BATTLE CREEK, MICH. — Breakfast cereal manufacturer WK Kellogg Co upheld net earnings growth in its fiscal 2024 second quarter despite slumping sales in a business environment that its chief executive officer called “challenging.”  

Also in its second-quarter report, WK Kellogg revealed details of a three-year supply chain modernization plan disclosed last summer in the prelude to its spin-off from The Kellogg Co.

Net income in the quarter ended June 29 climbed 15% to $31 million, equal to 36¢ per share on the common stock, from $27 million, or 32¢ per share, a year earlier. That followed a big gain in the first quarter, resulting in 21% net earnings growth to $64 million, or 73¢ per share, for the first half. Battle Creek-based WK Kellogg attributed the six-month increase to improved productivity and reduced waste in supply chain operations.

“We are delivering results and are on track for the year, even in light of the ongoing impact of inflation, which has led consumers to become more value-conscious, creating a challenging business environment,” Gary Pilnick, chairman and CEO of WK Kellogg, told analysts in an Aug. 6 conference call.

WK Kellogg noted that adjusted EBITDA fell 11.4% for the second quarter and edged up 1.3% for the half compared with stand-alone adjusted EBITDA. The company said the quarterly decrease reflected the cycling of one-time $16 million insurance proceeds from a fire at its Memphis, Tenn., production plant.

“Excluding the impact of that benefit, both gross margin and EBITDA margin improved more than 100 basis points year over year,” Pilnick said.

Adjusted EBITDA margin stood at 11.6% in the second quarter and 11.1% for the half.

At the top line, second-quarter net sales totaled $672 million, down 3.9% from $700 million a year earlier. WK Kellogg said stand-alone adjusted net sales declined 2.7%, reflecting a 4.8% volume decrease and a 2.1% gain in price/mix. First-half net sales fell 2.9% to $1.38 billion, with adjusted sales down 1.7% on a 4.2% decline in volume and a 2.5% increase in price mix.  

“Overall, our first-half net sales and EBITDA performance has us on track for the year,” Pilnick explained. “While we expect the challenging business environment to persist, these market dynamics emerged and impacted our business in the second half of 2023. So we will begin to lap that impact in the back half.

“Importantly, we are excited about our plans in the back half of the year, including back-to-school, as well as the ongoing benefits associated with leveraging our transforming marketing, sales and supply chain capabilities that are maturing every day. Given these dynamics, we expect volume to sequentially improve in the back half.”

In the United States, WK Kellogg said its dollar sales fell 2.5% and dollar share dipped 40 basis points year over year in the first half. The company’s Next Core cereal brands — Kellogg’s Corn Flakes, Apple Jacks, Corn Pops, Krave and All-Bran — led the way with gains of 2% in dollars and 20 basis points in share, with Corn Flakes and Corn Pops driving share growth. The Core 6 largest brands — Kellogg’s Frosted Flakes, Special K, Raisin Bran, Froot Loops, Frosted Mini Wheats and Rice Krispies, representing some 70% of sales — saw decreases of 2% in dollars and 30 basis points in share during the half. Also declining was the Natural & Organic segment with the Kashi and Bear Naked brands, down 4% in dollars and 10 basis points in share.

“Year to date, our Core 6 has benefited from the performance of Frosted Flakes, Raisin Bran and Rice Krispies, with share gains from both Frosted Flakes and Raisin Bran,” Pilnick said in the call. “Special K has been challenged. We are lapping a large innovation set, resulting in lost TDPs (total distribution points) and lower merchandising activity this year, which was further amplified by having less innovation in 2024. We’re also lapping a large customer-specific activation in Q2. This resulted in share declining 40 basis points year to date. The team is responding to improve our performance and has new commercial activations underway.”

Though Kashi and Bear Naked sit in the growing natural and organic category, Pilnick said the brands were separately managed before WK Kellogg’s spin-off from The Kellogg Co. and thus haven’t yet been able to share in that growth.

“Kashi has had approximately flat dollar sales, and our performance in Bear Naked continues to be impacted by lost TDPs stemming from our granola-related supply chain challenges, which we are in the process of addressing,” he said.

WK Kellogg reaffirmed its previous full-year 2024 outlook of adjusted net sales ranging from down 1% to up 1% and adjusted EBITDA growing 3% to 5%.

“We now expect net sales to be at the lower end of our range,” Dave McKinstray, chief financial officer, said in the call. “We expect sequential volume improvement in the second half, driven by increased commercial activation enabled by improved supply.”

Going forward, WK Kellogg has made supply chain modernization the linchpin of an effort to grow margin. The company first mentioned the strategy in August 2023 at its Investor Day event in New York. Over a three-year time span, WK Kellogg expects supply chain optimization to spur adjusted EBITDA margin expansion of 500 basis points, with adjusted EBITDA margin growing from about 9% to 14% coming out of 2026.

Pilnick gave details of the supply chain initiative in the second-quarter earnings call. The $450 million to $500 million plan calls for investment in new infrastructure, equipment, technology and capabilities and increased production at manufacturing plants in Battle Creek, Mich.; Lancaster, Pa.; and Belleville, Ont. The company also plans a phased closing of its Omaha, Neb., facility by the end of 2026 and a production scale-down at its plant in Memphis. The changes are expected to result in a net reduction of about 550 employees.

“This is a significant step in our journey as we continue to prioritize investments and consolidate production to ensure we have a reliable, resilient, efficient and agile supply chain and, importantly, ensuring our business has the appropriate margin structure to compete effectively,” Pilnick told analysts.

Via the modernization plan, WK Kellogg aims to reduce its “reliance on older, more rigid and higher-cost platforms” to sharpen operating efficiency, he said.