“When we were first designing the spin [off] of WK Kellogg Co. [from Kellogg as a standalone cereal business], the view was we would be a stronger company as an independent organization” because we could prioritize “everything we do in service of cereal” with the goal of stabilizing the top line and delivering outsized margin expansion in three years, CEO Gary Pilnick said last week at Barclay’s 17th annual Global Consumer Staples Conference.
“Today, we are even more confident about our ability to do both of those things,” and do them more quickly with a new goal of two years, he said.
For support, he noted that WK Kellogg is “performing largely as we expected” with nine of the company’s 11 biggest brands growing at or faster than the category and a tenth brand “making the turn.” He also noted that Frosted Flakes is the fastest growing brand despite being around for 70 years.
“That is what happens when you get the flywheel spinning with merchandising and innovation and ideas,” Pilnick said.
Growth reaffirmed despite category slowdown
Empowered by these early results, the company recently reaffirmed its medium-range guidance, which includes a flat top line within a category that is expected to be flat or down low single-digits over time – an equation that Barclay’s Managing Director and conference moderator Andrew Lazar suggested would require market share gain.
Pilnick said his confidence in the company’s ability to meet this guidance is grounded in the its independent direct sales force, which he acknowledged is “unique for a company of our size,” and its proactive investment of $450 million to $500 million to modernize its supply chain over the next three years.
As part of modernizing the supply chain, WK Kellogg will close one of its existing six plants and take another one “down to size” so it will have four and a half plants that are less expensive to manage and more efficient, said CFO Dave McKinstray at the Barclay’s event.
“While we are standing up a brand-new company, we are also transforming capital, transforming our market, our sales and our supply chain. And we think with those investments, and as we execute, that will be a tailwind for our business going forward,” Pilnick added.
Three lessons learned in the first year
Pilnick’s confidence in WK Kellogg’s short and long-term potential also is grounded in three lessons he said the company has learned in its first year as a standalone business.
The first, he acknowledged, is a “little bit surprising to us,” and it is the company’s increased depth of understanding of the cereal business.
“The Kellogg company 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 the spin. [McKinstray] and the team created [profit and loss sheets] for each of our brands, each of our customers, so the insights in the business now that it is standalone, [is] very different than when it was integrated,” he explained.
This will allow the company to “make more real time decisions as we are running the business.”
This feeds directly into the second lesson, which is the company’s “speed to go from idea to shelf to pantry,” Pilnick said. He described this as “frictionless” now that the company has an integrated sales force and integrated supply chain.
The third lesson learned in the first year is benefit of having a smaller, dedicated team in creating a positive culture.
“You know the expression that strategy eats culture for breakfast? Now we are in that day part, so I think we have standing to talk about this, but before it was 38,000 people. Now it is 3,000. We visited all of our plants on multiple occasions. It is easier to get your arms around the team, to drive engagement, drive inspiration and drive contribution,” Pilnick said.
Reflecting on these lessons and the early results, he reiterated: “The spin logic, we believe, works. We are even more confident today that it was the right decision and we are looking forward to the future.”
