“We are the best parent for MorningStar Farms,” which represents about 2% of Kellogg’s net sales and holds significant potential for growth in 2023 and beyond, CEO Steven Cahillane told investment analysts during the company’s fourth quarter earnings call yesterday.
This is an about-face from the company’s position last June when it unexpectedly announced plans to divide its North American cereal and plant-based foods brands from its snacking business “to better position each business to unlock its full potential.”
At the time, Cahillane said Kellogg would consider “other strategic alternatives” for the company’s plant-based business even as it pursued a spin-off.
“We did that,” and the review was “very thorough,” he said. And “given current market conditions as well as our confidence in this business as a long-term growth vehicle, we have decided to retain it as part of the global snacking company.”
He explained: “When we began this process, valuations for peer [plant-based protein] companies were stratospheric compared to where they are today. … So, the thesis when we started the process was to truly unlock shareholder value, if we could attract the same types of multiples in the public market, we should pursue that.”
However, he added, “the environment has clearly changed,” and valuations for plant-based protein companies have “come down quite substantially.”
In 2022, sales and velocities of plant-based meat have fallen with increasing speed quarter after quarter with sales of refrigerated meat alternatives dropping 7.2% in the first quarter of 2022 over 2021 followed by a drop of 14.5%, 15.7% and 17.5% the following three quarters, according to IRI data from 210analytics.
Declining sales has triggered a “shakeout” in the plant-based protein segment, which Cahillane said will leave few brands standing in the end. He is confident, however, MorningStar Farms will be among the surviving plant-based meat brands.
According to Kellogg, MorningStar Farms has grown steadily since it was acquired 20 years ago with estimated 2021 net sales of $304m and estimated EBITDA in June of approximately $50m.
Cahillane also praised MorningStar Farms as having “some of the highest household penetration, highest name recognition, fantastic foods, strength in the freezer space where this consumer is migrating back to, and profitability, unlike many of its peers.”
He also noted “a lot of momentum underlying in our people and their plans” makes him “optimistic” about the brand’s potential in 2023 as do “underlying consumer drivers around health and wellness, around environmental concerns, around moving away from animal proteins, all still remaining.”
Plus, he added, MorningStar Farms “has one of the cleanest labels out there,” which has become a top consumer concern about plant-based proteins.
‘There is no condition by which we won’t execute’ cereal business spin-off
Kellogg’s reversal on the plant-based business prompted at least one investment analyst to ask if there was a risk the company would make the same decision about its cereal business and “if the markets really melt down or valuations change” if it would decide to keep its cereals portfolio intact with the rest of the business.
“You never say never … but we are very, very confident that there is no condition by which we won’t execute the spin by the end of this year,” Cahillane said reassuringly.
He explained: “It is a tax-free spin-off, a dividend to our shareholders really, and so we don’t have to rely on the debt markets. We don’t have to rely on IPO markets, equity markets. It is a dividend to our shareholders and while nothing is without risk, we have a very high degree of confidence, and we absolutely plan on executing this by the end of the year.”