CHICAGO — With profit margins and service levels recovering and volume weakness waning, prospects for the balance of 2024 are positive at Kellanova, the company’s top executive said. After a first quarter that exceeded the expectations of financial analysts, the company reaffirmed its 2024 guidance with increased confidence.

Adding to management’s excitement on a May 2 investment call was the imminent release May 3 of “Unfrosted” on Netflix, a comedy directed by Jerry Seinfeld about the 1960s birth of Pop-Tarts.

Source: Kellanova

Six months after Kellanova was created with WK Kellogg Co as a spin-off from Kellogg Co., Steven A. Cahillane, chairman, president and chief executive officer, said Kellanova was solidly on track.

“We’re two quarters past the spin-off and already the benefits of a more focused, more growth-oriented and more profitable portfolio are on display,” he said. “We again delivered continued on-algorithm financial performance that tracked ahead of expectations. Our stronger commercial plans are taking hold with improving end market performance that is leading to improving volume performance, and this improvement will continue. We continue to progress ahead of schedule in the restoration of profit margins. All of this enables us to reaffirm our 2024 guidance with an increased level of confidence.”

First-quarter net income at Kellanova was $267 million, equal to 78¢ per share on the common stock, down 10% from $298 million, or 67¢ per share, in the same period last year. Net sales were $3.2 billion, down 4.2% from $3.34 billion. Adjusted earnings per share were $1.04, up 33% from 78¢. The company’s adjusted operating margin widened to 15% from 12% in the first quarter of 2023.

Reaffirming its guidance for 2024, Kellanova said net sales growth of 3% or better is anticipated as is operating profit of $1.85 billion to $1.9 billion. Adjusted earnings per share are forecast at $3.55 to $3.65, versus $3.23 in 2023.

Investors reacted to the quarterly results enthusiastically. The company’s shares popped as high as $63.23 in trading May 2, up 11% from the May 1 close.

“We delivered another strong financial performance in the first quarter, marked by improving profit margins and tangible signs that this year's return to full commercial activity is taking hold in the marketplace and beginning to restore volume and share,” Cahillane said.

Adjusted operating profit of the North America business of Kellanova was $269 million, up 39% from the prior year on a currency-adjusted basis. Net sales were $1.688 billion, essentially unchanged from $1.686 billion in the first quarter of 2023. Snack sales during the quarter rose 0.3% in North America while frozen foods sales slipped 0.7%.

Volume was down 4.7%, versus a drop of 6.5% in the fourth quarter last year.

Cahillane was cheered by flat net sales given that the comparison with a year ago is what he called the “toughest” the company will encounter in 2024. He attributed the volume decrease to “industry-wide elasticities” and predicted the moderation of volume weakness to continue through the year because of the company’s stepped-up commercial activities and easing elasticity of demand.

Half of the improvement in profitability was attributed to items related to the company’s spin-off, but the other half was due to improved productivity, service levels and logistics.

“So in spite of soft category demand, North America again delivered financially,” Cahillane said.

Drilling down into individual product categories, he said crackers and salty snacks enjoyed an “upward trajectory” in sales and volume, gaining share, citing increasing merchandising for Cheez-It and share gains by Club and Toasted. Pop-Tarts also gained share in the portable wholesome snacks category, and Eggo began to narrow share losses thanks to improved distribution. Morningstar Farms also picked up share.

Volume weakness centered principally on lower-income consumers, he said, reflecting greater economic pressures faced by that segment.

“We’re probably, as we get into the back half of the year, going to be past the worst of that because of the SNAP benefits, because of the restoration of having to pay student loans, because of the improving economic environment overall from an employment standpoint and from a wage standpoint," Cahillane said. "I think we’ve seen the last of it. So we always forecast elasticities to be the most challenging in the first half of the year and to improve in the back half of the year.”

Explaining his confidence about prospective volume trends, Cahillane said a decrease in food purchases is not sustainable. The effects of GLP-1 drugs on volume have been and will remain minimal, he said.

“You start with the premise that more or less the caloric state remains the same, then the volume goes somewhere,” he said.  "And I think those with the best full commercial activation with brands that matter to consumers are going to be the ultimate winners, and that’s why we’re excited about where we are in terms of our ability to reinvest and continue to step up our investment against the consumer and against household penetration and making sure that we’re delighting our consumers all along the way.”

While consumers under pressure tapped into their pantries to cut back on purchases, “you can only work that pantry so long. The pantry is not an infinite supply of stuff,” he said.

He acknowledged that “new consumer behavior around less food waste and making sure that leftovers are really used” may endure but will level out.

Just back from the Los Angeles premiere of “Unfrosted,” Cahillane called the movie “absolutely hilarious.”

“It’s a farcical take on the launch of our beloved Pop-Tarts,” he said.

In discussion with analysts later in the call, he said Kellanova sees the movie as a unique brand-building opportunity.

“It really is an exceptional movie,” he said. “And when a comedic genius and icon like Jerry Seinfeld makes a feature length movie about your product with a star-studded cast, that gives you an opportunity. So we didn’t know about it, and we’re leaning into it. We’ve got displays going up all over the place. We’ve got a special pack with Jerry’s picture on it, and we’ve got a 90-second video shot by Jerry that’s airing right now. None of that was in the budget, and we were able to lean in, in a meaningful way to really accelerate the Pop-Tarts momentum. So we’re in that type of position right now. So there’s nothing looming on the horizon that’s scaring us. It just allows us to really set up the year for an exceptional performance.”