Max Gumport: Great. And then just as a follow-up. We’ve been hearing from restaurant companies and some of your packaged food peers about early signs of the shift to food at home as consumers economize and react to inflation. Doesn’t sound like you’ve really referenced that in your remarks. I’m curious if you’re seeing the cereal category showing any early signs of benefiting from that type of dynamic. Thanks. I’ll pass it on.
Gary Pilnick: Very fair. I mean, right now when we see the market, we’re not seeing anything any meaningful change in the trajectory of the business. I mean that would be a potential tailwind as we go forward and I would understand that consumer reaction, but we’re not seeing it in the market right now.
Operator: Our next question comes from Robert Moskow from TD Cowen. Please go ahead.
Robert Moskow: Hi, thanks. I wanted to ask a couple of questions about the margin ramp that you have for the next few years. And you mentioned the new equipment that you’ll be spending on. Can you give us a sense of the degree of, like, unlock that this investment provides you? Like is it very fast? Is this high efficiency equipment that can boost margins parabolically in kind of your out years? And then the second question is, once you’re out of this TSA agreement, is there any noise we should be aware of in terms of like margin progression just like into 2025? Thanks.
Gary Pilnick: Thanks, Rob. It’s an excellent question. So, let’s talk about supply chain right now. And what you’re referring to is one of our key strategic priorities of modernizing our supply chain. You heard us earlier actually reiterate the overall plan that we talked about back in Investor Day about growing, expanding our margin by 500 basis points from 9% to 14%. We also talked about the timing. We reiterated that that would be the run rate coming out of 2026. So that continues to be the way we’re looking at this right now. We could see that flowing through the P&L and we have talked before that the margin enhancement will follow the investment as well. So that’s what I think we should all expect to see over the next couple of years.
I will tell you one of the things that encourages us a great deal about modernizing our supply chain. The Board, senior executives, we were in the plants last week. The enthusiasm is coming through from our people and what’s key for us is when you match your financial investment with your investment in people, that’s what makes the impact enduring. So, we’re excited about that program. We always have been. You heard me talk about that’s not just for margin, but it’s for the top line. So, we feel very confident about our ability to take that forward. I’m going to turn it over to Dave in a second. He’ll probably get into more detail. But when you think about TSA, we’re not seeing a major inflection point as we come off the TSA and we start operating on our own.
But Dave, why don’t I turn it over to you for both?
Dave McKinstray: Yes, Rob, thanks for the question. A couple of things I would say on that. I think if you look at our margin progression over the last six months or so, couple of things I’d mention is our supply chain modernization, we’ve talked about it being a multipronged approach and we’re confident we’ve seen some of the early benefits of that as we think forward. I think Gary put it well of how we’d step into that 14% that he referenced. On the TSA, just one small addition, two big areas where we have TSA is going to be through our distribution and then our IT infrastructure. And how we’ve really built the TSA is that there’s not a margin headwind or tailwind. So, as we’re stepping off, we’re ramping up, right? So those costs are really just being transferred from Kellanova as a TSA provider to other third party or our own infrastructure, whatever it may be, right?
So, you can think about those overall costs considered in our P&L and they’re relatively smooth. They shouldn’t be a big headwind or tailwind as we progress.
Robert Moskow: Okay. Thanks. I do have a follow-up. Last year, you talked a lot about your master brand strategy in advertising and one particular execution of that. And then this year, I think you got some criticism from some unexpected places. Has anything changed regarding the strategy for Master Brand advertising or regarding the execution itself?
Gary Pilnick: Yes. It’s a terrific question. When we talk about that, we talk about multi brand. When you think about multi brand, the reason why that’s effective for us is we get to advertise a combination of brand at the same time with a similar message. That’s what we’re able to do. So, by doing that, you can just imagine the returns would be that much better because we can get to our consumers with our great brands with one message. So that’ll be something that I think we’ll continue doing going into the future because we think it’s quite a good strategy overall and we can apply it to a variety of different brands in different circumstances. Terrific question.
Operator: Our next question comes from Robert Dickerson at Jefferies. Please go ahead.
Robert Dickerson: Great. Thanks so much. Maybe just first question, I think I heard you say Q1 is usually kind of like a naturally higher volume quarter, which I understand. I’m just curious since this is there are a lot of moving pieces to the new co, kind of like how you think about general seasonality of the business, and maybe more specifically, like how you would think about maybe Q4 seasonality relative to Q1 if we were kind of in a normal, not awkward kind of year-over-year dynamic?
Gary Pilnick: Yes, Rob. So, thanks for the question. I think, one a couple of things is seasonality has actually changed a little bit or we’ve seen it change a little bit as we progress through COVID. It will be interesting to see do we continue to move back towards pre-COVID seasonality, do we find a new seasonality. So that’s something we’re still working through a little bit, right? But I would say here’s generally the shape of our seasonality as Q1 has traditionally been the highest volume quarter for this business. There’s a lot of activation around the 1st of the year. In January, it’s typically one of the higher promoted periods of the year. So that really drives Q1. There’s a lot of consumer back-to-routine after the holidays, those type of things.
The other big thing I would talk about is back to school, right? That’s another area where, again back-to-routine, you’re typically getting into the pantry all those different things. Then Q4. Q4 of course you have 2two big seasonal dynamics or holiday dynamics, I guess, I should say around the Thanksgiving holiday and then the Christmas holiday. What that typically does is you lose in the store, there’s a lot of shelf activity, display activity geared towards those holiday seasons, right? So, that’s typically going to be another area where everyday routines are disrupted, right? So that’s going to be a lower volume quarter for us traditionally than Q1.
Robert Dickerson: Okay. Fair enough. And then I guess just kind of speaking to the full year guide on EBITDA, there have been a lot of questions kind of if there are other headwinds forthcoming or how should we think about Q2. But kind of broadly speaking, right, I mean, clearly, if you kind of run rate Q1, you’re ahead of the guide. Sounds like they’re kind of we have the insurance, lap impact, a little bit of the inventory piece kind of in Q2. But then also like as we think about the back half and clearly like back half is lower than the first half, but all that said kind of rolled up into one. It’s like even to kind of get to the high end of the 2024 EBITDA guide, I mean, it clearly implies that Q1 is the highest EBITDA quarter.
And then maybe kind of speaking to seasonality, then maybe like Q4 is the lowest EBITDA quarter. Just trying to, I think, kind of understand broadly like, hey, you had a great Q1 gross margin is better, why not raise the EBITDA guide? Well, there’s some one off, okay, maybe Q2, but then is there anything else we should be thinking about back half? So, a lot in there, just trying to gauge kind of the cadence of EBITDA and why not raise the guide?
Gary Pilnick: No, it’s a terrific question, Robin. The way we’re thinking about it is this. This is the very Q1 of our very first full year. It’s certainly early days. We’re pleased with the way the business is performing. In fact, it performed the way we thought it would perform. So, our view is, feels prudent right now to say, hey, we’re going to reaffirm our guidance. We’re pleased that we could do that. It’s also fair to say when we were confident saying it at our Q4 call, we’re that much more confident saying it now because we have a quarter under our belt. So that’s really the way we’re thinking about it, but appreciate your question.
Operator: [Operator Instructions].
Operator: We have no other questions in the call. So, I’ll pass the floor back to Gary Pilnick to conclude.
Gary Pilnick: Thank you for joining our call today. I hope you heard that we’re on track. Hope you heard that we’re executing our strategy, all of which gives us confidence for the business going forward. We look forward to sharing our Q2 results with you in August. Thanks for joining us.
Operator: This concludes today’s conference call. Thank you for your participation. [Operator Closing Remarks].
