Gary Pilnick
Chief Executive Officer at Kellanova
Thanks, Karen. And good morning, everyone. Thank you for joining our second quarter call. Today, I will discuss our financial results, in-market business performance and the announcement we made this morning regarding actions we are taking to advance our strategic priority, to modernize our supply chain. I will provide detail regarding the scope of our investments as well as how these actions are expected to make us a stronger, more reliable and more agile company into the future. I will then turn the call over to our Chief Financial Officer, Dave McKinstray, who will provide additional detail on our Q2 perform and our supply chain modernization efforts. We'll close out the call with time for Q&A.
What you will hear today, is that 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.
Looking at Slide four, you can see our financial results. Today, we reaffirmed net sales and EBITDA guidance and now expect net sales for the year to be at the lower end of our guidance range. For the quarter net sales declined 2.7%, broadly in line with our expectations, and we delivered gross margin of 30%, which is a sequential improvement versus Q1 and one of the highest levels of gross margin achieved by this business in years.
Our meaningful margin improvement continues to be driven by our emphasis on operational discipline across the enterprise, a key benefit of being a more focused company. It's important to note that we have improved our margin while at the same time increasing investment. We continue to be choiceful and targeted about these investments and remain focused on driving ROI.
EBITDA margin was 11.6% in the quarter, despite the decline in net sales, we were able to improve upon our Q1 performance. This demonstrates our team's strong execution and the resiliency of our business to improve our profitability. As we previously mentioned in Q2 of 2023, we received one-time $16 million insurance proceeds related to the fire at our Memphis plant. Excluding the impact of that benefit, both gross margin and EBITDA margin improved more than 100 basis points year-over-year.
Overall, our first half net sales and EBITDA performance has us on track for the year. 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.
Let's turn to Slide five, to discuss the category and how our portfolio performed in the quarter. The U.S. cereal category, as measured by Nielsen XAOC declined 2% in the quarter and is down 1.1% year-to-date, with volume declining low single digits. As expected in this environment, consumers are more discerning and trends continue to skew towards value oriented channels which are delivering year-to-date dollar growth.
This year, the majority of our portfolio has performed better or in line with the category. Nine of 11 brands are gaining or holding share year-to-date with frosted flakes and raisin brand delivering dollar sales growth. Our overall performance is lagging the category largely due to challenges in special K, one of our largest brands as well as Bear Naked. Despite these headwinds, we are maintaining our U.S. share at 27.6% year-to-date, which has remained consistent from Q4 of 2023, when we first launched as an independent company.
Our volume in the quarter was impacted by the challenged business environment and our PPA transition. On a unit basis, our volume is closer to flat in the quarter.
In Canada, our team delivered another quarter of excellent performance and again grew share, extending our market-leading position. Year-to-date, our share position improved 160 basis points to 39%, led by the performance of our three largest brands in Canada, Mini-Wheats, Frosted Flakes and Raisin Bran.
On Page six, you can see the performance of our U.S. portfolio. Our business is more easily understood if you look at it as follows: our Core 6, the Next Core and Natural & Organic. Our Core 6 represents approximately 70% of our sales and includes our six largest brands, which are depicted on the slide. The Next Core contains iconic brands like Corn Flakes, Corn Pops and Apple Jacks. And finally, Natural & Organic is represented by Kashi and Bear Naked. 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.
Special K has been challenged. We are lapping a large innovation set resulting in lost TDPs 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.
We recently launched a campaign called Special for a Reason, created through our new marketing model, where we utilize digital assets and social platforms to drive increased relevancy. This new campaign highlights what makes this brand so special. Special K has a variety of delicious foods designed with a variety of specific nutritional benefits targeted to specific consumer cohorts. Our commercial team is also being agile and delivered a bold collaboration with celebrity chef Molly Baz, launching a new campaign in less than two weeks that received more than 1 billion impressions.
We have more work to do and it will take time, but this is a good example of being a focused business, which allows us to identify issues and opportunities and act quickly in an end-to-end matter. Excluding Special K, our Core 6 is up 10 basis points of share and grew dollar sales modestly year-to-date. Moving to our Next Core, year-to-date, these brands have gained share due to a mix of TDP and display increases across the group, led by the performance of Corn Flakes and Corn Pops, each growing more than 600 basis points ahead of the market.
Finally, our Kashi and Bear Naked brands participate in a growing segment of the cereal category. As we mentioned previously, these brands were managed separately pre-spin. Year-to-date, the N&O category has dollar sales growth of 7%, including 2% volume growth. That said, we have not yet participated 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. You can see very early signs of improvement in the market data.
We know these brands and their positioning have great promise and the team is excited to drive innovation, refresh marketing, reliable supply and in-market execution.
Slide seven, is the strategy slide we have discussed in the past. We have shared this before and spoke of the benefits of being a focused and integrated company. Today, we'll focus on investment and how we plan to advance our strategic priority of modernizing our supply chain.
Now let's turn to Slide eight. When we introduced our strategy at Investor Day in August of last year, we spoke to you about investing $450 million to $500 million in our manufacturing network, targeting EBITDA margin expansion of approximately 500 basis points, resulting in expected EBITDA margin growth from 9% to approximately 14% as we exit 2026. We also noted that modernizing our supply chain would be the centerpiece of our margin improvement plan. As you have seen in our performance, we are already making progress.
Today, we are advancing our supply chain modernization initiative by announcing the specific details of our capital investment. Importantly, each financial detail is the same as we spoke about at Investor Day. 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.
Of the $450 million to $500 million spend, we plan to invest capital of up to $390 million in new equipment and infrastructure to increase production at our newer, more efficient plants, and we expect to incur approximately $110 million of cash one-time costs to execute the initiative. We are prioritizing and investing in more agile and efficient platforms and reducing our reliance on older, more rigid and higher cost platforms. By doing so, we plan to consolidate our overall network footprint, which would drive improved operating efficiency.
We plan to close one of the oldest facilities in our network where we have aging infrastructure, older platforms and less efficient building configuration. In addition, we no longer make the rice for Rice Krispies Treats since the spin. As a consequence, we are reducing production at another facility as we consolidate our rice production. Production would begin to move in late 2025 in both facilities, with completion expected in late 2026.
These are necessary decisions made with thoughtful consideration to ensure our supply chain network is more reliable and allows WK to thrive into the future. And they are challenging as well as they affect our WK people. We recognize and appreciate the tremendous contributions of our WK teams at these facilities over the years, and we will ensure our employees are fully supported through the transition.
I'll now hand it over to Dave, who will provide more details on our Q2 results and our supply chain investment.
