Kellanova and WK Kellogg Co: Breaking down a tale of two opportunities
In June last year, Kellogg announced its Board of Directors had approved a plan to pursue a separation of its North American cereal business via a tax-free spin-off.
Kellanova will feature a growth-oriented portfolio that is weighted toward snacks and emerging markets, led by highly differentiated brands with considerable opportunity for expansion - think Pringles, Cheez-It and Pop-Tarts, and also international cereal brands like Frosties/Zucaritas and Tresor/Krave.
WK Kellogg Co builds on the breakfast cereal giant’s 117-year legacy of innovation, which has earned it a majority hold in the North American cereal market with a portfolio of power brands like Frosted Flakes, Special K and Froot Loops.
“We are excited to be able to share the strategies and financial outlooks for what will be two outstanding companies after the spin-off,” said Steve Cahillane, Kellogg Company’s chairman and CEO at the company’s investor day.
“We’ve discussed previously the benefits of enhanced focus and fit-for-purpose strategies for both standalone companies, and today we will share how these benefits translate into improved financial performance and shareowner value.”
‘Taking our performance to the next level’
Kellanova is poised to become a major hitter in the global snacking market, along with the international cereal, noodles and North American frozen food sectors - with an eye on turning over $13.6bn in net sales for 2024.
The business entity will focus on a strategy coined ‘Differentiate, Drive & Deliver’, which prioritises the ways in which Kellanova will ‘Delight Consumers; Drive a Growth Portfolio; Deliver Perfect Service & Store; Expand Margins; and Live its Better Days Promise’ - quite a task, but full of promise of strong financial performance.
Its portfolio is heavily weighted towards snacking, which in 2022, brought in 60% of the CPG giant’s net sales, growing at a CAGR of around 9% between 2019-2022. The addition of emerging markets bumped it up to 80% of net sales.
In addition to participating in categories with above-average growth - salty snacks, crackers, and portable better-for-you snacks - Kellanova has the backing of formidable brands like Pringles, Cheez-It, Pop-Tarts and Rice Krispies Treats, among others.
The snacks business spans the globe, with roughly 15% of its net sales coming from emerging markets, while International Cereal represented about 20% of 2022 net sales. This business retains all of Kellogg’s international performers, like Frosties/Zucaritas, Tresor/Krave, Choco Krispies, Crunchy Nut, Corn Flakes and Nutri-Grain.
Think Kellogg frozen foods and one instantly thinks Eggo (10% of 2022 net sales), but the business’ Frozen Foods category actually comprises much more: frozen waffles, pancakes, French toast, MorningStar Farms and plant-based foods. These all fall under the Kellanova portfolio.
Finally, Kellogg’s noodles and other business in Africa accounted for just over 10% of 2022 net sales (25% CAGR 2019-22) and offers ‘exceptional near-term and long-term growth’ as Kellanova expands in this emerging market.
In a statement, Kellogg said Kellanova - as a standalone - ‘will benefit from greater operational focus and fit-for-purpose strategy and resource allocation, investing behind its differentiated brands to deliver consistently strong net sales and earnings growth over time.
‘This growth will be complemented by improving profitability through operating leverage, a mix shift toward its most differentiated brands, building scale in emerging markets, and ongoing productivity and revenue growth management.
‘In the near-term, profitability will also benefit from actions taken to mitigate the stranded-margin impact of spinning off WK Kellogg Co.’
All of this is reflected in Kellanova’s financial outlook for 2024, expecting to generate net sales of $13.4-$13.6bn and an adjusted-basis operating profit of $1.85-$1.90bn. With depreciation and amortization remaining at roughly 3% of net sales, this translates into adjusted-basis EBITDA of $2.25-$2.3bn and adjusted-basis earnings of $3.55-$3.65 per share.
Over the long-term, Kellanova is targeting net sales growth of 3-5% on an organic basis; operating profit growth of 5-7% on a currency-neutral and adjusted basis (<15% medium-term target); and earnings per share growth of 7-9%.
“Kellanova is entering an exciting new era, in which we are building on what was already a strong business, applying a sharpened strategy and taking our performance to the next level,” said Cahillane.
“The result is a compelling opportunity for value creation, marked by a more growth-oriented portfolio, better profit margins and faster sales and profit growth, all propelled by a passionate and engaged organisation with huge excitement for the future.”
Adding the spirit and mentality of a startup to a 117-year legacy of leadership
WK Kellogg Co is on the starter block in an already powerful position, with a 117-year legacy of innovation and marketing, a scaled infrastructure, an experienced leadership team and a market leading position with power brands like Frosted Flakes, Special K, Froot Loops, Raisin Bran, Frosted Mini-Wheats, Kashi. The entity will focus on three key cereal markets (US, Canada and Caribbean) and expects to bring in around $2.7bn in net sales for 2024.
The company has installed a three-pronged strategy to ramp up efficiency and agility: greater operation focus and resource allocation; modernising its supply chain; and building an ‘energised and winning culture’, headed by Gary Pilnick, long-time Kellogg veteran. A robust innovation pipeline and new marketing model will ensure ‘compelling’ new products and ‘impactful’ messaging to reel in consumers; capped with a dedicated sales organisation solely focused on cereal.
This focused action is anticipated to generate net sales of around $2.7bn in 2024, adjusted-basis EBITDA of $255-$265m; and stable net sales over 2024-2026 (adjusted-basis EBITDA margin improvement of 500 basis points).
The substantial investment to realign its manufacturing network and introduce new tech and automation expects to show as approximately $500m of debt on its balance sheet in the form of a term loan, however, WK Kellogg Co foresees cash dividends of around 45% in 2024.
“We could not be more excited about the prospects for WK Kellogg Co,” said Gary Pilnick, CEO-designate of WK Kellogg Co. Pilnick has had 23 years with the cereal giant, most previously as vice chair, corporate development and chief legal officer.
“We will start with a strong foundation of powerful, iconic brands and a 117-year legacy of leadership in marketing and innovation. To that, we will add the spirit and mentality of a start-up, with an integrated commercial strategy focused on cereal and a comprehensive plan to modernize our supply chain - all supported by an energised and winning culture.
“The result will be a stronger, more profitable company, well positioned to win in cereal and deliver for our shareowners.”
A copy of WK Kellogg Co’s Form 10 Registration Statement (filed on 24 July 2023) is available on the US Securities and Exchange Commission’s website.
Kellogg Co win over protein content
In other news, Kellogg and its Kashi unit have defeated appeals seeking to revive two proposed class actions that allege false advertising and consumer deception.
The Ninth US Circuit Court of Appeals in San Francisco rejected claims that federally approved labels on more than 30 products sold under the Kashi, Bear Naked, MorningStar Farms, RX and Special K brands overstate the amount of protein they contain.
The plaintiffs had contended the decades-old FDA rules failed to consider protein quality and allowed manufacturers to list twice as much protein as humans could absorb.
They argued the labels “broadly tout protein quantity” without disclosing these amounts include “poor quality” protein the human body cannot absorb.
“Not all proteins are the same, as humans cannot digest or use some types of protein as readily as others,” plaintiffs’ lawyers argued in a court filing, noting Kellogg’s labels do “not account for whether a human can actually use any of the protein.”
Federal law allows companies to base their protein listings on the amount of nitrogen (about 16% of a protein’s weight) released when a product is consumed. The more protein that a product has, the more nitrogen there will be and the amount of protein in a product is estimated by multiplying its nitrogen content by 6.25.
The plaintiffs contended amino acid content testing is more accurate in representing the percentage of protein that can be digested by the human body. As an example, the lawyers highlighted Kashi Go Cinnamon Crisp with its 11g (sic) of protein claim (nitrogen method). Using the amino acid score, this drops to 9.37g of protein, and even further - to 7g of protein - when corrected for protein digestibility by the human body.
However, in a 3-0 ruling (upholding a federal judge’s dismissal of the lawsuits), circuit judge Morgan Christen said that while the text and structure of the FDA regulations showed it could be misleading under federal law to promote protein quantity of on labels, she found no allegations the Battle Creek, Michigan-based company had crossed a line.
“The intricacy of the FDA’s nutrition-labelling regulations reflects the agency’s careful compromises among the diverse interests of its stakeholders,” said Christen.
She added, “If plaintiffs believe that a reasonable consumer would assume that all proteins are created equal and that any products marketed as containing a certain quantity of protein provide identical protein-based health benefits, they are free to urge the FDA to amend the regulations or to challenge the agency’s rules as inconsistent with its statutory mandate.”
She agreed with a lower court judge that federal law preempted the plaintiffs’ claims under California and Illinois consumer protection laws.
Lawsuits
Nacarino et al v Kashi Co, 9th US Circuit Court of Appeals, No. 22-15377; and Brown et al v Kellogg Co in the same court, No. 22-15658.
