WK Kellogg Co (NYSE:KLG) CAGNY 2024 Conference Summary Company Overview - WK Kellogg Co is a $2.7 billion revenue business, a leading player in the cereal category in the US, Canada, and the Caribbean [6][10] - The company operates with approximately 3,000 employees and has a dedicated sales force [6][10] - The leadership team has over 180 years of combined Kellogg experience [6] Core Industry Insights - The cereal category is valued at over $10 billion in North America, being the number one breakfast choice for children and the second for adults [10] - Cereal drives 50 million personal decisions weekly, with basket sizes increasing by nearly 150% when cereal is included [11] - Cereal is low in fat and calories, nutrient-dense, and represents only 5% of added sugar in the average diet [12][13] Strategic Focus and Execution - The company emphasizes a focused strategy on cereal, integrating marketing, sales, and supply chain functions to enhance visibility and decision-making [14][15] - The first strategic horizon focuses on optimizing the existing business, targeting a 500 basis point margin expansion from a 9% EBITDA base [9][54] - The second horizon involves exploring inorganic growth opportunities such as M&A and joint ventures [10] Marketing and Sales Strategy - The integrated commercial plan aims to enhance demand creation and in-store activation, focusing solely on cereal [23][25] - The CORE 6 brands represent approximately 70% of the business, with a strong emphasis on brand marketing and innovation [23][24] - The sales force is dedicated exclusively to cereal, allowing for deeper customer engagement and better execution [36][37] Supply Chain Modernization - The supply chain modernization plan includes a capital investment of $450 million to $500 million over the next two years [46] - The company aims to consolidate manufacturing networks to improve efficiency and reduce costs [44][45] - Recent improvements in customer service have been noted, achieving the highest level since March 2020 [43] Financial Outlook - The company targets a stable top line and significant EBITDA growth, with a disciplined approach to capital allocation [52][56] - The goal is to increase cash returns to shareholders as margins improve, targeting a debt level of approximately 2.5 times EBITDA [56] Cultural and Community Engagement - The "Feeding Happiness" initiative aims to promote healthier eating and community engagement through programs like "Mission Tiger," which supports youth sports [20][38] - The company emphasizes a strong culture driven by employee engagement and a commitment to sustainability [19][20] Key Takeaways - WK Kellogg Co is positioned to leverage its heritage and focus on cereal to drive growth and profitability [4][21] - The integration of functions and a dedicated sales force are seen as critical to unlocking potential in the cereal category [15][36] - The company is committed to modernizing its supply chain and enhancing operational efficiency to support its financial goals [44][52]

[PART I — Financial Information](index=3&type=section&id=PART%20I%20%E2%80%94%20Financial%20Information) [Item 1: Financial Statements](index=3&type=section&id=Item%201%3A%20Financial%20Statements) This section presents WK Kellogg Co's unaudited combined financial statements and related notes, detailing financial position, performance, and cash flows post-spin-off [Unaudited Combined Balance Sheet](index=3&type=section&id=Unaudited%20Combined%20Balance%20Sheet) Total assets increased to **$1,866 million** from **$1,436 million**, while total liabilities rose to **$1,670 million** from **$749 million**, primarily due to new debt and postretirement plan assumptions Combined Balance Sheet Summary (Millions USD) | Account | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | **Total Assets** | **$1,866** | **$1,436** | | Total current assets | $739 | $670 | | Property, net | $721 | $645 | | Postretirement plan assets | $270 | - | | **Total Liabilities** | **$1,670** | **$749** | | Total current liabilities | $931 | 666 | | Long-term debt | $487 | - | | Pension liability | $130 | - | | **Total Equity** | **$196** | **$687** | [Unaudited Combined Statement of Income](index=4&type=section&id=Unaudited%20Combined%20Statement%20of%20Income) Q3 2023 net sales slightly decreased to **$692 million**, but net income rose to **$42 million**, while year-to-date net sales increased to **$2,112 million** but net income declined to **$95 million** due to spin-off costs Combined Statement of Income Summary (Millions USD) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $692 | $705 | $2,112 | $2,018 | | Operating profit | $17 | $7 | $71 | $83 | | Net income | $42 | $23 | $95 | $127 | | Basic and diluted EPS | $0.49 | $0.27 | $1.10 | $1.48 | [Unaudited Combined Statement of Cash Flows](index=7&type=section&id=Unaudited%20Combined%20Statement%20of%20Cash%20Flows) Year-to-date operating cash flow significantly increased to **$184 million**, while investing activities used **$89 million** and financing activities used **$31 million**, reflecting debt and a large dividend Combined Statement of Cash Flows Summary (Millions USD) | Activity | YTD Sep 30, 2023 | YTD Oct 1, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $184 | $53 | | Net cash used in investing activities | $(89) | $(38) | | Net cash used in financing activities | $(31) | $(15) | | **Increase in cash and cash equivalents** | **$64** | **-** | [Notes to Unaudited Combined Financial Statements](index=8&type=section&id=Notes%20to%20Unaudited%20Combined%20Financial%20Statements) These notes provide crucial context on the spin-off from Kellanova, detailing accounting policies, new debt facilities, retirement benefit obligations, related-party transactions, and separation costs - WK Kellogg Co spun off from Kellanova on October 2, 2023, trading as **"KLG"**, with financial statements prepared on a carve-out basis including allocated corporate expenses[22](index=22&type=chunk)[23](index=23&type=chunk)[27](index=27&type=chunk) - The company assumed pension and postretirement plan assets and liabilities, recording a **$130 million** pension liability and **$270 million** in postretirement plan assets as of September 30, 2023[51](index=51&type=chunk) - A new Credit Agreement was established on September 12, 2023, including a **$500 million** term loan and a **$350 million** revolving credit facility, with total borrowings at **$664 million** as of September 30, 2023[56](index=56&type=chunk)[64](index=64&type=chunk) - A **$663 million** dividend was paid to Kellanova on September 29, 2023, funded by new debt financing[39](index=39&type=chunk)[72](index=72&type=chunk) - Significant spin-off costs totaled **$28 million** for the quarter and **$89 million** year-to-date through September 30, 2023[84](index=84&type=chunk) [Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations](index=20&type=section&id=Item%202%3A%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's standalone operations, financial performance, liquidity, and capital resources, addressing challenges like supply chain disruptions, inflation, and market competition - Key business challenges include ongoing supply chain disruptions, inflationary pressures on raw materials and labor, and intense competition in the ready-to-eat cereal category[106](index=106&type=chunk)[107](index=107&type=chunk)[111](index=111&type=chunk) - The company's strategy to combat inflation involves productivity initiatives and revenue growth management actions, including price increases, to offset rising input costs[107](index=107&type=chunk) [Results of Operations](index=23&type=section&id=Results%20of%20Operations) Q3 2023 net sales decreased **1.9%** to **$692 million** despite improved gross margin, while year-to-date net sales increased **4.6%** but net income declined **25%** due to spin-off costs Net Sales Performance | Period | Net Sales Change | Volume Change | Pricing/Mix Change | | :--- | :--- | :--- | :--- | | Q3 2023 vs Q3 2022 | (1.9)% | (13.4)% | 11.5% | | YTD 2023 vs YTD 2022 | 4.6% | (9.7)% | 14.3% | Gross Margin Performance | Period | Reported Gross Margin | Adjusted Gross Margin | | :--- | :--- | :--- | | Q3 2023 | 28.4% | 27.9% | | Q3 2022 | 24.7% | 25.0% | | **Change (bps)** | **+370** | **+290** | EBITDA Reconciliation (Millions USD) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Reported net income | $42 | $23 | $95 | $127 | | EBITDA | $72 | $43 | $174 | $210 | | Adjusted EBITDA | $55 | $32 | $215 | $153 | - SG&A expense increased **30.1%** year-to-date, driven by **$61 million** in incremental separation costs and a **$49 million** increase in advertising and promotion expense[132](index=132&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) The company now manages its own liquidity, securing a new credit facility with **$664 million** in borrowings, and reported strong year-to-date operating cash flow of **$184 million**, while declaring a **$0.16** per share dividend - The company now relies on its own cash flow and credit facilities for liquidity, no longer participating in Kellanova's centralized cash management[139](index=139&type=chunk) - As of September 30, 2023, the company had **$664 million** in borrowings under its new credit facility, with an additional **$436 million** available[140](index=140&type=chunk) - The Board of Directors declared a dividend of **$0.16** per common share, payable on December 15, 2023[94](index=94&type=chunk)[140](index=140&type=chunk) Summary of Cash Flows (YTD, Millions USD) | Activity | Sep 30, 2023 | Oct 1, 2022 | | :--- | :--- | :--- | | Operating activities | $184 | $53 | | Investing activities | $(89) | $(38) | | Financing activities | $(31) | $(15) | [Item 3: Quantitative and Qualitative Disclosures about Market Risk](index=31&type=section&id=Item%203%3A%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks from foreign currency, commodity prices, and interest rates, with primary exposure to variable-rate debt, where a **125 basis point** rate change would have an immaterial impact - The company is exposed to interest rate risk from its new variable-rate Credit Facility, which is based on SOFR plus a margin[161](index=161&type=chunk) - A hypothetical **1.25% (125 basis point)** change in interest rates would have an impact of less than **$1 million** on pre-tax income for the quarter[161](index=161&type=chunk) [Item 4: Controls and Procedures](index=31&type=section&id=Item%204%3A%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[162](index=162&type=chunk) - No material changes were made to the company's internal controls over financial reporting during the third quarter of 2023[163](index=163&type=chunk) [PART II — Other Information](index=32&type=section&id=PART%20II%20%E2%80%94%20Other%20Information) [Item 1A: Risk Factors](index=32&type=section&id=Item%201A%3A%20Risk%20Factors) No material changes were reported to the company's risk factors from those previously disclosed in its Form 10 Registration Statement - No material changes were reported to the risk factors previously disclosed in the company's Form 10 Registration Statement[166](index=166&type=chunk) [Item 6: Exhibits](index=33&type=section&id=Item%206%3A%20Exhibits) This section lists exhibits filed with the Form 10-Q, including key agreements like the Separation and Distribution Agreement, Credit Facility, and CEO/CFO certifications - Key agreements filed as exhibits include the Separation and Distribution Agreement, Tax Matters Agreement, and the new Credit Facility agreement, defining the company's standalone structure and obligations[170](index=170&type=chunk)[171](index=171&type=chunk)