Q1 2020 Earnings Call
Welcome to the post holdings first quarter 2020, <unk> earnings conference call and webcast.
In the call today from post our Rob Vitale, President and Chief Executive Officer, and Jeff that Oxy Chief Financial Officer.
Today's call is being recorded and will be.
Favorable for replay beginning at 12 PM Eastern time.
The dollar number is 805 858367 again the number is 805 858367 and the passcode is 1371 013.
At this time, all participants had been placed in listen only mode. It is now my pleasure to turn the floor over to my main or a post holdings for introduction you may now begin.
Good morning, and thank you for joining US today with me are Rob Vitale, our president and CEO and Jeff Statics, our CFO Robin Japanese.
Together with prepared remarks. It afterwards, we'll have a brief question answer session.
The press release that supports these remarks is posted on our website in both the Investor relations or does he see filing sections and post holdings Dotcom. In addition, the releases are available on the Fccs web site.
Before we continue that we'd like to remind you that this call will contain forward looking statements.
Which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements.
These forward looking statements are current as of the data those call and management undertakes no obligation to update these statements. As a reminder, this call is being recorded an audio replay will be.
Available on our website.
And finally this call will discuss certain non-GAAP measures reconciliation of these non-GAAP measures to the nearest GAAP measure see our press release issued yesterday and posted on our website with that I will turn the call over to Rob.
Thanks, Matt. Thank you all for joining us I wasn't sure I was going to do this.
I think before I go into my prepared remarks, I'm going to share with you that I have about.
90% of the way back from a.
Testing virus I've been fighting this week, so bear with me through.
Hacks and other things as we share with you our results for the quarter, so with that [laughter].
The first quarter came in largely inline with expectations.
We communicated a 2020 plan with modest second half favorability and in total our quarter is consistent with our cadence expectations.
As always there are some puts and takes across the business. This morning in my prepared remarks, I will provide some additional clarity.
Do you run 2020 outlook, a brief business update and comment on capital allocation.
[laughter].
To start I want to give some additional detail around the quarterly cadence.
Well revenue is closer to evenly split between have our plan called for and continues to call for.
First half adjusted EBITDA to represent approximately 46% to 47% of the year. This compares to a first second half split in 2019 40 951.
We expect the acceleration into the second half for the following reasons.
A serial promotional calendar that it's weighted to the second half.
Navigating potato side dish production constraints that have resulted in customer allocations.
The timing of pricing moves.
Cycling startup costs for our Norwalk plan.
<unk> cost reductions versus first half investment and cost reductions.
And the timing of key promotional events for Bell ring customers.
Both with heavy premier protein advertising spend in Q2.
Turning to the business spelling is off to a great start their call is coming up shortly so I won't steel any of their thunder from a post perspective, the focus remains on how to best strategically manage the asset allocators of capital.
This will be a story.
The making and one that looks quite promising.
Our domestic cereal hadn't expected decline in consumption as we lapped aggressive promotional events in grocery and club.
As I mentioned, our promotional calendar this year favors the second half.
More structurally we were early in license suites, and we're seeing the impact of competitive reactions.
We have a promising innovation pipeline <unk> continued to be confident in the near and longer term trajectory of the business.
The category itself was a relatively bright spot this quarter inclusive of non measured channels. It grew approximately 25%.
We did this continues to perform well and we would like to find a way to build around this team.
Good service eggs, and potatoes, and Bob Evans side dishes had solid growth.
However, we had weakness in retail eggs and cheese.
Across the integrated supply chain, we incurred costs tied to supporting potato demand, we are struggling with labor shortage in some key rural markets.
Both factors pressured profit growth and another wise.
Solid quarter.
Both issues will linger to a degree throughout the year.
Eighth Avenue made solid progress to recover from a week 2019.
It also executed a strategic purchase and acquiring peanut butter manufacturing assets from kind of agora.
We continue to expect adjusted EBITDA.
100, 105 million before consideration of the kind of or purchase.
Turning to capital allocation.
Our attempt to acquire the Treehouse private label cereal assets met with opposition from the FTC.
We believe it was wrong conclusion, but we ultimately agreed with Treehouse the protracted litigation was.
Neither parties best interest.
We continue to search for M&A prospects, but we always do so against an array of capital allocation choices, including buying our own shares this quarter, we acquired 2.2 million shares of post.
Bite the commitment to share repurchases, we ended the quarter at leverage levels that for post our historically low.
With that I will now turn the call over to Jeff.
Thanks, Robin good morning, everyone.
Adjusted EBITDA for the first quarter was $303.1 million with consolidated net sales for the quarter growing 3.2% year over year [laughter] [noise].
Post consumer brands net sales and volumes declined by 3.1%.
Okay, and 3.4% respectively.
This volume decline is largely attributable to have your promotional activity in the prior year period, and lapping new product pipeline fills.
Average that pricing improved 0.3 that as we benefited from a full quarters of last year's price increases, but they were largely offset by.
Unfavorable mix skewed to private label versus branded products.
We had a 230 basis point improvement in gross margins driven by $5.1 billion of cost savings from implementing our new integrated business planning process.
These savings are incremental to our other continuous improvement initiatives.
However.
We had offsetting higher as June a close this quarter for consulting fees and warehousing costs related to implementing these new processes, including optimization of our inventory footprint.
Net of all these factors segment, adjusted EBITDA declined 3.4% compared to the prior year.
We fix net sales increased.
<unk>, 0.6% over the prior year.
This reflects an 8.7% improvement an average net pricing, partially offset by a 7.6% volume decline.
Average net pricing benefited from targeted based price increases.
Lets volumes sold on promotion and favorable mix.
Well sell.
Good volume growth and discuss was offset by declines in non biscuit products, resulting primarily from capacity constrained.
Strains on extruded products.
The average U.S. dollar to pound Sterling exchange rate in the quarter was flat with the prior year and as a result was not as significant variable in the year over year comparison.
Overall, we had a big segment adjusted EBITDA increased 17.7%.
Net sales in foodservice increased 3.1% with volumes up 3% driven by strong growth in both egg in potato products.
Despite this volume growth adjusted EBITDA declined 2.3% from prior firm.
The prior year.
Driven by higher integrated supply chain cost, including startup costs at our new pre Cooktek facility.
And unplanned downtime in our potato plants.
Refrigerator retail net sales in volumes declined, 4.5% and 7% respectively.
Overall side dish volumes.
Line, 5.2% driven by capacity constraints, which led to customer allocation.
However, Bob Bob Evans granted side dishes grew 5.4% as we prioritize allocations to this faster growing portion of our business.
Retail egg and cheese volumes declined approximately 10% and 9%.
Respectively.
Segment, adjusted EBITDA declined 8.8% this quarter driven by overall volume declines higher integrated supply chain costs as previously mentioned and lower contribution from our cheese business caused by lower sales volumes and higher commodity costs.
These items were partially offset.
Hi, an improved price cost relationship versus four sausage products.
Bill ring net sales increased 31.3% well adjusted EBITDA grew 40.9%.
You can hear further detail about bell rings results on their conference call later this morning.
Turning to our capital markets activities during the.
A quarter, we repurchased approximately 2.2 million shares at an average price of $102, a 97 cents per share.
Our remaining share repurchase authorization is approximately $368 million.
During the quarter, we repaid our legacy term loan in full.
Primarily for the proceeds of the Bel Ray transaction and subsequent to the quarter, we retired or 8% nodes, eliminating the one outlier to our bond ladder pricing.
As a reminder, neither bell ringing nor poster obligors or gearing tours of the other parties debt.
Accordingly, we report leveraged statistics for.
<unk> independent of Bell ringing debt and adjusted EBITDA.
Post pro forma net leverage on this basis was approximately five times as of December 30 Onest.
During the quarter, we generated $108.4 million of cash flow from operations, which was down from a year ago, driven primarily by 49.
Million dollars in higher net settlements of our interest rate swaps and timing of working capital across several of our business several of our business segments.
Capital expenditures were approximately $77 million, which included the purchase of our previously leased side dish manufacturing plant in Silver Springs, Texas and.
In of our gross capital projects in eggs.
With that I'd like to turn the call back to the operator for questions. Operator at this at this time if he would like to ask a question. Please press Star then the number one on your telephone keypad, that's star than the number one.
Your first question comes from the line of Andrew Lazaro with Barclays.
Good morning, everybody and glad you're on the man Rob. Thank you.
Two things if I could I guess first.
Talking about volumes in surreal were lower year over year as I think you expected due to the time your promotions and pricing moves in the in the period last year, I guess would your expectation be that volume and sales begin to accelerate.
In this fiscal quarter.
Even in you know what looks to and I think what you expected to be somewhat more competitive arena. This year and does sort of slight growth in EBITDA. In this segment for the full year still seem to make sense in terms of how you're thinking about it.
Yes to both I would say to give you a little more color.
We expect at the beginning of the acceleration this fiscal quarter, but it did to be more material next quarter. These were to relatively discrete large amounts last year, one of which is being repeated in the second half one of which was a margin decision. So as we lap that event <unk> execute that event.
In the second half, we should see some of that acceleration and in terms of the projection on adjusted even die, we fully expect to be able to maintain or grow from 2019.
Great and then second would be you know fiscal when cues you mentioned was the the second quarter in a row in which post bought back about sort of 3% of it sharebased or so yes can you talk a little bit about what what this says or maybe doesn't say about you know the attractiveness right now of the various sort of core avenues that post typically looks at around it's it's <unk>.
<unk> model and I and I assume I think the 40, 647% <unk> split is similar to what you had fought last quarter I don't think there's a change to that but just making short. Thank you.
Yeah in reverse order, it's the same as we thought last quarter with respect to share by buybacks versus other.
Uses of capital Everything's relative comparison, so you know if the market for M., an a. is 12 or 13 times and the multiple post is x. is simply a comparison of would we rather invest in post or something different and it may not always just be assemble mathematical calculus. There may be capability. So we're trying to buy or a market that.
As a different growth rate, but it starts with a relative analysis of our business for us versus competitive alternatives.
Great. Thank you very much <unk> hmm.
Your next question comes on line of Chris <unk>.
Hi, good morning.
Hi, Rob help you feel better there I was curious about just to follow question on the post consumer brands business. The I think Jeff you mentioned, some cost savings coming through some integrated business planning type savings coming through.
As soon those are sustainable and should continue like it's a lot of to me that occurred last year does that then kick up in Q2, three and four or is that we hitting the run rate for the same you just curious how that influences even done that in a division.
Yeah, it's a progression throughout the year. So we would expect to build upon the savings that were cheap.
With incremental saving throughout.
And of course.
Some of that is necessary to offset inflation that we're seeing in the business, but mmm definitely a progression and and that's one of the reasons that Rob called out for some of the second half loading as our overall plan.
Okay, and then just an idea and if I could on the food service Division on those costs for Norwalk did you did you quantify those in the quarter. If you could it be great and then just understand this sounds like those continue a bit into cue to is there a number <unk> maybe given for the year in terms of the effect on on the divisions profitability.
There's two different buckets.
Costs, which is roughly 3 million bucks, but there's also ramp up costs, which.
Oh really are inefficiencies, we have not tracking separately isolated so that the difference between the factory running as a fully operational versus the learning curve process to get there is a yeah I would estimate and a low handful of millions of dollars <unk> <unk>.
Okay. Thank you for the time thank you.
Your next question comes from the line of John Baumgartner would Wells Fargo.
Good morning things for the question did Ya.
I know Robin we go to to P.C.D. and we look at your your Nikita serial categories values and that's obviously doing you know very stable outperformed over time and I'm curious given this run we pattern stronger wage growth that low in consumer are you thinking changes in terms of dynamic our folks, creating up or the trading out of the category or his loyalty you know generally.
Pretty stable as it's ever been.
Oh, we're seeing good loyalty within the entire bag segment. So we haven't seen any changes a consumer trading up and out of it.
Okay.
And then just follow up on food service you know wondering if you could speak high level in terms of any activity or just level, you're seeing from you stores doubling down or you know U.S.R. a couple of down on breakfast or cease doors coming in and prepared food Howdy.
Opportunities that emerging for you you know pre and post Bobby in terms of cross selling or having a gain at new volume girl going forward.
Well, you've probably seen wendy's is going to breakfast and.
Q not Q.S.R.C. stores have become a significant source of convenient breakfast. So we're continuing to see it as a material trend across the country and where we have seen the result of the Bob Evans acquisition and cross selling is in our potato business, where we're saying really quite extraordinary birth rates.
We have seen some and sausage, but it's a more additive a bit more commoditizes business, where we're really unique isn't that sausage excuse me in that potato and <unk> category.
So you're you're ramping up across selling pretty well already in that space.
Particularly in potatoes.
Great.
<unk>.
<unk>.
Your next question comes on the line of Bill cap oldest son trash.
Thanks, Good morning morning, though.
Hey, I'm, sorry, I could just give me a little more color on the the unplanned downtime at the plant.
Sudden just what <unk>, what actual infected head in the quarter in in going forward.
The unplanned downtime, we we talked a little bit about that last quarter. It. It was some unforeseen mechanical failures that.
One of our plant in particular that required us to take down the plant in order to replace the.
I'm going to Miss speak here, but it was a coil on on refrigerator or some kind.
So we we ended up sacrificing some downtime.
Of a couple of days, so that we get that replace that.
In in in the production.
And then there were some other one off events weather related events that also kind of hit us disk or.
In any way to quantify like what what the impact was just that for variability I mean, it's really it's really difficult to do that because it was like it was a couple of two three days up production.
But translating that into what it might have been in terms of profits really difficult. We know that it led to a law sales.
Ah, but to further qualify it's pretty hard to do.
Got it and then just switching to eat Avenue it seemed like.
One of the better quarters. It avenues hadn't in quite some time is that kind of on the uptick as a business and and and with the acquisition does that help the margins meaningfully.
The I would say right now it is in stabilization.
We've kinda bottomed at our making sure that we've got a stable foundation upon which to build in terms of the second part of your question. It will certainly expand dollar profit. This is largely call man business. So it'll come at a average margin that's a bit lower.
But a very high returns thanks, what we paid for it.
Great. Thank you. Thank you.
Your next question comes from the line of Michael Laughery, when Piper Sandler.
They get the morning.
[noise] [noise] with the.
F.T. seeds objections on tree house, and how much visibility do have on that and specifically what I'm trying to just make sure I have my hands around is how much of that is private label specific or do you imagine this could sort of foreshadow any potential issues with any other serial do.
No. We we believe it as 100 per cent of private label specific.
That they felt that the combination of post and tree house would effectively eliminate competition in the private label sub segments and what we felt was.
Novel and in our opinion inappropriate was having such a narrow definition of the market that 7% of the.
Market can drive competition in that big a category, we found counter intuitive.
And we argued that it was actually consumer friendly but to no avail.
Yeah no. Thank you that's really double and then just don't potatoes, the it's they've turned much more inflationary.
Can you just give us some color on on how that how you pass that through and how manageable you see that being.
We have been able to pass through the ingredient.
Inflation quite effectively we're we're struggling a bit some of the labor inflation unrelated to the potato crop, but related to the potato factories.
And it doesn't mean you take my persist through the year.
We eventually should be able to price it but it will persist for at least through the corridor.
Okay. Thank you very much.
Thank you.
Your next question comes on the line of David Palmer would ever core I assign.
Hi, good morning, it didn't have.
Good morning, just a a a quick observation it feels like there's breakfast wars going on inside the supermarkets, but also in the restaurant channel and you might have different feelings about either one but you certainly are <unk> are a participant in both usually you're seeing catalogs trying to perhaps getting the game.
The taste and fun cereals and.
Perhaps teamed up more promotional activity. This first half the calendar year.
And I suppose you're bracing for impact a little bit dare.
But also on the on the breakfast side away from home.
Not just wendy's, but Mcdonald's is getting in the game there and obviously dunkin has a very successful new breakfast sandwich as well so I would imagine you're looking at a very good demand year, perhaps but it's really special year on the food service side.
From a damp demand perspective, but.
The way that the shaping up competitively in supermarkets might be tough for the next six months at least what what are your thoughts there.
You said it fairly well I think in my prepared remarks I commented on that we were early in license sweets with our Oreo product.
And had very good growth essay you know 2018 early 2019.
And there was a competitive reaction to that as we would expect.
And there was an onslaught of innovation base round license weeds from both Kellogg's in General Mills.
And we've seen just greater competitive intensity is that demands state gets potentially over saturated and well we need to effectively compete at the retail level is a better Boulder innovation and that's nothing new would probably said that as long as categories around but we feel pretty good about our innovation pipeline.
Right now and I think you know what we're seeing in our immediate quarter is a conscious decision to see some territory rather than fight for share in that environment in a in a category that is a bit overheated. So we're trying to pick our battles carefully fight for the right share not just all share.
And.
Be selective in retail in food service I don't have much to add what used to what you said, we're saying very strong you'd have volume growth across most of our categories in support of the trend that you mentioned.
Yeah on on that the food service sign on evaluated egg side in particular.
It seems like this next 12 months, if we get passed some of these friction costs should be a very good one for the incrementality of the new manufacturing evaluated eggs. I mean, you spend 60 $70 million on capacity there I would imagine you're thinking that that could be a double digit <unk> millions Ah.
Boost at some point during this this fiscal year.
How should we think about that kicking up and benefiting you win on terms I don't think it's on reasonable to think about it exactly as you just characterize it as a exiting the year run right.
Okay.
Thank you.
Thank you do.
[noise]. Your next question comes from the line of cans as slow would the bank of Montreal.
Oh come on everyone. It can.
He talked about the.
The serial dynamics in the U.K., how was it progressing and I I believe you are trying to take out the hockey there have you tightened it up and just give a little thought on that we debates business.
Yeah. The the general demand is flat to slightly down.
We have had a bit more decline and volume than the market because of our aggressive moves on price as we saw a tourist or <unk> the traditional pricing dynamic in March and structure.
We have taken out capacity, we we may have overshot, a little bit and taking out capacity.
Because we're now putting a little capital back in to make sure that we keep our service levels, where there need to be but that has gone well and we expect there to be some significant cost savings again like my last answer as we approach the end of have why 20 and having full.
The annualized in 21.
Greatly appreciate thank you. Thank you can.
Your next question comes from a line of Rob Dickerson would get frames.
<unk>, you're you're in Q1.
We we didn't hear the first part of your question right. So I'm sorry, Yeah. Just a question asked you know I, just and kind of trend kittens for the year. It was up a decent amount.
Q1, you know despite or let's say you know offset decent impressive gross profit growth.
Is there is there any way you could just kind of Simplistically pocket, you know, but driving increasing that S.G.N.A. and then why are why not that might ease as we go through the year and then I have a quick follow up.
There there's no single significant driver. So it's it's several smaller items that tend to add up as far as the segment that driving most of it it's the bell ring segment.
And it's a handful of activities, they're ranging from some increase warehousing cost is there a inventories has gotten a more stabilized.
Some cause for some consulting not in a bell ring, but some costing consulting activities around the company as we mentioned in the in the P.C.B. business. So it's really a a handful of a couple million dollars a items and and I've neglected the mentioned earlier on Bell ring, there's some incremental.
Public company costs.
As we did the I.P.O. during the quarter and that's the sort of thing that will be ongoing the consulting fees, we would expect to.
To diminishes the year goes on.
Okay, Great and then.
Sorry go ahead.
So we were done go ahead, Oh, okay, great [laughter], sorry, and yeah, and then just in in terms of capital structure.
You finish the year decent cash balance kinda about this you have in the past like you said.
You know of leverage is low relative to history for you.
And then obviously don't pay dividends. So yeah, you bought back some stock in Q1, you went through that rationale just kind of thinking forward. So you know if your stock, let's say, we're even less expensive or kind of where it is today and the cash balance.
No strong you know is is it is it a rational to think that you know repurchased activity overall for the year could be off relative to history or do you. You know just say hey, we're obviously, we're always opportunistic we're always looking at the trade off and our pipeline is very strong as of you know as of now on the.
<unk>.
Well I would say the latter the pipeline and strong, but we always look at it in the context of all of our choices for allocating capital I wouldn't want to get into predicting what we're gonna do next I would rather just give you the conceptual framework and let you <unk>.
From there.
Fair. Thank you so much thanks right.
Your next question comes on the line of Brian Holland with D.A. Davidson.
Thanks, Good morning, gentlemen, most of my questions have been answered so.
Rob I think you alluded to this though when you're prepared remarks, I'm curious about your thoughts on the emanate landscape right now in the U.K. Weetabix appears a solid beach head for you I presumed evaluations, perhaps more palatable there than here, but obviously a challenging market with perhaps lower visibility right. Now so I guess just looking for a refresh on your thoughts about the landscape on that side of the pond.
Well, we're very pleased with the execution that the team has performed in the last two years and it's a team that we think can do more so we would like to give them the opportunity to do more but at the same time as you've just rightly highlighted into choppy environment. It's incrementally less choppy now that we at least have clarity that.
And perhaps it is going to occur we have another we have another milestone in terms of understanding exactly how it occurs so we're not we're not likely to rush in with with both feet, but we wouldn't mind, finding something small to tuck in under them and give them expanded.
Union there.
Appreciate the <unk>. Thank you.
Thank you.
I think that's our last question and I just want to again to apologize for some of the coughing and hacking in the background here. So thank you and will.
Talk to all next quarter.
Thank you for your participation in today's conference you may now disconnect.
[noise].