Release Date: May 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kellanova Co (K, Financial) reported a strong start to 2024 with better sales growth, profit margins, and cash flow than projected.
- The company reaffirmed its 2024 guidance with increased confidence due to over-delivery in the first quarter.
- Organic net sales growth remained above the peer group median, benefiting from pricing strategies and a growth-oriented portfolio.
- Kellanova Co (K) is making significant progress in emerging markets, adding capacity for major brands like Pringles, and investing in brand building.
- The company's strategy to focus on differentiated growth and operational efficiency is yielding positive results, with continued margin expansion and profitability.
Negative Points
- Volume declines were noted due to elasticity impacts around the world, particularly affecting the U.S. market.
- Foreign currency translation negatively impacted net sales growth by a significant margin, especially from the Nigerian Naira.
- Despite overall growth, certain regions like Latin America experienced a decline in operating profit against strong year-earlier growth.
- The company faces ongoing challenges with currency devaluation, particularly in Nigeria, affecting pricing and volume metrics.
- Kellanova Co (K) is still navigating the complexities of the post-spin-off environment, including managing transition service agreements and optimizing the network.
Q & A Highlights
Q: Just in scanner data. I know it doesn't cover everything. But -- and clearly, you're able to perform quite well anyway lately. But just noticing that as we've seen for a little while now, private label continues to gain share in both crackers and potato chips, maybe at a little faster rate than they are in most food categories. So I'm just curious as we -- maybe you think about 2Q and 3Q with some of the, maybe elasticity fading trends, as you mentioned, maybe some lapping of last year's SNAP reduction.
A: Yes. Ken, we don't really see the same thing that you're talking about in terms of private label. It's been a little bumpy, to be honest with you. And if you look back to, say, 2019 all the way through this year, there's no meaningful moves in private label in the categories that you mentioned. And if you look at PWS, portable wholesome snacks, there might be a little bit more movement there. But I think it's really a story of not much to see there when you take all the noise out because you do have private label last year spring a little bit more due to supply disruptions, bottleneck shortages. So there's some of that's just coming back to where it was. I think equally, there is in the nonmeasured channels, as you said, growing faster. And so you can't always look at the syndicated data as a complete proxy for our own top line performance because of that growth and the growth in away-from-home channels as well, which has been very good. So I think, not to be -- I hope you don't take that as a dismissive comment, but I think it's not as much to see as you might really think as you really analyze the fulsomeness of the data.
Q: First, just on the TSA impact. I think we've got the moving pieces now, but it sounds like maybe it was $45 million to $50 million benefit on EBIT and then maybe the $35 million of that was on the gross profit line? Do I have that right in terms of the size of the TSA with the reimbursement piece?
A: Yes. I think you've got that right. I think the TSA reimbursement was around $45 million, and that split between gross profit and SG&A is about right.
Q: So I think you mentioned at the beginning that the first quarter was coming in a bit better than expected on both the top and the bottom line. I'm wondering, therefore, why there wouldn't be a guidance raise at this point or whether maybe there are things on the table that are still highly uncertain. I mean we've just mentioned the consumer. Maybe you could just speak to what you see as the key uncertainties as we move through the next few quarters?
A: Yes. I think Alexia, it really comes down to the simple fact. It's only the first quarter. So there's always uncertainty with 3 quarters to remain but it really gives us the very strong confidence that we're going to deliver a very good year. And what I mean by that is it allows us to really think about the best levels of reinvestment that we can do.
Q: I wanted to just try to bridge the profit improvement you saw in North America. I think even excluding the TSA contribution that you noted, we'd be looking at almost a 20% increase in operating profit relative to last year's adjusted number. Clearly, the positive pricing would seem to have offset the volume declines. But just wondering on other items. It does seem like investments were stepped up, but the cost environment maybe is a bit more favorable? And then kind of how does that cost environment progress as we think about subsequent quarters?
A: Yes. I think very strong performance in our North America business this quarter. So very pleased with that. I think it's all the factors that you mentioned. So it's the benefit of the revenue growth actions that we took last year. It's a moderating cost environment. So we're seeing that play out. I think this quarter, the supply chain performed well. And from a lapping standpoint, this was the biggest lap from the shortages and bottlenecks. So those were kind of some of the drivers.
Q: Last quarter, I think you guided to 20% for the year, North America Snacks organic sales growth, low single digits. Is that still the thinking? And if so, how do you envision price versus volume this year for North America? Just looking at the last 4 weeks, and I know you highlighted in the last 4 weeks, I don't know if that composition is how you're thinking things will play out. But it does look like price per unit is down low single digits with volume offsetting that, and I'm not sure how indicative that will be?
A: Yes, David, I think if you look at what's happened in the last 18 months, 2 years, been too much price and not enough volume for obvious reasons. And now we're seeing the -- we're starting to see the reversal of that in North America. And as I mentioned several times on the call now, we're seeing a better volume performance. You can see that in the latest published data. We're seeing a gradual recovery in that.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
