BOSTON — Eleven months after being spun off from Kellogg Co., WK Kellogg Co has emerged as smaller but nimbler company better positioned to leverage its iconic brands to drive growth in the ready-to-eat cereal market, top executives said at the Barclays Global Consumer Staples Conference.

The transaction splitting Kellogg Co. into two public companies — WK Kellogg Co (the North American cereal business) and Kellanova (the global snacking, international cereal and noodles, plant-based foods and North American frozen food businesses) — was completed Oct. 2, 2023. Battle Creek, Mich.-based WK Kellogg represented just 15% of the legacy company’s business, or less than $3 billion in annual sales.

However, WK Kellogg can focus growth on 118-year-old Kellogg’s roots as a cereal company and optimize its organization accordingly, said Gary Pilnick, chairman and chief executive officer of WK Kellogg, in a Sept. 4 virtual chat at the Barclays event in Boston. And since the spin-off, industry analysts have deemed Kellogg’s split as achieving what was intended: enabling two different businesses to perform better on their own.

“The spin logic, we believe works,” Pilnick said. “We’re even more confident today that it was the right decision, and we’re looking forward to the future.”

More agile company

 WK Kellogg’s lineup of household names provided a strong foundation for the new company. Led by the Core 6 brands (Kellogg’s Frosted Flakes, Special K, Raisin Bran, Froot Loops, Frosted Mini Wheats and Rice Krispies) — representing some 70% of sales — the product roster also includes the Next Core brands (Kellogg’s Corn Flakes, Apple Jacks, Corn Pops, Krave and All-Bran) as well as Kellogg’s Honey Smacks, Cracklin’ Oat Bran, Smart Start, Crispix, Mueslix, Vector and Extra cereals plus Kashi cereals and Bear Naked granola.

“When we were first designing the spin, in terms of WK Kellogg Co, the view was we would be a stronger company as an independent organization,” Pilnick said at the conference, whose participants included chief financial officer David McKinstray. “Now it’s a little counterintuitive when you’re part of a $15 billion global company like Kellogg Co. was. But the view was we’d be able to prioritize, and everything we would do is in service of cereal. We recognize that the strategy for WK Kellogg Co, the North American cereal business, would be distinctly different from that of the balance of Kellogg Co., or Kellanova. So we can create our own strategy, we can then get the balance sheet we need to invest in that strategy and then create the organization to execute it.”

Pilnick cited focus and agility as the top advantages for WK Kellogg as a stand-alone company.

“The Kellogg Co. has been at cereal for 118 years, literally, yet our understanding and grasp of this business is so much greater now than it was before,” he said. “During the spin, Dave and team created P&Ls for each of our brands, each of our customers. So the insights into the business now that it’s stand-alone are very different than when it was integrated. We can make much more real-time decisions as we’re running the business.

“The second thing would be speed. As part of an integrated company (with) an integrated sales force and integrated supply chain, now all we do is cereal. The speed to go from idea to shelf to pantry is frictionless. We’re moving incredibly fast.”

The ability to translate ideas into action is “actually faster than we thought it would be” and is expected to provide “a tailwind for the business going forward,” Pilnick said. “Before it was 38,000 people (under Kellogg Co.), now it’s 3,000 (employees under WK Kellogg). We’ve visited all of our plants on multiple occasions, and it’s easier to get your arms around the team to drive engagement, drive inspiration and drive contribution. That’s something we’ve learned over the last year.”

Sharpening the supply chain

A strategic and financial linchpin for WK Kellogg will be its three-year supply chain modernization. Unveiled in early August, the $450 to $500 million plan includes investment in new infrastructure, equipment, technology and capabilities at its manufacturing plants in Battle Creek, Mich.; Lancaster, Pa.; and Belleville, Ont., with a goal of boosting production at those sites as well.

The initiative also will entail consolidation of WK Kellogg’s manufacturing footprint. The company plans to close its plant in Omaha, Neb., in a phased production shutdown beginning in late 2025, with full closure expected near the end of 2026. Production at the Memphis, Tenn., plant also is slated to be scaled down starting in late 2025.

“We’re consolidating our footprint; that creates some simplicity,” Pilnick said. “We’re also investing in packaging, platforms and technology, but also we’re investing in our people. So what comes out at the other end? A tremendous amount of flexibility.”

More flexibility with packaging will enable WK Kellogg to better meet consumer and retailer demand for “the right pack, at the right price, at the right place,” said Pilnick. Likewise, upgraded technology “gives us flexibility to make our current foods and other foods as well,” he said, adding that more digitization will allow the company to “assess the way we’re performing 24/7.”

“We’re now going to leapfrog what we are able to do today to what we could do tomorrow,” Pilnick said.

The supply chain plan reflects financial targets that WK Kellogg announced in August 2023 at its Investor Day event in New York. Over the three-year time frame, the company seeks adjusted EBITDA margin expansion of roughly 500 basis points, leading adjusted EBITDA margin to rise from about 9% to 14% exiting 2026 — with supply chain modernization as the chief driver.

“We are closing one of our plants, and we’re taking one down in size,” McKinstray said. “So what that looks like is 4.5 plants versus the 6 we have today. With that, all of the costs associated with those plants come out of the P&L. Along with that, we’re optimizing our manufacturing network. The cost differential between our highest-cost and our lowest-cost plants is about 50%. So we’re moving production or optimizing our production within those lower-cost facilities. Between the closure of the plant and the optimization of the network, you can see how we have confidence in the delivery of the 500 basis points.”

Bolstering the brands

Eight months into its first fiscal year, WK Kellogg is “performing largely as we expected,” Pilnick said.

Net income for the 2024 first half ended June 29 climbed 21% to $64 million. Net sales for the period declined 2.9% year over year but on an adjusted basis dipped 1.7%, reflecting a 4.2% decrease in volume and a 2.5% increase in price/mix. Adjusted EBITDA edged up 1.3% for the half. In reporting results, the company upheld its previous full-year outlook of adjusted net sales ranging from down 1% to up 1% and adjusted EBITDA growing 3% to 5%.

“We just reaffirmed our guidance, and what gives us confidence, as you take a look at our base business, is 9 of our 11 biggest brands are growing at or faster than the category,” Pilnick said at the conference. “And actually, a 10th might be making the turn,” he added, referring to Special K and noting the brand’s association with health and wellness.

“We’ve already launched a new campaign at the end of Q2 called ‘Special for a Reason’ to get this idea going,” Pilnick said. “Special K has a broad repertoire of products with a variety of nutritional benefits. The key for us is, how do we reach the (consumer) cohorts with our new marketing model to say, ‘We are here for you,’ if you’re looking for proteins, for low-calorie or for folic acid? There are ways for us to do that with our new marketing. That’s just a piece of the puzzle.”

The campaign, designed to spotlight inspiring individuals, includes a collaboration with cookbook author and social media influencer Molly Baz, the first pregnant woman to be pictured on the front of a Special K box.  

“What gives us a lot of confidence is we have a new marketing model, which was different than before as a way to really leverage our media and reach consumers,” Pilnick said. “We have our new sales force, and all they’re doing is selling cereal, with more predictable, reliable supply. That’s what’s underneath all of this, but we have work to do.”

McKinstray said WK Kellogg also expects a second-half lift from cereal partnerships with cookie franchise Crumbl (Kellogg’s Crumbl Chocolatey Chip Cereal) and Netflix for its popular “Wednesday” streaming TV series (Kellogg’s Wednesday Cookies & Creme Cereal).

“We’re excited about those things,” he said. “And early reads are they’re performing well in market.”

WK Kellogg, too, is banking on a rebound from its Bear Naked granola brand this year as supply issues are worked out.

“That is an area where we think will sequentially improve as we move throughout the year,” McKinstray said.

Canada marks a growth opportunity as well. Pilnick said WK Kellogg has been gaining market share in Canada, where cereal consumers are more concerned with wellness attributes. In comparing the Canadian and US markets, he said Mini-Wheats holds twice the market share and All-Bran holds 10 times the share.

“The team is really performing,” Pilnick said of the Canadian sales force. “They’re growing the business across every one of their major customers.”

WK Kellogg also is ensuring its core brands remain vibrant.

“In this day and age, when we know there’s pressure on consumers, premium in our category is also growing, which gives you a sense of the overall affordability of our space,” Pilnick said. “But don’t sleep on our core brands, because if you take a look at what’s happening right now, the fastest-growing brand is Frosted Flakes. It has been around for 70 years. That’s what happens when you get the flywheel spinning with merchandising and innovation and ideas.” MBN