Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kellanova Co (K, Financial) reported strong quarterly results, demonstrating a more growth-oriented and profitable portfolio post-spinoff.
- Year-on-year organic growth in net sales was on target, with sequential volume improvements outside of Nigeria.
- The company returned to full commercial activity with a robust innovation launch calendar, including notable products like Pringles Mingles and Cheez-It in Europe.
- Kellanova Co (K) raised its full-year guidance due to better-than-expected first-half performance, with organic net sales growth now expected to be above 3.5%.
- The company continues to improve profit margins, with a significant increase in brand-building investments and a target of a 15% operating profit margin by 2026.
Negative Points
- Volume declines were noted in Nigeria due to currency-driven price increases, impacting overall volume performance.
- Despite strong performance, the company faces challenges in Europe with volume declines and category elasticities.
- The impact of last year's divestiture of the Russia business and foreign currency translation, particularly the Nigerian Naira, clipped net sales growth.
- Interest expense increased meaningfully year-on-year, reflecting higher interest rates, partially offsetting operating profit growth.
- The company remains cautious about the second half, particularly in Nigeria, where further pricing actions may lead to continued volume declines.
Q & A Highlights
Q: Steve, can you elaborate on the factors driving the sustained volume improvement in North America for the second half?
A: The improvement is primarily due to our return to full commercial activation, led by Pringles. This includes increased distribution, new shelf resets, and a full innovation activation. We are also returning to pre-pandemic levels of price promotion activity in a rational environment.
Q: How do you view the outlook for Europe, given the current volume pressures and upcoming innovations like Cheez-It?
A: Europe remains a challenging environment, but we are confident in our growth plans for the second half. Our football sponsorship and the Cheez-It launch in the UK are expected to drive growth. Despite the tough environment, we anticipate continued growth in Europe.
Q: Can you provide more details on the performance in Latin America, particularly in Mexico and Brazil?
A: Latin America had a strong quarter with growth in both cereal and snacks. Mexico saw record shares in the cereal business, and Pringles performed well despite capacity constraints. Brazil was impacted by floods, but the underlying business remains strong, driven by Pringles.
Q: How is the pricing environment in North America, and do you expect it to remain rational?
A: We expect the pricing environment to remain rational. We are returning to pre-pandemic levels of price promotion activity, which is prudent and balanced. This approach is helping us achieve good volume growth and a healthy balance between price mix and volume.
Q: What are the expectations for Nigeria, given the significant price increases and volume declines?
A: Nigeria's volume declines were better than expected despite significant price increases. We remain prudent in our forecasts for the second half but are encouraged by the current performance. The team is executing well on the ground, and we may see some upside.
Q: Can you discuss the impact of gross margin improvements and how you balance this with customer expectations?
A: Our gross margin improvements are driven by productivity and returning to pre-pandemic levels. We are also increasing brand-building investments, which helps create winning retail programs. The focus is on growing faster than retailers' same-store sales through effective commercial activation.
Q: What is the outlook for innovation growth, and are you back to pre-pandemic levels?
A: We are back to pre-pandemic levels of innovation, and this will continue to improve. Innovations like the Cheez-It launch and Pringles Mingles are expected to drive growth. We have a strong innovation calendar for next year as well.
Q: How do you view the competitive landscape in terms of promotional activity and investment in the back half of the year?
A: We see the environment as rational and expect it to return to pre-pandemic levels. The focus will be on innovation, brand building, and quality merchandising. We anticipate a rational pricing environment going forward.
Q: Why do you believe your business does not need more price investment compared to competitors?
A: We had a strong second quarter and raised our guidance. We feel confident in our innovations, brand-building returns, and geographic portfolio. We do not see the need for additional price investments beyond what we are already doing.
Q: How are promotional lifts trending with the return to more normal levels of activity?
A: Promotional lifts are improving sequentially. The investments we are making are yielding better returns, and we expect this trend to continue into the second half of the year and beyond.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
