Q3 2022 Post Holdings Inc Earnings Call
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Welcome to post Holdings' third quarter 2022 earnings conference call and webcast.
Hosting the call today from post are Rob Vitale, President and Chief Executive Officer, and Jeff <unk>, Chief Financial Officer.
Today's call is being recorded and will be available for replay beginning at 12 o'clock P M Eastern time.
The dial in number is 808 395679.
No passcode 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 Matt Mainer Investor Relations of post holdings for introductions, Sir you may begin.
Thanks.
And thank you for joining us today for Post's third quarter fiscal 'twenty two 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.
Press release that supports these remarks is posted on our website in both the Investor relations and the SEC filings sections of those holdings.
In addition, the release is available on the SEC's website.
Before we continue I'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 a.
Actual results could differ materially from these statements.
These forward looking statements are current as of the date of this fall and management undertakes no obligation to update these statements.
As a reminder, this call is being required 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 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.
You, Matt and thank you all for joining us post had a successful quarter.
We are building momentum for the final quarter of the year and into next year. This is despite some lingering problems and our supply chains as well as historical levels of inflation.
I'm going to begin with some comments about margins.
First we have largely managed to offset the impact of inflation with pricing input costs remain volatile and we anticipate additional inflation and additional pricing.
We are confident in our ability to deliver the needed pricing.
Percentage margins declined year over year, primarily resulting from the mechanics of our grain based pricing model in foodservice as.
As well as a mix shift in our overall business portfolio.
Within foodservice EBITDA per pound grew nicely and is now on par with pre pandemic levels.
<unk> per pound as our primary K P I, rather than percentage margin as ladder fluctuates with the direction of pass through pricing.
The mix shift results from acquisitions that contribute on average lower margins.
<unk> to value within cereal and the increase in foodservice as a percentage of total post revenue.
Each of these are margin dilutive they are each attractively profit accretive.
And in this case at least we do continue to see elevated costs in our supply chain.
With respect to our supply chain.
The bad news is that they remain under stress. The good news is they continue to improve albeit not in a straight line.
We started the year expecting this basket of problems that fall under the umbrella of supply chain challenges to rapidly improve as he had a pandemic driven stimulus increased workforce participation.
The problem is both more nuanced and more blunt there appear to be more structural changes in the work force that require creative solutions and productivity initiatives.
Meanwhile, there are more glaring disruptions and geopolitical relationships that have long lasting impacts on where we source as a result, we expect supply chain improvement to be more steady and gradual ultimately leading to better volumes as reliability and through an expanding margin as controllable cost management and productivity improves.
North American cereal business continues to benefit from consumption strength and key brands like fruity pebbles, and honey bunches of boats as well as strength in private label and value.
Our branded share reached 20% of total private label reached six 7% recall, we are by far the largest provider of private label ready to eat cereal.
A recent innovation most specifically premier protein cereal has also been quite well received.
Foodservice effectively navigated the impact of avian influenza.
We had predicted that by Q4, we would reach our pre pandemic profit level, we will likely exceed that level and look to enter 2023 with momentum.
Our risk to maintaining that momentum throughout the year is largely a function of continuing to improve our supply chain.
We are still not fulfilling customer orders at an acceptable level.
And the other hand, our refrigerated retail platform was hurt by a I would say cost increases could not be pass through quickly enough power.
The business made great strides year over year recall that last year, our supply chain limitations left us unable to build inventory ahead of the key holiday season.
We've expanded our capacity with third party manufacturers and we are fully prepared for the upcoming season.
Leveraging third party manufacturers comes with some margin pressure and we expect that to reverse as we use internal capacity to support the growth of the franchise.
This quarter, our side dish products grew volume over 10%, we expect attractive long term growth and supply chain improvement enables us to re engage more aggressively in marketing the brand.
Weetabix keeps chugging, along despite a challenging consumer market marketplace. The U K inflation rate has run ahead of the U S with particularly meaningful increases in core products like food and energy.
Ebix has been able to maintain sales and margin.
It does appear that we will enter 2023 facing currency headwinds as it relates to weetabix.
As you all know the capital markets have been choppy. We believe this plays to our long suit. An example, being our recently completed bond tender that Jeff will discuss in more detail. We continue to aggressively pursue M&A and in the last two years have completed six tuck in acquisitions.
We expect the volatile markets to lead to some larger opportunities.
Obviously, we cannot predict in any will convert to acquisitions, we will remain disciplined on price regardless of market dynamics.
Meanwhile, we continue to explore combinations for this back the weak IPO market has made execution more challenging here too we will remain highly disciplined in our efforts. We continue to believe in the elegance of the structure, but if the market timing is bad we will not force an outcome.
While we continue to focus on M&A, our capital allocation landscape is broader in.
In addition to the bond tender, Jeff will provide details on share buybacks and lastly recall the postal was $19 4 million shares at Bell ring brands, which we expect to monetize within the next six months.
Before turning the call over to Jeff I want to reiterate how encouraged I am with the sequential and the year over year progression of our business during 2022.
We see good cause for optimism entering 2023 as well as longer term opportunity in both volume and margin as we continue to proceed to make progress on our supply chain with that I will turn the call over to Jeff.
Rob and good morning, everyone.
Third quarter consolidated net sales were $1 5 billion and adjusted EBITDA was $251 million net.
Net sales increased 22% and benefited from approximately $63 million of incremental sales from recent acquisitions.
Actions in each segment.
Volume demand recovery in the foodservice segment.
Internal and external labor shortages and supply chain disruptions continue this quarter, causing our per unit product costs remain elevated.
Customer order fulfillment rates improves, but we're still well below optimal levels.
Turning to our segments and starting with post consumer brands net sales and volumes increased 23% and 14% respectively.
Excluding the benefit from the private label cereal acquisition net sales and volumes grew 16% and 7% respectively.
Branded and legacy private label cereal average net pricing increased eight 8% driven by pricing actions, partially offset by unfavorable product mix.
Pebbles Honey bunches of boats mom bags, Peter Pan and legacy private label cereal drove the volume increase.
Adjusted EBITDA decreased one 3% versus prior year, primarily driven by costs related to ongoing supply chain challenges.
An increase in employee incentive costs.
<unk> net sales increased 1%, despite a significantly stronger U S dollar against the British pound, which caused a foreign currency translation headwind of nearly 1100 basis points.
Net sales benefited from the significant list price increases.
And sales from recently acquired <unk> brands.
These benefits were offset by unfavorable mix, reflecting growth in private label products.
Excluding the benefit from the <unk> acquisition volumes declined 6% as growth.
From private label distribution gains and new products was not enough to offset declines in other products.
Called the prior year period benefited from Covid driven at home consumption.
Supply chain disruptions, most notably in packaging transportation availability and equipment reliability.
Continue to suppress volumes and pressure segment profit.
Segment, adjusted EBITDA was 2% lower than prior year, primarily because of the aforementioned foreign currency translation headwinds.
Okay.
Foodservice business saw net sales and volume growth at 33% and 6%, respectively lifted by distribution gains and higher away from home demand.
<unk> growth continued to outpace volume growth as revenue reflects the impacts 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 remains below pre pandemic levels.
Adjusted EBITDA grew 45% benefiting from the volume recovery and improved average net pricing.
And bind mitigated the impact of higher cost to produce.
Frigerator retail net sales increased 12% while volumes decreased 3%.
Excluding the egg beaters, and hallmark acquisitions, and the divested Willamette egg farms business net sales and volumes increased 10% and 2% respectively.
Pricing actions drove increases in average net pricing across all products.
Side dish and sausage volumes grew 10% and 4% respectively, while volumes in other product categories declined.
Retail egg product volumes in particular declined from supply reduction from the impact of avian influenza.
Adjusted EBITDA decreased to $30 million and was pressured significantly by dairy costs.
Costs due to avian influenza higher manufacturing costs and increased freight.
Moving to capital markets transactions in the third quarter, we purchased approximately $1 9 million of our shares at an average price of $76 43 per share.
Year to date.
Repurchased approximately $3 8 million of our shares.
Through the end of the third quarter, we completed a modified Dutch auction to purchase approximately $140 million and principal amount of our $4, 625% senior notes due April 2030, and approximately $382 million and principal amount of our four 5% senior notes due two.
September 2031.
We paid $450 million for these notes, reflecting a $72 million discount to par.
Net leverage at the end of the third quarter as measured by our credit facility was approximately six two times on this basis, we expect to reduce leverage by approximately half a turn once we fully execute intended debt for equity exchange of our retained ownership of $19 4 million shares or dollars.
With that I'd like to turn the call back to the operator for questions.
At this time, if you would like to ask a question. Please press the star and <unk> 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.
And our first question will come from Andrew Lazar with Barclays.
Hi, Rob and Jeff Good morning, Andrew.
And Andrew we are only taking multiple choices Marty yes.
I'll keep that in mind.
First off just with PCB, obviously organic growth in the quarter very strong and ahead of the category growth rate. So just trying to get a sense of its sustainability.
And the key drivers I guess, what are you seeing on trade down and elasticities and things of that nature.
Well, obviously pricing is a big component, but we're also seeing good volume growth across our value portfolio with additional distribution in our mom franchise as well as gains in private label. So we've been talking about this eventual term for some time and it feels like it's.
Here are stable and potentially building some momentum so it feels like that's an opportunity.
From a consumer trade down perspective, and a customer perspective, so it feels pretty encouraging right now now the inhibitor of courses supply chain execution because we.
We could do more if we had more effective throughput.
And then I know, it's a bit early to discuss sort of detailed guidance for for next fiscal year I think previously though.
It seemed like we can basically take the second half run rate of this year.
Is that kind of maybe add a little bit to get to sort of a preliminary look at about 23 could sort of look like.
I guess any reason to think dramatically differently at this 0.1 way or the other just discrete things that we sort of know about that we should be aware of on that front.
There is no reason to believe are different than you articulated but the hesitation that I would have would be we have not gone through our planning in.
We want to make sure, we're where we need to be on inventory and a.
Productive capacity as we you know, which we obviously have just done.
We anticipate doing in the second half of the year or so.
Yeah, I think the swing factor is where do we get.
Our supply chain as we enter 2003, and then move into in 'twenty, three but I would say your basic premise is certainly intact.
Thanks, so much.
Thank you.
Thank you.
Our next question will come from Chris Growe with Stifel.
Hi, good morning.
Good morning.
Good morning, I want to start first if I could with the with the Foodservice Division and.
The profit came through it at a very nice rate in the quarter.
And I guess I'm, just curious to what degree or if you can didn't know how much of this is like avian flu benefit and then you made a comment about maybe having a little better run rate out of 'twenty two for foodservice just to get a sense of like what you're thinking there in terms of the benefit to profitability I guess from the pricing initiatives in this recovery in volume.
Yeah.
The avian influenza benefit was roughly 10.
$10 million in the quarter coming out of our ingredients segment and if you go back to where we had expected to see the second half shape. Our EBITDA expectation was about 48 52 third to fourth quarter and the effect of that is going to make it more like 50, 50, So we'll keep that benefit and probably growth.
There.
There's very limited impact in the fourth quarter, we see.
Stabilizing pricing very effective work within our organization to get inflation pass through as well as <unk>.
Decent demand.
Some potential consumer weakness.
Okay, that's encouraging and then one one area that.
It was kind of different what I had expected, especially given some of the dialogue last quarter was it refrigerated retail division. Some of you had you know a real.
Optimistic and bullish outlook on the business certainly side dish volumes are very strong, but the EBITDA has been challenged.
So I guess.
As avian flu that was one of the you know kind of the higher egg prices that we own one of the issues there is that.
Kind of being mitigated now and I guess.
Other factors around the supply chain, we should be aware of in terms of understanding the margin for that business on the the EBITDA recovery, we'd hope for there.
Yeah.
Was there a handful of things one is I think the.
The estimates were a bit on the high side and not reflective of the third fourth quarter Delta.
So the.
From our perspective from an internal estimate perspective, there was a bit of a mess, but it was almost entirely attributable to AI cost being.
Being incurred at refrigerated retail from our foodservice business, so an internal.
Transfer.
In terms of the overall margin structure I commented in my prepared remarks.
As we seek to fix our supply chain, we've leveraged more third parties and that has a temporary cost or a <unk>.
Temporary percentage cost.
As we will now circle back end use internal capacity too.
Support growth, we don't want to abandon the contract manufacturers. We think they are a vital part of our ongoing supply chain and great partners. So we are we are bringing down our internal absorption temporarily and we will now rebuild it.
So the other aspect of course is that we focus a lot on side dishes, because that's the real churn, but the franchise, but that segment also contains.
Our sausage business, which has more commodity volatility tied to south pricing, we've done a nice job of bringing some more sophisticated pricing mechanisms to that market, but it is still.
Market that has some margin volatility.
Albeit a relatively small piece of the total business, but it can magnify some of the market volatility within that segment.
Okay.
Thank you for that and I appreciate it.
Thanks, Chris.
As a reminder, that is star one to ask a question.
And our next question will come from David Palmer with Evercore ISI.
Thanks.
I guess a question going you know as we look into the first part of fiscal 'twenty three I'm wondering how you're feeling about pricing net of commodities across the business and then if you can break it out.
Thinking about supply chain.
Friction costs that you might have incurred last year that that maybe would be getting a little bit better by that.
Well I would expect by the time, we get to the beginning of 'twenty three we would have priced no. One inflation. So we would now be dealing prospectively with what changes from here.
What that will be but.
I think what we've demonstrated is an ability to pay.
What comes out at us with ingredient input inflation.
With respect to supply chain progress.
Largely going to Echo what I said in my prepared remarks is that you know.
Rather than it being a bind.
Binary event that we are solved its going to be a more gradual process of grinding it out quarter to quarter and we think there is a fairly substantial.
Margin opportunity as we do improve overall execution, both upstream and downstream but.
But we're not in a position yet to quantify it having not completed our.
Planning process for 'twenty three.
And then specifically on that's helpful with regard to the post consumer brands business.
You mentioned.
That there was some compensation impact as well as supply chain.
And can you just sort of quantify I would've expected a little bit better margins given the volumes that you are having there, but maybe you can give us a sense of why.
What was driving the magnitude of the margin headwinds given given the strong volume I'll pass it on.
Well a couple of things I mix is a big component of the PCB volume because as we shift.
From the from branded to more private label and value. While again is profit accretive. It is margin dilutive and then we had some.
We had some incentive a lack of comparability I think in the third quarter of last year.
We didn't achieve some of our incentive targets and then the third quarter of this year. They were achieved so it's just a comparability issue.
Thank you.
Thanks, Dave.
Our next question will come from Jason English with Goldman Sachs.
Hey, good morning folks.
Thanks for talking to me Jason.
We've been talking supply chain challenges I think every quarter for a very long time and it actually predates COVID-19.
And if we should assume any refrigerated business and you said today.
Some of the challenges appear to be labor and nature of where you see like structural changes to the workforce, suggesting that.
The heating to evolve your supply chain.
So can you give us a bit more color around that can you give us a bit more size of the prize in terms of like what you're leaving on the table today, because your inability to get to have everything humming. So we can contextualize, what the fixes could bring to it to your P&L and lastly can you touch on what it's all going to cost should we expect a surge in cap.
As you look to go in and maybe modernize or move equipment around or or change where production is whatever the solution set requirements.
I'm going to do that a little bit in reverse order I think.
We are not going to require a surge in capex, but we may have a materially different mix of our capex from trying to be a bit more experimental two being very focused on asset reliability maintenance more.
Shift some of that mix from what has historically been.
Combination of growth and maintenance to a couple of years, where we're highly focused on maintenance and asset reliability.
With respect to.
The comments about workforce.
What I would say is as we've all heard this term the great recognition.
At our share participation in what is the net result is that we have a generally less experienced workforce.
So as you have a plus experienced workforce you have the indirect costs that.
That inexperience can create and it doesn't require.
Major.
And costs, what it requires as you know me.
More diligent training.
Yeah.
Okay.
Okay.
In a satisfactory way, but yes, it's Tom.
For details.
Yes, I get it.
I wanted to.
On the phone I appreciate that it's really loaded question.
And it's probably not appropriate for the call but I.
I appreciate the effort and look forward to having more conversations on it going forward.
Sure.
Ladies and gentlemen, this does conclude the question and answer a question of today's call.
I would now like to formally close the call and we thank you for your participation you may disconnect at any time.
Thank you.
Okay.
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