Dive Brief:
- WK Kellogg will invest up to $500 million over the next three years to update its supply chain as it pursues increased production output and improved profit margins, according to a Q2 2024 earnings call.
- The cereal maker behind Frosted Flakes and Raisin Bran will spend $390 million on new equipment and infrastructure as part of the plan, with the remaining $110 million consisting of a one-time cost to execute the initiative, according to WK Kellogg CEO Gary Pilnick.
- Shifting production capacity is also a priority for the company, as it plans to shutter a cereal plant in Omaha, Nebraska, while streamlining operations at a site in Memphis, Tennessee, and increasing production at other facilities. WK Kellogg CFO Dave McKinstray said the the company will lay off 550 people due to the consolidation.
Dive Insight:
Faced with falling demand in recent years, Kellogg Company split up its businesses into two separate entities last fall. It tasked WK Kellogg with focusing exclusively on reinvigorating the company’s slowing cereal business.
Pilnick expects a more consolidated supply chain will better position the company to “compete effectively,” particularly when it comes to financial performance and improved profit margins. The CEO noted the company’s supply chain modernization effort is “the centerpiece of our margin expansion program.”
The company will shell out roughly $45 million in 2024 as part of the total planned investment, with the bulk of spending occurring in 2025 and 2026, according to WK Kellogg CFO Dave McKinstray.
WK Kellogg’s move to shrink its production footprint is another element of its supply chain strategy. Pilnick said the company is consolidating its rice production, as it no longer serves the Rice Krispies Treats brand following last year’s business separation. The brand is now under the control of Kellanova, the snacks-focused division created by the split.
The company expects to phase out production at the Omaha plant by the end of 2026 and to begin reducing output from the Memphis facility later next year, according to a securities filing.
WK Kellogg is “already making progress” toward its supply chain goals, according to Pilnick, with the company touting its overall equipment effectiveness, consolidated Mini-Wheats production and expansion of its Belleville, Ontario, facility in an earnings presentation.
“When you think about what we’re doing, I think what you should have in your head is production shifting more than anything else, shifting from our oldest facilities to more efficient facilities and from older, more rigid platforms to newer, more agile ones,” Pilnick said.
McKinstray said the company expects to have negative $50 million in free cash flow in 2024 after incorporating the supply chain initiative. The CFO further noted the company will be utilizing the delayed-draw term loan feature on its $1.1 billion credit agreement to help fund its supply chain investments.
“[Our lenders have] been lockstep with this understanding the cash needs, where it’s going, how it’s being spent, the returns we’re getting for it,” McKinstray said on the earnings call. “So we have all that funding committed to us and we feel good about that.”
