Q2 2022 Post Holdings Inc Earnings Call
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Welcome to the post holdings second quarter 2022 earnings conference call and webcast hosting the call today for post are Rob Vitale, President and Chief Executive Officer, and Jeff as the Ducks Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at 12 P. M. Eastern time the dial in number is 890 259356 No pass code is required at this time all participants have been placed in a listen only mode. It is now my pleasure to turn the floor.
Over to Jennifer Meyer Investor Relations of post holdings for introductions you may begin.
Good morning, and thank you for joining us today for post second quarter fiscal 2022 earnings call with me today are Rob Vitale, our president and CEO and Jeff <unk> our CFO.
Rob and Jeff will begin with prepared remarks, and afterwards, we'll have a brief question and answer session.
Yes release that supports these remarks is posted on our website in the Investor Relations section at post Holdings Dot Com. In addition, the release is available on the SEC's website.
Four we continue I would like to remind you this call.
Al will contain forward looking statements.
These 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 date of this call and management undertakes no obligation to update these statements.
As a reminder, this call is being recorded and an audio replay will be available on our website.
And finally this call will discuss certain non-GAAP measures for a reconciliation of these non-GAAP measures to GAAP.
Measure see our press release issued yesterday and posted on our website with that I will turn the call over to Rob. Thank you Jennifer and good morning, everyone.
We had a successful quarter and despite some near term challenges we remain quite upbeat about the year.
I want to start by expressing my appreciation to our colleagues who work towards the bell ringing transaction.
This quarter, we completed the spin off of 80% of our position.
Transaction required an enormous effort for many people across our organizations and I'm grateful to each person for their sacrifice and effort.
I'm excited for the next chapter of the Bell Rings story, the Premier protein brand remains a leader in the developing category.
With considerable runway for expanding household penetration and innovation.
<unk> has become a clear leader in sports nutrition. This business has tremendous fundamentals in terms of both growth and cash generation. We believe the transaction will also improve its technical support with greater liquidity in the shares.
We are pleased with post performance this quarter.
Nonetheless, our business is not firing on all cylinders and we are still earning below our potential.
The expected second half increase reinforces that thesis.
Meanwhile, labor conditions are improving.
<unk> manufacturing performance is improving.
Transportation is improving I.
I make the distinction about controllable manufacturing because we continue to face sporadic ingredient shortages that create inefficiencies in our factories and in our broader supply chain.
Our procurement team has developed a triage approach to identifying flash points at the earliest possible moment, starting with better demand planning. However, because it is triage it does lead to downstream inefficiencies.
I expect the supply chain to continue to improve in our management of shortages will continue to improve but the combination of pandemic disruption labor imbalance inflation and now geopolitical instability has led to more lingering macro problem than we anticipated.
Speaking of inflation, we have seen ramping cost increases across our business for the most part we have been able to raise prices to offset the cost increases, but the timing varies across our segments.
Speaking briefly to each segment post consumer brands had a solid performance again it was not perfect as we manage both supply interruptions and the resulting inefficiencies.
We have reverse distribution losses in our key multi meal franchise with expanded distribution available in stores in April and at the same time, we are continuing to see a modest shift towards value priced consumption.
Weetabix continues to navigate challenging waters exceptionally well U K and European consumers are more directly feeling the impact of Ukraine related disruption reflected in higher energy and food prices.
Meanwhile, we will face a currency headwind as the pound has weakened against the dollar.
Our refrigerated retail platform is improving nicely.
Dish business resumed growth as capacity recovered we are approaching the level of capacity, which we can resume our brand building efforts.
On the other hand, we have struggled with commodity volatility in both our cheese and sausage categories.
Foodservice continues to move towards recovery.
Obviously, the 55 million in adjusted EBITDA reflects both a sequential and year over year improvement, we continue to expect to exit the year on an EBITDA run rate in line with our pre pandemic level of profitability.
We now expect this to occur at slightly lower volumes with better margins as the business is modestly shifted to higher value added products.
This spring we have seen the first emergence of high path had pathogenic avian influenza since 2015.
We have thus far depopulated two farms, we are working to mitigate the lost supply, albeit at materially higher prices.
Last night, we affirmed our adjusted EBITDA outlook range of $910 million to $940 million. These outlook numbers reflect the impact of known events, which we do not expect to have a material effect. It does not incorporate a significantly a significant expansion.
And the direct impact on post supply.
With one exception our recent acquisitions are performing quite well.
Huntington private label cereal and egg beaters are exceeding our underwriting case.
Peter Pan is meeting expectations, but synergies begin to hit the P&L in 2023.
All markets underperforming our underwriting case as costs have escalated faster than we have priced.
While it is not terribly material, we hold ourselves accountable to getting these right and we expect to correct. This in time.
We were an active buyer of our shares again this quarter, although we had some constraints in our ability to acquire shares near the spin date.
Since we last reported to you we have repurchased an additional $1 2 million shares since 2017, we have now purchased approximately 23 million shares.
You are all aware that borrowing costs are on the rise our capital structure anticipated. This are long dated and fixed rate bond ladder positions us quite well to manage through increases in the cost of capital.
The war in Ukraine has several impacts on our business, while we do not sell into Russia, or Ukraine, both countries contribute to the global grain and energy trade, the realized and potential threat to Ukraine commodities and the potential sanctions of Russian energy will have a lingering impact on price and potential potentially availability.
While the environment is choppy our business is gaining momentum.
I find it enormously encouraging because this is where we perform best when volatility drives opportunities for significant change, we expect to find such opportunities on both our strategic and tactical level.
Thank you for your time this morning, and your continued support and with that I will turn the call over to Jeff.
Thanks, Rob and good morning, everyone.
Before getting into the details of our quarter I would like to remind you that bell ring has been presented as discontinued operations for all periods.
And the consolidated figures I will discuss represent results from our continuing operations.
Second quarter consolidated net sales were $1 4 billion and adjusted EBITDA was $230 million.
Net sales increased 17% and benefited from approximately $70 million of incremental sales from recent acquisitions pricing actions across each segment and volume demand recovery in the foodservice segment.
Higher raw material freight and manufacturing costs continued to pressure year over year margins this quarter, although they improved sequentially.
While internal and external labor shortages and supply chain disruptions improved throughout the quarter, we continued to see lower throughput and higher per unit product costs.
Similar similarly, our customer order fulfillment rates improved but were still below optimal levels.
Turning to our segments and starting with post consumer brands net sales and volumes increased 19% and 20% respectively.
Excluding the benefit from the private label cereal and Peter Pan acquisitions, net sales and volumes grew eight 8% and three 4% respectively.
Zero average net pricing increased five 4% driven by pricing actions and favorable product mix.
Pebbles, and honey bunches of oats drove the volume increases.
This growth was partially offset by year over year softness across value in private label cereal products and our exit of certain low margin business.
As Rob mentioned on a sequential basis, we have seen some improvement in value sub segment volumes.
Adjusted EBITDA decreased 5% versus prior year, primarily driven by costs related to supply chain disruptions across freight.
Supply reliability and warehousing these.
These disruptions drove declines in throughput and fixed cost absorption.
Higher manufacturing cost per pound.
Weetabix net sales and adjusted EBITDA increased 3% and 4% respectively. The weaker British pound created the headwind to these growth rates of approximately 280 basis points.
Average net pricing increased 5%, reflecting both list price increases and modified promotional pricing.
Volumes declined 2% as growth from private label distribution gains and new products.
It was not enough to offset declines in other products.
Recall prior year benefited from Covid driven at home consumption.
Supply chain disruptions, most notably in packaging and transportation availability.
To suppress volumes in this segment.
Our foodservice segment, so our net sales and.
And volume growth of 22% and 11%, respectively lifted by distribution gains and higher away from home demand.
These gains were achieved despite the negative impact on demand caused by almost the omicron variant in parts of January and February .
Revenue growth continued to outpace volume growth as revenue reflects the impact of pricing actions and the effect of our commodity cost pass through pricing model.
Although we saw year over year growth this quarter total segment volumes remain below pre pandemic levels.
Adjusted EBITDA grew 34% benefiting from volume the volume recovery and improved average net pricing, which combined mitigated the impact of higher cost to produce.
Q2 performance was also impacted by employee absenteeism, resulting from the omicron variant earlier in the quarter.
Refrigerated retail net sales increased 12% while volumes decreased 1%.
Excluding the egg beaters, and <unk> acquisitions, and the divested Willamette egg farms net sales and volumes increased 7% and 2% respectively.
Pricing actions drove increases in average net pricing across all products.
I just volumes grew 5% this quarter, although supply chain constraints, most notably around labor availability continue to suppress growth.
Adjusted EBITDA decreased to $37 million and was pressured by significantly higher cheese in sao input costs higher manufacturing costs and increased freight.
Moving to cash flow, we generated $144 million from operations in the first half of the year.
Our net working capital increased primarily reflecting the impact of inflation.
As a result of our distribution of 80% of our interest in Bell ring, we received net proceeds of approximately $260 million.
Following the completion of the spin off we redeemed $840 million of our 575% senior notes due March 2027.
Our net leverage at the end of the second quarter as measured by our credit facility was approximately six one times.
On this basis, we expect to further delever once we execute the intended debt for equity exchange of our retained ownership of $19 4 million shares of Bell ring.
With that I would like to turn the call back to the operator for questions.
Thank you at this time, if you would like to ask a question. Please press the star and one on your Touchtone phone you may remove yourself from the queue at any time by pressing the pound key.
Once again that is star one to ask a question, we will pause for a moment to allow questions to queue.
Thank you our first question will come from Andrew Lazar with Barclays.
Body Andrew are good thank you.
The full year EBITDA guidance is about I think at the mid point $5 million or so above what the implied range for remain co was prior to the distribution of Bell rings shares.
Just hoping you could dig in a bit on what sort of areas in the business. Specifically gave you. The most comfort in this range, particularly in light of all the unknowns still out there and the fact that at the time I think consensus is also at the very low end of the range that you put out there.
Yeah, I think if you look at each of the components of the business, we feel a bit of a firming with respect to our supply chain efficacy, even though there's still plenty of problems I don't want I don't want to understate that we feel good about the.
Ongoing shift in some of the consumption behavior to more of our value.
Products, we continue to feel good about the demand recovery yet.
Reising stability in foodservice, so rather than pinpoint one thing I would tell you I'd say general sense of the business firming in the face of some ongoing challenges and I want to put that I would say two things in context, one we're talking about a fairly small change in that so it's more of a refinement in our change and secondly.
Hmm.
We still think that despite the momentum of improvements in the company and the firming of the guidance that the business is underperforming so I don't want to.
Suggests we're declaring victory by raising that guidance by.
A small amount.
We're reflecting the realities, we're seeing in our spa.
Despite still seeing some pretty challenging situations around commodity pricing and supply chain throughput.
Got it alright, thanks for that and then.
This question I know, it's getting I think way ahead of ourselves clearly at the moment, but I guess, how do you see the sort of like the goldilocks scenario for the food group moving forward regarding inflation in other words like is it better to have the rate of inflation moderate even if costs stay at elevated levels given a lot of the pricing is now.
Better in place or starting to see actual deflation, which can can bring with it its own set of challenges to manage as well.
Hey.
Okay I got you okay.
I appreciate it thanks very much.
Yeah.
Thank you. Our next question will come from David Palmer with Evercore ISI.
Hi, David Hi, good morning.
And we could do like a multiple choice version of this call I mean, it really it would really make things easier if you don't mind.
[laughter].
And you only gave two choices. So you can't go to four.
Right none of the above right now.
But I one of the things I was wondering about is and you know as you're getting further into the year you might have visibility into this as we experienced a second wave of inflation.
I haven't looked back at some of the friction costs you might have had with the employee outages you talked about with foodservice.
If we get to the end of fiscal 'twenty. Two you know how much of the friction costs. Do you think you will have had that might be easy comparisons for your gross margins and then and then in terms of pricing timing versus input inflation. We're hearing a lot about that that could be another thing that you are looking back on as a favorability item.
That might actually be coming at you because we've had another wave of inflation that has caused some pricing to catch up but.
Is there any way to quantify those two friction points or drags to gross margins for fiscal 'twenty two.
We're working through all of that and I would say, there's both puts and takes you in a bit of reverse order you're quite right to observe that there inflation has come in waves and I think we had we were in a pretty good spot prior to.
The invasion of Ukraine, and then we saw another wave of inflation, which will require further pricing movement. So you know I think.
One of the interesting thing has been the wave pattern of the price level movements throughout the last year.
Second.
You were also quite right in saying there are improvements in the supply chains as we come off of some of the COVID-19 costs, but.
To a fairly meaningful extent some of those have been replaced with other costs around.
Lack of ingredients that we have had to effectively in my script I called it to triage to prioritize different products to sub optimize our mix in order to move product to or to ship product, where it is rather than where it's supposed to be so you know what I tried to.
In my comments is that.
Things are getting better, but they are not too bright yet so we do have some opportunities to improve margins.
Obviously, you do expect them to improve with efficiencies, but some of that is being offset by upstream supply chain challenges.
I mean, even if you were to talk about this sequentially do those friction costs.
How would you I expressed that the pricing versus input cost mismatch and the friction costs going forward versus what we saw in the quarter.
Well I don't want to add more quantification at that level beyond what we have embedded in our guidance. So what I would.
Give you is directionally, we are we are continuing to see them.
Improve where we can control it and they and the problems seem to be moving upstream.
So it just it changes the way we manage them because what we are primarily doing is making sure we've got.
We are seeing in the right position.
Because I think we have managed well once the ingredients come into our factory and get them through our D. C. So it just changes our behavior a bit but beyond giving you the guidance number we've given in the aggregate.
I wouldn't want to get into trying to parse out.
What does the immediate future look like for ingredient shortages versus pricing or efficiencies.
Okay. Thank you thank you to.
Thank you. Our next question will come from Chris Growe with Stifel.
Hi, Good morning, Hey, Good morning, Chris Hi, I just wanted to ask you on the Foodservice division and just to understand kind of the pricing there.
I think you've been pushing through some more aggressive pricing I think even kind of beyond the.
The green based pricing, so things like transportation logistics, and I think that sort of starts should start to pick up a little bit and help you overcome some of the incremental inflation in that business.
Think about it the right way does that does that start to pick up a little bit in the third quarter or is that already coming through by chance I just want to get a sense of how that's phasing through the year.
You, you're 100% of thinking about it correctly, the we've seen substantial increases in costs and non pass through aspects of our cost structure and you highlighted one of the biggest ones in transportation. So we started pricing that are around the first of the year through the first quarter, but the real impact of that doesn't flow until our fish.
So in Q3.
Okay. Thank you and then I'm just.
I know, there's a bit of a timing element around the debt for equity exchange with the remaining bell ring shares.
Is there a rough timeframe for when that can or will happen later this year.
The only timing we've provided us within 12 months of this bad so it could be anytime within 12 months.
Okay.
Okay. Thank you very much for your time today. Thanks, Chris.
Thank you. Our next question will come from Michael Lavery with Piper Sandler.
Thank you and good morning, Michael.
I just wanted to touch on foodservice margins and make sure to understand how that unfolds in and I know you.
You gave some comments in your prepared remarks, but just thinking maybe through the rest of this year and a little bit beyond partly wondering what you've.
As said before that you think are returned to normal margins.
Probably wouldn't come until fiscal 'twenty three.
Yes.
It's a little further out obviously, but has anything changed.
Would that maybe be can still happen in fiscal 'twenty three.
Get there and it was a little bit better this quarter than we thought.
Are you ahead of track on in terms of how it may go just kind of an update on how that probably unfolds.
Yeah, Let me, let me make sure I'm clear on what I said or at least intended to say, we expect to get back to pre pandemic levels of profitability on a run rate basis by Q4 of fiscal 'twenty two.
So okay great.
It went a little fast and so I wanted to I didn't I wasn't sure if I caught that and I wanted to just make sure that I heard that right. That's great. Yeah. So that is not a change that's just.
Reinforcing what we had said previously.
We do see a bit of margin improvement as our mix shifts to the higher value add specifically pre cooked product.
And we do anticipate that there will be some.
Long term volume impairment and some of our smaller categories around travel and perhaps office cafeteria is representing.
1% of.
The business.
A relatively small amount so.
So we fully expect to have a.
Profitability levels back to the 2019 levels in Q2.
And barring something surprising go into 'twenty, three with that expectation to reflect as a run rate.
Sorry.
I Might've Misheard you just now you said the 2019 levels in.
Did you say Q2.
Do you mean Q4.
Before.
Yeah, Okay, Great and then just on the Weetabix business.
Sure.
Organic growth there was good and it was pricing driven but I'm just curious how the volumes have held up.
Maybe in the last months into the to the third quarter, just trying to understand how the U K and European consumer.
It's holding up is that are.
Are you seeing a slowdown there yet or how do we think about the rest of the year for for modeling that segment.
We have not seen a meaningful slowdown in volumes, yet, but what we are expecting is that there could be some shift from branded to private label of which we have a a good position.
<unk> in both so you know there could be some.
Relatively modest.
Margin dilution if that shift occurs with the consumer under some pressure from both energy and food costs.
Okay, great. Thank you.
Yes.
Thank you our next question will come from.
Jason English with Goldman Sachs.
Hey, good morning folks.
I guess I wanted to dig in a little bit Warrington factory avian influenza.
<unk> right now.
Reaffirming the comments you made last quarter that sort of back half Q4 run rate for profitability in foodservice as what you thought it would be before.
But it seems like you should be selling a lot of eggs at market based pricing I think you were selling 15% of your grain stock and market based price pre AI, you'll probably signed at least 10.
Which would seemingly all market decent arb opportunity.
Once all of a sudden you what why why is your profit outlook for the back half not changing.
We are procuring more of our eggs now on a spot basis with some of the losses in volume that occurred lots of supply volume that have occurred to date.
So the effect to date has been negligible.
There are some obvious puts and takes as a pricing changes in the second half that could add some.
Incremental support to that and there are frankly, some incremental risks if we lose more supply. So what we have attempted to do is give you guidance.
That is largely consistent with our guidance create pre AI.
Our AI events to date have a negligible impact and then to the extent AI takes it of course that is materially different from our expectation or elevated prices beyond where it is.
We could have some different puts and takes around it.
Got it yeah I appreciate that things can still go worse, so it's better to put some buffer in there, but just to make sure I understand the math right. You were buying you were selling 15% of your eggs all grand procured at market, you've lost 5% supply. Some you should still at a minimum be selling 10% of your great got it.
Market based lost with the second farm, we've lost about 10%.
Got it okay. So now that surplus has shrunk to five or so okay.
Understood and then real quick you mentioned.
And we're going on a year now of you seen.
Losses on the values here for multimedia and private label you mentioned some mom distribution gains can you can you expand upon that.
And whether or not based on that sort of the sequential growth that <unk> seen plus the distribution gains are we potentially an inflection point for that consumer brands business in terms of the value tier moving higher.
We believe so we have seen a meaningful expansion of total distribution points in both mass and grocery.
We do expect that the inflation rate will start to create some movement within the category towards more of a value orientation.
But to date it has been modest.
But you know.
Going back to your first point.
I'd say around November December we saw the bottom of the decline and since November December the trajectory has been a slow move upward to the right.
Got it thanks, a lot I'll pass it on thanks.
Jason.
Yeah.
Thank you. Our next question will come from Bill Chapell with true Securities.
Thanks, Good morning, Good morning, maybe just following.
Following up on Jason's questions I mean, and this maybe goes over to eighth Avenue is the sense that.
Private label.
And value is is on an uptake or bouncing off the bottom and we're just trying to get understand yeah.
There have been some positive signs, but I don't know if that's a start of a trend or if it's too early to tell.
I think the answer is were too early to tell but it certainly has stopped getting worse, which is step one of improving so we do have some cause for optimism in both our ready to eat cereal portfolio as well as with an eighth Avenue from a volume perspective.
With an eighth Avenue and I think broader private label. The challenge has been more making sure our pricing is keeping up with the cost inflation, but volumes have not been as big of a problem certainly of life.
That's clear and then do.
Do you have I think you'd talked about labor issues on on the side dish capacity is that you know not just for that business picture for all of the business. I mean are you seeing the labor picture pick up where you can get to full capacity across the businesses or is that a lingering problem.
So the answer is a little bit of both as a on a macro basis, it's much better, but we have some specific locations, where we just have a real sticky problem, which I would.
Offered.
It becomes more of an issue of geography, and changing some of our hiring practice than it is a macro labor on balance I think the macro labor imbalance has improved but we still do have some very specific.
Cool issues that we're working through.
Okay. Thanks for the color.
Thank you.
Thank you. Our next question will come from Ken Zaslow with bank of Montreal.
Hey, good morning, guys.
Good morning, how are you.
Good.
Two questions one is.
We've been through this AI before but when you think about your long term model.
It does.
Do I have any impact on your earnings power in 2024, 25, or whatever happened either positive or negative is it simply just a temporal what do you think theres something.
That changes your algorithm or or a longer term thought process.
Well I think if you consider the position that our business holds in its category a disruption like this generally over time improves the quality of the business because I think it highlights the value of our scale and our reliability because if you you know.
You go into our customer base right now the people that we are most are working to make sure. They are not affected our customers going into this.
The supply disruption so I think it really highlights the value of being in the <unk> in the fold as a customer of a scale provider who can manage a situation like this with the most.
Degree of Alacrity and effectiveness, so I think well.
Well, it's a situation that we certainly don't wish upon ourselves or anyone else it reinforces the value of being a customer of ours.
Okay. The second question I have is can you talk about your service levels and as your labor comes back have you seen improvements in your service levels.
Where are they relative to where you want to be and can you think about where they expect to be say in six months or nine months, how do you think that progress happens.
I would say that right now we are fortunate that were being graded on a curve.
That honor that our service levels are from a historical perspective are quite dreadful.
From a relative perspective across the CPG landscape.
Pretty decent and that one of the more significant opportunities ahead is to get that customer fill rate back to historical norms and it frankly starts with making sure we have ingredients coming in the door, when we need them and where we need them to be.
Yes.
And one more I'm sorry, how does your innovation are you able to.
Ramp up your innovation, whereas the ingredient keeping you from doing that.
What do you think is the.
A real shortage that is changing your business structure or is it just hey, it's more of a.
Pete.
I'll leave it there.
It's a great question and I would say it adds a bit of complexity to our innovation cycle because innovation by definition adds a little bit of complexity to our business to our customers' business into our procurement efforts. So we've had.
Great success for instance, and on the demand side of the Premier protein cereal.
And we've had some challenges in getting enough product.
And that's just one example, I would say in general it's a mixed bag, but the.
The supply chain.
Conditions, and when I say that I'm I'm not talking about post I'm really talking about across the country and up in downstream.
Do make it marginally more difficult to effectively introduce new products and we've got a good pipeline. We think we're in good shape in terms of.
Introducing good ideas.
But we need the execution side snowfall.
Great I appreciate it thank you guys.
Alright, thank you.
Okay.
Thank you ladies and gentlemen. This concludes today's event. Thank you for joining US you may now disconnect.
Yeah.
Yeah.
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