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Gary Pilnick

It's a great question. We've been talking about that internally. If you don't mind, I'm going to tease the words a little bit, Andrew. We do think it's been accelerating. We've been watching this for a while. It's the reason why we're able to pivot so quickly and you heard what we're doing and know our plans are in the back half of the year. The reason for that is because we saw this coming.
We actually think it's quite a good thing for the category, a good thing for us, and that's why we're prepared with not just new foods like the. Relaunch, but campaigns across many of our mainstream brands regarding fibre. So, we were prepared for this.
If we sit back and say, why do we think this might be happening? Well, as we're looking at what the, what's happening within the consumer.
Sentiment is obviously down. We're all seeing the same information, so there's continuing interest and focus on value. We understand that. At the same time, in our category, what we're also seeing is some of our consumers are also willing to pay more. It's an interest in health and nutrition.
I think that's going to continue. I think this is simply the continuation of a trend that we saw coming. That at some point started to accelerate and quite honestly, maybe this was just how it would naturally happen, but we don't expect it to slow.
We think this is something that is more than a fad, it's a trend going forward. That's why we're already prepared and we're doing things with our food and our promotion. And again, we think this is quite a good thing for our category and for us because as folks are focusing on a combination of value, on health, those two things, we're a terrific destination for that because we know we can provide that in the category.

Andrew Lazar

Thanks for that. And then just one for Dave. I'm just trying to get a better sense of the magnitude of sort of gross margin contraction expected in the second quarter. And I guess do you think one quarter is enough to sort of right size, finished goods inventory with sort of the revised demand forecasts. Thank you.

Dave McKinstray

Yeah, Andrew, good question. I mean, you can see we've adjusted our top line estimate for the year. So, you know our demand outlook we think is commensurate with what we're seeing in the category, the dynamics we're seeing in the consumer, on which Gary just alluded to, as well as then the actions and activity that we're enhancing in the back half of the year. I Sure you list to the prepared remarks that went through all of that and we can go through that in more detail as well, but our demand forecasts and what we have now guided to considers all that.
And now what we've done is we've adjusted our manufacturing plan that's commensurate with that. We feel good about that. We feel good about where that's tracking like you said. That will mean that we have the largest impact to Q2 as we make those adjustments to our manufacturing plan, but as we move to the back half a year, we should come out of Q2 right sized on the right levels of inventory. We need to operate our business, and that'll set us up then for a more stabilized gross margin performance in the back half.

Operator

Kenneth Goldman, JP Morgan.

Kenneth Goldman

Hi, thank you. Hi guys, thanks so much. I wanted to ask a little bit, one of the comments in the prepared remarks was that the category in the US and Canada continues to provide the stable backdrop you need to execute your strategy.
I know that, you did support the 500 basis points of growth by the end of '26 today, but I was just curious, to circle back a little bit toward the part of the strategy that talks about flattish sales growth, right? And then it may be positive sales growth after '26. I think that's sort of what the initial outlook was anyway.
So just trying to get a sense, in light of kind of some of the challenges you're facing today, how do you think about or how you define stable backdrop just so we kind of understand that phrase a little bit.

Gary Pilnick

No, I think that's very fair. I can I appreciate the question. And when we think about what's happening in the category, the reason we said in the prepared remarks as providing that backdrop, because the way it's performing right now is consistent with our planning assumptions and what we need to deliver our model.
If you take a look in the US, down about 80 basis points, sequential improvement on both sales as well as volume and TDP displays, the fundamentals of the category are solid right now. The key for us is as we're seeing a shift in the category, we need to shift with it, and we believe we could do that. We're confident we could do that.
So if you take a look at what's happening, we know that there's continued interest in value and continued interest and growing interest in health and wellness. That's the place that we're going to go. I talked about that a moment ago during Andrew's discussion. So, we do, we still continue to drive a business that focuses on a stable top line.
1 1 in that range, we talked about that and then that allows us to then deliver the outsized margin growth over the long term. And I appreciate you mentioning the supply chain program. That's the restructuring we're doing. You reach all the way out. That's what delivers. There's a significant amount of margin for us, and most of that is mechanical, as you know. As you get closer in, we're also always looking for ways to drive our profitability, and there we have a variety of things that are in sight right now.
And then if you go to the top line where you were describing, in our prepared remarks, we did talk about the trajectory changing in the back half.
And you heard us talk about very tangible things that we've already done, for example, distribution gains in channels that are winning right now. They're coming online now. They're going to come online in the back half of the year. We talked about incremental investment in our brands. We know that when we do that properly, the top line responses to it.
Dave talks a lot about return. On that investment, the good news is that has been improving. And then you also heard what we're doing with respect to the launches associated with different health and nutrition brands. But don't misunderstand. Our mainstream brands also are getting a lot of attention. We simply we realize we just finished up filming.
I'll give you a secret, Ken. We just finished filming a spot with Tony Hawk. The skateboarder we associate Tony with Frosted Flakes that happened a while back. We're bringing him back into the franchise and we're excited about that. So those are the reasons why the tangible reasons why we do think our trajectory will change in a positive way, and we do need a stable top line to deliver that model, and we feel good that we can deliver on that.

Kenneth Goldman

All right, thanks for that. And then quick follow up, it was mentioned that the higher promotions, reflects a strategic reallocation of the 53-week profit. I think it was mentioned that you're redirecting from some other brand investments. Is it as simple as you're maybe not going to be spending on air as much? Just wanted to kind of get a better sense of which brand investments are not being deemphasized but are sort of, feeling a little bit of that reallocation.

Dave McKinstray

Yeah, Ken, good question. So, I'd start with saying it's not that we're deemphasizing brand investment, we're more strategically shifting that investment. And we're trying to get closer to where the consumer is. So, as we think about that, we've talked a lot about ROIs over the last 18 months.
One of the things that we focused on specifically in our consumer facing investments was our return on those investments over the last 18 months. We've done a really nice job of enhancing the returns on those investments over the last 18 months and that gives us confidence that that's going to provide better returns for us both in the short term but also in the long term as consumers continue to interact with our brands, pick it up off the shelf, or in their online retailer.
So that's how we're thinking about it, Ken, is more just a shift of activity. It's not less brand interaction, but really just how the consumer's interacting with it a little bit differently.

Operator

(Operator Instructions)
Megan Clap, Morgan Stanley.

Megan Clap

Hi, good morning. Thanks so much. Maybe I could just follow up on Ken's first question there on, the category continues, as you mentioned, to perform in line with your expectation and more about your market share performance and it's nice to hear you've identified some fixes, but I guess if we look at the balance of the year, it does.
Seem to imply, you're expecting to get back in line with what the cat how the category is performing so you know how confident are you in that in terms of the fixes that you've identified that you can get back to, performing in line with the category this year.

Dave McKinstray

Yeah, Megan, thanks for the question. I'd start with saying, it's not going to happen overnight. We've said that we'll sequentially improve kind of each quarter into the back half. So, as we think about that and you think about the call the building blocks that we have in the year to go, some of those things are happening now. Gary just mentioned that we're picking up distribution gains in a key channel as we speak that just happened starting really kind of the middle of P4, so that is just getting into.
We have more of that coming as we move into Q3, more coming in Q4, so it is kind of sequenced out that first piece of distribution gains. We talked about the strategic investment allocation. We'll have dollars working harder in the marketplace, both in Q3 and then compared to a year ago in.
For as well. So think about it like that is we'll have a little bit of sequential improvement throughout the quarters as the year goes on, the Kashi-launch, we're excited about that.
We think that that food is going right where the consumer is, so that will be happening right around the end of Q2. So again, these things aren't just a big bang here immediately. They're going to be kind of staged in as the year goes in. And as we think about 2026, all those distribution gains will wrap into next year. Obviously the Kashi relaunch will wrap.
Next year and we're continuing as we talked about at Kearney in the Spoons framework, we're continuing that activity and enhancing our health propositions, both, from the health and wellness and emphasizing the health benefits of our mainstream brands into 2026.

Megan Clap

Okay great thanks Dave that's helpful and then maybe just as a follow up, can you help us understand between in the balance of the year, how the top line guide is changing as it relates to volume and price I think previously you talked about kind of low single digit pricing realization '25, is that still how you're thinking about it? Was the change more on the volume or was its kind of equal between price and volume? Thank you.

Dave McKinstray

Yeah, Megan, so just as a reminder, we executed our second wave of PPA around the middle of last year. So, as we finish our Q2, we will have fully lapped that second wave of PPA in the marketplace. So we would expect to realize price in the low single digits here in Q2 called about the same rate, maybe a little bit less than we did in Q1 and then as we move in the back half we would expect that price realization.
To flatten out, so we would expect our pounds and dollars to move relatively in line in comparison to a year ago, both in Q3 and Q4, and then as we move into '26, we'd expect similar movement.

Operator

Peter Galbo, Bank of America.

Peter Galbo

Hey guys, good morning. Thanks for taking the question, Gary. I want to step back a little bit on the commentary you gave, reiterating the 500 base at this point of even margin expansion still exiting '26 and just based on the commentary both for the quarter today and what we're probably going to see through the rest of the year, with gross margins being flattish, I'm just curious if the.
Complexion of how you're still planning to get to that 500 basis points has changed, and what I mean by that is I think previously we had kind of all expected that it would be, the 500 basis points or close to 500 basis points of gross margin expansion and based on just some of the commentary both for the quarter and for a year to go today, I'm just wondering if that again if that complexion from the gross to even dot margin line has kind of changed in your thinking.

Gary Pilnick

No, it's a fair push. So let me start with them and then I'll back it up.
We're not changing our view on that. So, the view is the 500 basis points would be coming through gross margin. Let me explain, and I'm going to back up a little bit. At Cagney, Sherry talked about the program being on schedule in our budget. She mentioned how we're doing it, the way we're executing it. We have 8 separate initiatives.
By the way, two of the eight work streams are now completed, so the focus continues, and you heard today. We reiterated again that the program is on schedule on our budget, and for us, our ability to start to talk about the same economics today that we did almost two years ago tells us we're on the right path. Now, when we talked about it, we did talk about it being primarily a mechanical impact.
To our P&L because of what's happening within the consolidation of our supply chain network that continues. You already said about talking of 300 basis points or so, give or take. We already delivered about 100 basis points and then the other 100 basis points comes as well, and we believe. Primarily through gross margins, so none of that has changed.
The only thing for us is as time moves on, as we continue to execute, as we continue to make commitments to lock in capital expenditures and the investment we're making, our confidence in the overall program grows.
And yeah.

Dave McKinstray

Yeah, Peter, I think just to elaborate a little bit more, as Gary said in the upfront, 500 basis points, mostly through gross margin. Everything we said remains intact. Now as we think about this year's profit delivery, obviously we just took down our outlook for 2025, but as we think about 2026, we're actively working on how we continue to think about that profit as being delayed into 2026.
And so just kind of start of how you can think about that. I kind of overviewed the top line and some of that wrapping benefit into 2026. Well, that's going to be a benefit into next year. But beyond that, our cost structure, we're currently identifying ways to further enhance our margin, and that's both in gross margin and even a margin. We talked about the fact that we are largely now unplugged from Kaanova, so we have all of our own now SGNA that we are looking to optimize as we move forward. Think about over the last 18 months we've been standing up all of our own distribution centres. Those have been staggered over 18 months. Again, now we're fully separated. We're going to look to optimize that, similar in manufact.
We're always looking at ways to further enhance our efficiencies. So, these are all opportunities, and I'll give you a proof point in the past, we came into last year and we talked a lot about waste reduction. That was an area we identified and we're able to go after and get good winds. So, we're continuing to identify areas like that that will further bolster our 2026 delivery and then the 2027.

Peter Galbo

Okay, thanks for that, guys. That's helpful context and Gary, maybe just a second, there's obviously been a lot of reporting on the competitive dynamic on serial. You have a large competitor who's reducing capacity as well, and I guess I'm just trying to understand kind of the perspectives on again the longer term, prospects for the category in light of some of the actions that are being taken relative to your long-term guidance and. You know what that could mean top line vis a vis.what profitability could look like going forward again if we are going to be in a scenario where the industry is reducing capacity. Thanks very much.

Gary Pilnick

No, very fair, and I think you heard from Dave just a moment ago about our confidence in terms of our profitability. We talked, we already have a massive restructuring going on right now and that's supply chain modernization again on budget, on schedule, so we feel very good about our ability to drive that going forward and also the line of sight that I think you just heard from Dave about additional areas we can go now that we're stood up, now that we're 18 months in, we're past the TSA, we got our distribution set up, our ERP system has been has been cut over, so we have even more opportunity to optimize the organization and our company going forward.
In terms of the top line, I'll go back to what we said earlier about what's happening within the category. The category is holding in. And it's shifting and again we will shift with it. We believe that this shift as it continues, and if it, as consumers are looking for value, they're looking for health and wellness, they're looking for joy and taste, and the consumer is not a monolith. It's a combination of those things, and some want more value than they want more, and some want more nutrition.
No matter what the combination is, the serial category is a tremendous destination for those consumers. If we had to write out what we would want the consumer sentiment to be, to actually to improve our category, to drive our category, this would be it because we know price.
Pound we show up very nicely and compare favourably in terms of nutrition, we talked about our spoons concept. Those are the health credentials relating to our category that largely go ignored or unrecognized or misunderstood.
Those are things that we can get after and that's why with what's happening right now with the consumer, and we're always following the consumer, we think while it's some pressure in the first quarter, undoubtedly, it is a long term tailwind for this business, for the category for this business and for WK.

Operator

Robert Moskow, TD Cowen.

Robert Moskow

I think. Hey, Gary, I didn't see anything in here about the plan for Special K to try to stabilize it. And given that this was a brand that really did have strong health and wellness credentials for a long time, it would seem that there's some kind of pent-up equity there. You didn't mention it in the front of pack labelling that you plan to do for those, for the other brands. Can you give an update on that?

Gary Pilnick

Oh, I'm glad you mentioned it. And you're right, this has significant health credentials. You also saw in the public data that it did, we did not have a good quarter. We lost 40 basis points. And at the same time, we are optimistic about this brand. I go back to what's happening with the consumer.
This brand is at the intersection of taste and health and likely hasn't been as hard hitting on health as we should have been. Now, this trend is now here and what we're starting to do now is stronger focus on the food, stronger focus on, let's say, nutrient density, but also the upcoming coms that you're going to see more food-focused, stronger claims on pack.
What you're going to see is with respect to this trend in health, we have a multi-brand fibre campaign that's coming. We're also launching a Special K protein granola we have in the marketplace right now Special K. Now that food is getting restaged, re-launched. It has zero added sugar and 18 g of protein. So, I think you have it exactly right that this should be a tailwind for us and for the brand. We need to now start shifting this more into the health orientation of what the brand stands for, and that's up to us. But I appreciate the way you asked the question. We do think there's real tailwinds here and this equity should stand up well and respond well to where consumers are going.

Robert Moskow

Okay, and then a follow up, the category where there is growth, it, it's in a lot of small emerging brands. I think a lot of them are very protein forward. Do you have any ability to acquire brands like that, or is your response to those brands just, improve the marketing on your existing portfolio to defend?

Gary Pilnick

My answer to that is an and. So, we like the portfolio that we have. We do believe the entire cereal category should be perceived better from a health perspective. And if you go to our health and wellness brands, we talk about. Re-staging it bare naked. You just made the point about Special K. So, we believe we have the arsenal here. We need to go focus more on that.
It's up to us. Now at the same time, while there are smaller brands in the market that are winning, we could do that too. And you're going to start seeing that in the marketplace as well, but we have, if you remember what happened with the spin, we have access to every piece of intellectual property that existed prior to the spin, and that's any of it from around the globe. That's what we get to use exclusively, perpetually, non-royalty. It's royalty free. We get to use it at our discretion.
So we're able to then go fight that fight the way exactly what you just said, and I have great confidence in the team that we have that we can go do this and do this well. And then you add it to the current portfolio about how we push Kashi forward by restaging that, the special cap point that you made, as well as our mainstream brands. But we could do it too and we're excited about that.

Operator

Thank you, and as a reminder for any final questions, please dial star one on your telephone keypad now, and we'll pause here briefly for any final questions to come in. With no further questions on the line, I would now like to hand the call back to Gary Pilnick for some closing remarks.

Gary Pilnick

We appreciate you joining our call today. You can see how we're moving quickly to improve our 2025 plan, executing what was already in the plan and reinforcing things that will resonate with our consumer, a very challenging and dynamic environment. But you can hear the confidence we have with the plan as we go forward. Importantly, our strategic priorities remain on track, and we're confident in the actions that we're taking to drive the business and create value over the long term. Very much appreciate your time.

Operator

With that, we will conclude today's conference call. Thank you to everyone who joined us today. You may now disconnect your lines.