Q4 2019 Earnings Call
Hosting the call today sometime around the Telly, President and Chief Executive Officer, and just <unk> Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at <unk> PM Eastern time.
The dial in number is 805 858367 and the pass code is 9777955.
This time, all participants have been placed in listen only mode.
It's now my pleasure to turn the floor over to Jennifer Meyer Investor Relations Post holdings for introduction you may begin.
The warning and thank you for joining yesterday proposed fourth quarter 2018 earnings call with me today, or Rob Vitale, our president and CEO and just data our CFO .
And Jeff will begin with prepared remarks.
The words will have a brief question answer session.
The press release of support these remarks of course on our website.
On the Investor Relations.
Filings auction I post holdings that.
In addition to really because available on the Fccs website.
Where we continue I would like to remind you that this call will contain forward looking statement, which are subject to risks and uncertainties there should be carefully considered by investors.
Actual results could differ materially from these days.
These forward looking statement our current as of today this call and management undertakes no obligation to update.
As a reminder, this call is being recorded an audio replay will be available on our website.
Finally, this call will discuss certain non-GAAP .
A reconciliation of these non-GAAP measures to the nearest GAAP measure see our press release issued yesterday imposed on our website.
I will turn the call over to Rob and good morning.
Thanks, Jennifer and thank you all for joining us this morning, I'm going to very briefly go over our 2019 results. Most of my comments address our strategic activities and our 2020 expectations.
Our fourth quarter came in as expected each business performed reasonably well for the full year consolidated adjusted EBITDA of 1.21 billion landed at the midpoint of our guidance range. This represents a growth rate of 5.4% on a pro forma basis, which exceeds our long term algorithm of 3%.
Jeff will discuss the breakdown of our segment performance. The key strategic initiative for 29 team was the IPO of our active nutrition business now known as building brands I think it began trading on the NYSE on October 17 under the ticker be RB are.
Want to thank and congratulate our teams for the exceptional effort that made the IPO possible.
The legal and tax structure is complicated but in essence post sold to the public was approximately 29% of its equity interest in the active nutrition business.
And retain ownership of 71%.
Document illustrating the structure is posted on our website and on the Fccs website.
During is well positioned as a leader in convenient nutrition.
And we look forward to continuing to support its growth.
I can hear directly from the Bell ring leadership team and our conference call later this morning.
We continue to believe that we should receive government clearance for acquisition of the Treehouse ready to eat cereal business.
We believe that there's intense competition in the cereal business and that this deal is unambiguously pro consumer.
And the efficiencies achieved will allow us to compete more aggressively.
We were surprised at this combination has received the degree of scrutiny that it has but we are actively engaging with the FTC and.
And we hope to convince the FTC to prove the transaction so.
Our outlook for fiscal 2020, adjusted EBITDA, including 100% contribution from filtering.
He is $1.22 billion to $1.27 billion, which.
At its midpoint is in line with our 3% long term growth algorithm.
We expect modest favorability to the second half of the year.
As you like we have seen.
Filtering has guided for fiscal 2020, adjusted EBITDA at a range of $192 million to $202 million.
Our guidance incorporates among others the following assumptions.
We continue to see the domestic in UK cereal markets as flat to slightly declining.
Our promotional timing favors the second half of 2020 in response to product introductions and competitive activities.
Demand growth remained strong for foodservice business or retail side, this business and our convenient nutrition products.
We faced commodity inflation in our retail businesses, but we have various tools to offset it including pricing and cost reduction.
Labor markets remain tight through most of our manufacturing footprint.
Accelerating demand in foodservice and retail refrigerated potato products have pressured category wide capacities, we will incur costs associated with expanding trapped capacity and third party sourcing as we navigate the supply constraint.
These capacity limitations will temporarily dampened consumption growth.
Filtering adjusted EBITDA growth is expected to be below historical trends for 2020.
As we invest to support substantial topline growth.
And incur approximately $7 million of incremental public company cost.
And lastly, we assumed the pound to dollar exchange ratio of 1.2 way.
Again, we expect these assumptions to build to a year that will be in line with our long term algorithm.
Both with respect to growth and with respect to cash generation.
Recall that post owns approximately 6% of the common equity of eighth Avenue food and provisions.
We do not consolidate eighth Avenue because of capital structure and the control provisions are more akin to a minority investment.
Having no had a challenging 2019 and its adjusted EBITDA forecast for 2020 is a range of 101 under 5 million.
Capital structure includes net debt and preferred equity of 920 million at September Thirtyth.
These estimates exclude any impact of the plant acquisition, we announced last week.
Regarding capital allocation in 2019, we generated 688 million in operating cash flow and we invested approximately 270 million and internal capital projects.
We repurchased 3.3 million shares of common stock for $331 million.
Considering adjusted EBITDA growth organically generated cash flow and the proceeds from the IPO, we meaningfully reduce leverage.
For 2020, I would anticipate a similar approach to capital allocation, which you're marks free cash flow towards investments shares M&A for debt reduction an opportunity opportunistically uses the balance sheet, depending on capital market conditions.
With that I will now turn the call over to Jeff.
Thanks, Rob and good morning, everyone.
Our consolidated results this quarter met our expectations adjusted EBITDA for the quarter in fiscal year were 303.6 million and $1.21 billion respectively.
Pro forma net sales for the quarter grew 2.4%.
Post consumer brands grew net sales and volumes by 3.5% and 1.6% respectively.
Average net pricing improved 1.9%, despite unfavorable mix, primarily resulting from private label volume gains.
We saw good improvement in segment adjusted EBITDA, this quarter, which grew 6% compared to the prior year.
Primarily benefiting from the growth in net sales.
Consistent with the third quarter pricing fully offset year over year systemic inflation in commodities freight and wages this quarter.
Weetabix net sales decreased 2.6% over the prior year quarter pressured by the week, British pound, which created a headwind to net sales growth of approximately 550 basis points.
Average net pricing increased 12.5% year over year, as we continue to lap or promotional strategy reset.
Strong volume growth in private label Biscuit volumes was offset by declines in non biscuits products, resulting from capacity constraints on extruded products.
Core Weetabix branded biscuits volumes continued to stabilize.
Weetabix as adjusted EBITDA declined 8% more than half of which resulted from the unfavorable currency exchange rate.
The balance of the decline was caused by greater investments in brand building restoration of incentive compensation at a premium level and increased raw material costs.
It is important to note that for the full year. The Weetabix segment grew adjusted EBITDA approximately 2%.
From a currency headwind in excess of 500 basis points.
The increase investments in brand building and incentive compensation.
Net sales in foodservice increased 4.5% with volumes up 3.7% driven by strong growth in both again potato products.
Volume growth and favorable product mix supported by gains and higher value added products drove year over year adjusted EBITDA growth of 6%.
The refrigerated retail segment had good fourth quarter had a good fourth quarter with net sales in volumes growing 2% and 3% respectively.
So I just volumes remain healthy growing 9.4% this quarter.
Well, Bob Evans branded side dishes continued to grow with volumes up nearly 15%.
Capacity constraints, Rob mentioned will temporarily inhibit the growth rate in 2020.
Segment, adjusted EBITDA grew 3.8% this quarter and benefited from volume growth and an improved price cost relationship for sausage products.
Higher side dish manufacturing cost for modest were modest offset to this growth.
And our active nutrition segment net sales decreased 2.5% well adjusted EBITDA grew 4.7% benefiting from favorable input costs.
You can your further detail about acting Attritions results this quarter on the Bell ringing fourth quarter conference call, which will be held later this morning.
Before moving to our guidance I like to provide a brief explanation of how we will report the after nutrition business going forward.
As Rob mentioned the structure of the IPO and related transactions is complicated, but I will keep this discussion at a high level.
The IPO did not impact our fourth quarter fiscal 2019 reporting.
Prospectively pose will continue to consolidate the building business, but we'll report a non controlling interest for the 29% beneficially owned by its public shareholders.
They'll rembrandts Inc. will have its own SEC filings earnings releases and conference calls, which may overlap, but not necessarily necessarily duplicate post disclosures.
We have designated Belden brands Inc. and its subsidiaries as unrestricted under the terms of our credit agreements.
As such neither bell rings, nor post or obligors or guarantors of the other parties death.
Accordingly, we will we will report leverage statistics proposed independent of Bell rings debt and adjusted EBITDA.
Post pro forma net leverage on this basis is approximately 4.8 times.
This reflects a 1.2 to 5 billion dollar term loan repayment. We made in October following the close of the IPO.
Turning to guidance, we expect adjusted EBITDA for fiscal 2020 to be in the range of 1.22 to 1.2, so $7 billion, including 100% contribution from Bell rings.
Additionally, we expect to make capital expenditure investments in fiscal 2020 of between 240 million and $260 million.
Finally exclusive the bell rings, we estimate cash taxes for fiscal 2020 will be approximately $95 million and we expect cash interest expense to be approximately $315 million.
With that I'd like to turn the call back over the operator for questions.
Operator.
Thank you.
Tom If you wish to ask a question simply press Star then the number one on your telephone keypad again that a star one if at any point. Your question has been answered and you wish to amend yourself from the Q pressed to town key.
Our first question comes from line of Chris Grayling Stifel.
Hi, good morning, It Chris Hi, I, just wanted to ask if I could first robin in relation to the guidance you gave for the year.
For post I guess first of all you talked about a 3% long term rate is that reasonable rate for the company going forward and then just understand kind of the factors that could push it to the upper end of the lower end. So those are the some areas whether it be costs or maybe some of the capacity constraints that may limit your EBITDA growth and 2020.
Yes, you know, we long talked about the 3% being the long term algorithm when you break the portfolio when do you.
Roughly half cash generation half growth and those are pure definitions because both.
Sides of the business do both aspects of growing and generating cash flow, but the.
In terms of what would make the guidance higher or lower its a 50 million dollar range on at the midpoint just shy of 1.25, so relatively small changes could impact that range.
<unk> cereal category being zero instead of down one is a meaningful contribution to that slight changes and the demand equation on any of our more rapidly growing businesses could change that and then certainly there are cost implications throughout the portfolio. It say six business unit.
Folio.
So there are a lot of moving pieces that could impact that guidance range.
Okay, and so just one follow on question to that I I and you have six different businesses you noted, but just from a like an input cost inflation, maybe in relation to whether it be pricing or opportunities you have to offset that inflation.
How would you look at that balancing without going through each business, but in general for fiscal 2000.
So I think it's important to.
No doubt I precisely mentioned inflation in the context of the retail business because the foodservice business while it.
Has inflation has a different pricing mechanism that we've talked about so we tend to think about inflation different in that in that sector. So it really impacts are more traditionally priced retail businesses and I think that when you look at the commodity infrastructure on round sugar grains corn, we are seeing out.
We're seeing.
What I would characterize as modest but persistent inflation across that across the categories and that through mix pricing.
Promotional activities and cost reduction, we expect to be able to offset enough of it to maintain a 3% growth that we have predicted.
And just just to sorry, one quick follow he was there any businesses, where you've you've announced price increase already for this year for than anything you're divisions.
Carryover, but not new okay.
Thanks, so much.
Thank you.
Our next question comes from London, Enrile Saar of Barclays.
Good morning, everybody oriented.
So first off you know I think there seems to be some some building concern over the fact that you know post has been a pretty consistent market share gainer in the Archie business for for some time and you know that can category competitive dynamics are going to somehow you know catch up to the company. So to speak this coming fiscal year I guess, given one wouldn't expect you either of them.
Two largest players to accept being I guess share donors sort of consistently.
Yes, maybe can you perhaps discussed this in the context of your expectations for for our tea in the coming year, maybe you know expectations for category growth sort of share performance and.
The type of maybe.
Stability or so if you are building in to account for some of that potentially will.
Certainly I think we would be naive to assume that competitors as as resourced and as talented as ours would.
Consistently be shared owner, so we certainly expect them to be aggressive and vibrant competitors. This year and each year. We have had good fortune in the last handful of years and I think a large part of that good fortune is that we were early and moving into some of the growth you're errors around bison sweetened products.
And that need to date has been perhaps overly addressed and that as we now look forward. We've talked about all this I think in some detail that we need to as a category and that's a company looking innovation a bit boulder and broader manner and many of the changes that we have made over the last 18 months starting with changing.
Leadership, all the way to looking at planning processes is to free up cost for reinvestment are aimed at.
Driving that category growth, so that it's real category growth rather than kicking up dust within a handful of license we products but.
We look at that as.
And ongoing both challenge and opportunity and fully expect.
If not all of our key competitors to be highly engaged and to compete for share I would tell you that not all shares created equal so that we look at trying to make sure that we are focused our competitive activities on fighting for the REIT share rather than each year.
Okay, and then I know it gets a little harder to sort of track.
Deal sort of synergies and cost saves a little bit as you know integration sort of progresses, but your modest again what.
You have that is sort of expected to be incremental cost saves from some of the recent deals that still flow into fiscal 2000, just trying to give a sense of how much of the EBITDA growth essentially can kind of come from.
You know discrete areas like deal cost saves that you would surely have better clarity for sure.
So I'm going to I'm going to.
Beg some latitude because I'm going now from memory on deals that are a couple of years old and have blended between deal results and just additional continuous improvement. So give me a relatively high margin for error, but we are.
That's how I love My life, Rob [laughter] we.
We closed the Clinton facility that we acquired with the Weetabix transaction at the end of the year. So that will roll over five to 7 million dollar cost reduction into 2020, we have an ongoing.
Cost reduction effort at Weetabix aimed at closing half of a facility.
That will occur in 2020, and then we have an ongoing.
Integration in the supply chain at Bob Evans that is actually in excess of the amounts, we announced pet acquisition, but longer in duration and more expensive because it involves more aggressive I T conversions, and we announced when we undertook it all told.
In the portfolio there is between 10 and $20 million a cost reduction flowing through 20.
But given that number in the magnitude of the EBITDA, it's difficult to directly track it from that number to where it flows through on the piano.
Okay. Thank you.
Yeah.
Our next question comes from one of David Palmer of Evercore ISI.
Hi, Good morning, Kevin we did on for David.
Question are you Capex. This year, you had a step up about $85 million most of that I think it was to boost capacity and value added eggs. So two questions on that well some of that spend bleed into 2020 and also how will you plan on measuring and ultimately judging the ROI on that spending and then what is the growth rate in value added.
Eggs, you're assuming to get there. Thanks.
Oh and reverse order the growth.
Right on value added eggs is mid single digits.
Shipping to the first part of your question the there will be some.
Spillover from.
2019 to 2020, as we finalize the the factory, which which has now been commissioned and is producing products. So yes. There is some carryover.
And with respect to this project, we will look towards the utilization of the factory a year out the utilization of all capacity related to value added eggs and measure the lift and that should be the resulting return on the capital invested we are being more aggressive in capital investments.
As a.
Labor costs are higher and.
Capital costs are lower so we're being a bit more active in terms of identifying internal capital opportunities.
Got it. Thank you thanks guys.
Our next question comes from minus Bill Chappell Suntrust.
Thanks, Good morning.
Rob I won't if the what does the M&A pipeline looks like but I would.
Want to know kind of the thought process behind.
The aggressive share repurchase in the quarter versus holding some of that cash back for potential M&A.
Well I think as you know we tend to look at relative value on a constant basis and make capital allocation decisions accordingly.
You don't necessarily look at just the cash on our balance sheet does the.
Source of capital available for M&A. So we look at it as a as a dynamic equation.
Looking more for the opportunity side, and then sources Yeah, we'll let me rephrase that we opportunistically look at both the.
Investment side, and the sourcing side, an act independently of each other.
So is that a way to say that you felt like your stock was cheaper than some of the deals that you're looking at.
I think I'm, just going to repeat what I said so that.
[laughter].
I will then moving to a two private brands, which I mean, no. We don't talk about as much or eighth Avenue.
Can you help us understand I mean are things improving there I think the original thought was that the business would have had close to 100 million EBITDA you know a year ago or in this year. We just completed so and that's kind of the goal for next year, where are we in the past them and you know what signs do we see a for improvement.
I think I think you precisely precisely laid it out we're about a year behind.
You know we intended for 2019 to be the year in which we took these three disparate businesses and then.
Melted them into one or go to market and one integrated model and that went poorly.
So the execution of that has set us back 12 months. It is going better we have over resources now I think we under Resourced. It.
So when you look out the categories and you look at the strategic outlook Uh Huh.
I expect to have some skepticism on this comment, but I I remain fairly optimistic on the business, but we executed poorly and we need to fix that.
Got it thanks, so much thank you.
As a reminder, ladies and gentlemen, if you wish to ask a question simply press Star then the number one on your telephone keypad again that star one.
Our next question comes from line, that's Ken Zaslow of bank of Montreal.
Hey, good morning, everyone, Hey, Ken.
Can you just talk about the capacity constraints in how you'll get over the two of them you said in.
The serially it we'd events and then you obviously said the one of the U.S. can you talk about how that came out in what's the.
We to overcome it and timing.
Let me start with the one in the U.S. its really.
We will sided issue we've had a terrific growth in demand of our refrigerated potato products, both in foodservice and retail so that's driving very high category utilization. So intermediate term, we have plans to address trapped capacity longer term, we likely need to add capacity.
To the category.
Unfortunately at the same time in our Mars Hill facility, which is a relatively smaller facility and Maine.
We have three lines one of them had a failure related to an equipment break down that we have consciously chosen to defer that repair up until after our busy season. So it's not that disruption that takes no high single digits of capacity out that we have to manage through a retail inventory.
And trying to drive output elsewhere. So it's a it's a as I said a dual sided equation of a very positive problem that we need to fix for any short term unfortunate that will be fixed in January .
In the and.
UK.
We have had some capacity that we are trying to take out.
So in taking out the capacity.
We probably overshot a bit and our.
Having a little bit of customer service execution issues that we will rebuild in the next handful of months no more than two quarters to get the customer service levels back where they need to be.
Okay and then my second question is what does the progress on their license cereals leave there.
I'm sorry can you ask that question again, what is the progress what are your licensing deals how they do which ones are going to keep.
Yeah.
How you think about it.
Now that you've kind of tested the now what's prognosis is.
Yes, so I'm not going to comment on specific.
And level products, what I will share with you is that I think it's an important part of our over our overall portfolio. It's an important part of the category, but it can't be the only tool in the innovation a tool box. So we need to broaden it but it is and remains and will remain an important part of our overall product mix.
Okay I'll leave it there. Thank you thanks.
Your next question comes from one of John Baumgartner of Wells Fargo.
Good morning, Thanks for the question John .
Rob wondering if you could just dig a bit more into the foodservice business just given the lack of visibility with the exposure to non measured channels can you can you just walk through expectations for F. 20 in terms of how we should think about the timing of the ramp in pre cooked capacity are there any new business wins, you're anticipating potatoes, just any.
Highlights that would be helpful. In terms, how you're thinking about business development from here.
I would.
Assume that the outlook for Michael looks a lot like the recent past for Michael that it's consistent steady growth theres not this is not a business that should see major step ups. It's a business that given our considerable position in the categories were in grow steadily as we drive demand within the categories.
As it relates to the ramp up tied to Norwalk.
Just logistically what we will do is first Phil Norwalk, where we have better cost because it's a newer facility that will de leverage some of our older facilities as we backfill them. So there will be a a margin pickup but it won't be as full as it will be once the entire system remains.
Or is returned to optimal capacity just the step function of a new factory.
I think was their third part of the question or was that it.
That was it but actually I have to follow up.
In terms of cereal just getting back to to Andrew's question thinking about somebody asked me the game theory, the competitive environment I'm curious what are the things that you know I've noticed as you look at you know general Mills getting great growth Lucky charms Cheerios is down Kellogg is back to growth in some other taste cereals health and wellness cereals are lower when do you think about the cereal.
Category in totality do you think that it's reasonable to think that both the taste and the health and wellness cereals can both grow at the same time or is it really kind of a trade off one of the other based on what's kind of more or less on trend for that period based on that how does it really inform how you're thinking about the level of reinvestment or more promotion regret.
The pricing in some parts of the category.
Well I don't want to sound Pollyanna should because a lot of people have tried to solve that equation of great taste and great health, but like those other people who have tried we believe that can be solved it just hasn't been solved effectively and the.
First up and driving that solution is to create the resources to do it which is what we've been attempting to do the last 18 months.
With some of the changes we're making so you know I don't want to be the latest person to say, we're gonna have a great tasting product that cures whatever else you, but we continue to strive towards being able to grow the entirety of our portfolio and not just one sub segment of it.
Okay. Thanks for your time, Thanks, John .
Our next question comes from the line of Michael that afraid of Piper Jaffray.
Thank you good morning.
Just two more quick ones on cereal one is.
Importantly, you had outperformance in on measured channel is there any reason to think that might not continue and I guess just as we look at the scanner data and kind of model outs from current momentum and looking ahead is that something that has any shift in the dynamic or that will keep going on and then second just as you've talked about.
Some of the opportunity to look at more maybe premiumization or white spaces. How do you see the portfolio of all then there is there some ways you can give a little peak ahead of how you might be able to look at some new innovation.
Taking those in reverse order.
I wouldn't want to talk in this kind of form about our innovation what I would tell you is that.
The questions you're asking are the right questions, but this isn't the right form to respond to that with respect to non measured channels I would tell you over the course of multiple quarters or a year.
There shouldn't be material changes, but what I would caution you as a quarter to quarter. There can be material changes because club is such a big portion of non measured channels that as they have promotional events. They can swing short term results fairly meaningfully.
Okay. That's helpful. Thanks, a lot. Thank you.
And ladies and gentlemen, we have reached the allotted time for Q and it today.
I will conclude today's conference call. We wish you. The great thing you may now now disconnect. Thank you.