. For their 2024 guidance, they affirm a 3% growth or better in net sales, with the exception of Nigeria where currency influence may impact volume. They will continue to provide absolute dollar guidance for operating profit and affirm a range of $1.85 billion to $1.9 billion.

In 2024, the company expects a mid-single digit growth in operating profit, with continued margin expansion and an operating margin of 14%. Earnings per share is expected to be in the range of $3.55 to $3.65. The effective tax rate is expected to increase to 23%. Interest expense is estimated to be $310 million and other income to be around $50 million. The company also affirms its outlook for free cash flow of approximately $1 billion, with year-on-year growth driven by operating profit. The company is announcing two high return network optimization projects, with upfront costs of $160 million, half of which will be in cash. These projects are expected to become cash neutral by 2025.

The company's savings for the project will start quickly, with a small portion of the overall $75 million coming in the second half of 2024. This will contribute to the company's operating profit margin expanding to 14% this year and reaching the medium-term goal of 15% in 2026. The company's financial condition is in good shape, with margin restoration and volume performance on track, and strong free cash flow. The company's portfolio is split into category groups, which have contributed to strong organic net sales growth in the quarter and for the full year.

The paragraph discusses the performance of Kellanova's North America region in the fourth quarter, which was impacted by rising elasticities and low service levels. Despite this, the region's operating profit grew in the mid-single digits and there was a restoration of underlying gross profit margin and operating profit margin. The snacks business in North America experienced slowing category growth rates, but the company plans to address this with a full innovation launch calendar in 2024. There were also increases in display activity and improvements in the quality of displays.

In the frozen food category, Eggo's consumption declined in the fourth quarter due to rising elasticities, while Morningstar Farms gained share in a declining vegan category. However, these conditions are expected to improve in 2024 with the return to full commercial activity, including new product launches and increased brand building investments. In Europe, Kellogg's saw strong organic net sales growth and operating profit growth, with snacks leading the way.

The company experienced double-digit organic growth in net sales in all major sub regions, driven by revenue growth management actions. The salty snacks category remained in high-single digit growth, with Pringles gaining market share in the UK and Spain. Portable wholesome snacks also outpaced the category in the UK and Italy. In cereals, the company saw organic net sales growth in the quarter, led by revenue growth management actions. In 2024, the company expects to deliver its 7th consecutive year of organic growth, led by snacks and the launch of Cheez-It in key European markets. In Latin America, net sales grew 5% in the fourth quarter and finished the year with 8% organic growth, despite volume declines due to SKU rationalization and price pack architecture initiatives.

In the fourth quarter, operating profit declined due to a strong year earlier period, but overall, the full year showed 8% growth. Snack sales were flat, with Pringles performing well and gaining market share in Brazil. In Latin America, cereals had strong organic net sales growth of 10% in the quarter and 9% for the full year. Looking ahead to 2024, the company expects continued organic net sales growth, led by snacks and cereal, with improved margins. In the EMEA region, organic net sales grew by 22% in the fourth quarter and 17% for the full year, driven by price mix and volume growth in Africa.

In the fourth quarter, EMEA posted solid growth despite currency devaluation in Nigeria. Snacks showed double-digit growth, led by Pringles in emerging and developed markets. Cereal also had sustained growth in emerging markets. Noodles and other products saw volume growth due to revenue management and expansion of the Kellogg's noodles business. The region is expected to continue its growth momentum in 2024, with sustained growth in snacks and cereal, and moderating growth in noodles and other products.

The company expects to continue expanding margins due to lower input costs and increased productivity in markets outside of Nigeria. The Kellanova era has had a successful start, with the company exceeding expectations in the first quarter. They are now shifting their focus to demand generation and are excited about their 2024 commercial plans, which include innovation, brand building, and expanding in emerging markets. The company is also pleased with their progress in restoring and expanding profit margins, and their outlook for 2024 remains intact. They are already working on future initiatives such as adding capacity for Pringles and expanding Cheez-It internationally. The company credits their success to their dedicated and talented employees. They are now open to questions from analysts.

Peter Galbo, a participant in a conference call, asks a question about the company's guidance for the year. He mentions the possibility of edible Pop Tarts being featured at a conference, but the CEO Steve Cahillane informs him that the idea did not survive a bowl game. Peter then clarifies that the operating profit and EPS ranges already include a 2% currency headwind. Another participant, Robert Moskow, asks about the phasing of the company's return to stronger innovation and normal merchandising in North America, and the CEO explains that it will happen throughout the year.

In 2023, the company focused on supply and reduced the number of product variations. However, they have since introduced new innovations such as Pringles Harvest Blends, Cheez-It Crunchy, Pop-Tarts crunchy poppers, and more. This will lead to improved displays and distribution, resulting in growth throughout the year. The company has also increased brand building investments to further drive sales. The top-line growth will be cumulative throughout the year, with the third quarter being the most notable.

The speaker is addressing a question about the company's market share performance in 2023. They explain that the decline in market share was not due to their core products, but rather the lack of support and merchandising for some of their newer innovations. They also mention that their brand health is still strong and they plan to increase advertising and merchandising efforts in 2024 to improve their share performance.

Steve Cahillane and Chris Carey discuss the strength of additional innovation and adding to market share performance. They mention that comparisons will be made against a year with little innovation due to COVID-19, but now they are returning to pre-pandemic levels. They also mention that the frequency and depth of promotions in the market have returned to 2019 levels and that their company is trying to get back to those levels as well. They also discuss operating profit and mention that at the Investor Day, they laid out some dollar expectations by segment.

The speaker says that the company's performance in the past few months has been in line with their long-term growth rates. They also mention the reorganization of the frozen and cereal businesses, which was driven by the need to focus on efficiency and effectiveness programs. This decision was made now that the company has overcome challenges related to supply and the pandemic. The company plans to close a plant and move production to more efficient facilities in the UK.

Kellogg's plans to expand the distribution of its power brands like Cheez-It in global markets, starting with Europe in the second half of the year. This is a long-term strategy and not expected to have a significant impact on the company's top line in the near future. The company has already successfully launched Rice Krispies Treats in multiple countries and expects similar growth for Cheez-It in the future.

The company is looking at expanding internationally with their portfolio, but they will do so in a cautious and practical manner. They expect gross margins to improve for the year, with supply chain costs coming down and some inflationary input costs being offset by pricing and revenue management. This should lead to a balanced and steady progress in gross margins across the quarters.

The company expects their A&P to be more front loaded as they return to full innovation, but they anticipate balanced gross margin progress across all quarters. They clarified that their comment about all regions being within their long-term algo in 2024 applies to both operating profit and organic net sales. North America is expected to see low-single digit growth due to a return to merchandising and innovation. The strong volume growth in EMEA was driven by expansion of their noodles business in Africa JVs, particularly in South Africa and Egypt. This expansion has resulted in leading share positions and will continue in 2024.

The speaker discusses pricing and margins in Nigeria, noting that the elasticities have been better than expected. They also mention the devaluation of the currency and the potential impact on pricing and shipments. The speaker then addresses a question about margins and explains that the starting point for 2023 is lower due to the inclusion of discontinued operations. They express confidence in reaching 15% margins and mention network optimization as a potential factor.

The 13% margin previously reported for Day@K was an internal estimate and the difference between that and the current 12% margin is due to TSA reimbursements for services provided to WKKC. Kellanova expects to reach a 14% margin in 2024 and a 15% margin in 2026, with the Finsar services agreement contributing $40-50 million per quarter. As Kellanova stops providing services to WKKC, costs and reimbursements will decrease.

The company is currently providing warehousing and being reimbursed by WKKC. Once the TSA is completed, WKKC will have their own warehousing and will pay for it directly. The cost and reimbursement will stop, but there is a small fixed element that is included in the 15% by size target. The EBIT guide of $1,850 to $1,900 includes a mid-teens growth rate driven by the TSA, but this is due to timing differences and not margin contributions. The comparison in the recast numbers only has one quarter of reimbursement in 2023, while 2024 has four quarters. Analysts are still questioning if the operating profit number includes a 2% FX headwind, which Amit confirms.

Ken Goldman asks about the impact of mark-to-market adjustments and foreign currency translation on the guidance provided in the press release. John Renwick clarifies that the guidance is typically on currency-neutral growth rates but they have provided absolute dollar figures to help with modeling. Amit Banati explains that the reimbursements they are receiving from WKKC are for costs they are incurring on their behalf, and they expect these expenses to drop off in 2025. However, there may still be some headwind as the reimbursements will also decrease.

During a conference call, Ken Goldman asks for clarification on the growth percentage, but decides to ask the question offline. Amit Banati responds that the growth percentage is related to timing. Ken Goldman thanks them and the operator concludes the call at 10:30. John Renwick reminds participants to call with any follow-up questions.

This summary was generated with AI and may contain some inaccuracies.