Q1 2023 Post Holdings Inc Earnings Call
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Welcome to post Holdings' first quarter 2023 earnings conference call and webcast hosting the call today from post are Rob Vitale, President and Chief Executive Officer, and Matt Mainer, Chief Financial Officer and Treasurer.
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.
800.
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136.
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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 first quarter fiscal 2023 earnings call with me today are Rob Vitale, our president and CEO and that mean, our CFO and treasurer Robin that will begin with prepared remarks, and afterwards, we'll have a brief question and answer session.
The press release that supports those remarks is posted on our website in both the investors and the SEC filing section at post holdings Dot Com. In addition, the release is available on the F. T CS website.
Before we continue I would 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 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 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, Jennifer and thank you all for joining us post had quite a solid quarter.
While all segments performed well foodservice performance exceeded expectations and contributed to our outlook revision for the balance of fiscal 2023.
Most encouragingly.
We are confident that the sustainable EBITDA level for foodservice has reset to approximately $350 million prior to considering the contribution from our ready to drink shake plant that comes online late this year.
Last quarter, we talked about margin restoration.
Compared to last year, we expanded gross margin by 170 basis points.
We expect some give and take throughout the balance of the year, including a dip in the second quarter. However, this quarter's expansion is expected to largely mirror our full year results.
Key drivers of margin expansion include pricing and supply chain execution offset by mix.
The pricing environment remains inflationary, but at a slower rate.
Data driven price increases remain achievable and elasticities in most categories remain relatively low.
Supply chains are demonstrably better fill rates continue to be below pre pandemic levels. As I have mentioned, we've used supply chain recovery is more of an ongoing process than a singular event once expected it to be.
Meanwhile, the shift towards more value price points is a margin headwind, but in most of our categories dollar accretive.
To give you some more detail and perspective on the individual businesses post consumer brands maintained a branded dollar share position of $19, 1%. Meanwhile, our private label business grew 13, 6%.
Interestingly, we have seen a stepped up level of competitor advertising intensity, which we believe is constructive for the overall category.
As I mentioned foodservice remained strong both in volume and pricing for some time, we have signaled our expectation that this business would emerge from the challenges of Covid and avian influenza in an improved position.
We believe that is rapidly becoming clear and forms the estimate I gave surrounding sustainable EBITDA.
Notably we expect to operate at approximately that level in the second half of this fiscal year.
Refrigerated retail continues to show mixed results our supply chain has markedly improved versus this time last year that recovery supported 12% volume growth in our core side dish category.
We do see some expansion of private label distribution in this category, we do not make private label, we are leaning into heavier brand investment to support both expanded distribution and velocities.
Illiquid ex remain under pressure as high path avian influenza costs have driven up pricing and resulted in the elasticity is among the highest in grocery.
Weetabix continues to be well managed and a challenging environment the margin pressure from elevated energy prices, which we highlighted last year developed as expected and will persist throughout the year. In addition to higher incremental costs and the impact on consumers drives mix towards private label.
<unk> acquisition of the youth that branch has gone exceptionally well with sales up over 30% when compared to the prior pre acquisition period.
As we mentioned last quarter, we continue to believe the current challenges in the capital markets, especially the debt markets create opportunities for post and MAA.
We remain interested in opportunities both large and small that could complement an existing business or provide entry into a new category.
This quarter, our capital allocation skewed towards bond rather than share repurchases has that same debt market volatility created unusually attractive prices.
This quarter, we sold our remaining stake in Bell rang brands.
All told our investment of a little over $700 million generated after tax proceeds of $2 billion and resulted in a distribution to shareholders of an additional $2 billion for future is bright and I'm excited to see the Bell rings story continue to develop.
Last but not least we revise our guidance yesterday evening.
We increased our outlook to an adjusted EBITDA range of one point O. Two five to one point out of six $5 billion to reflect year to date results and an increased optimism in the condition of the business.
While we have yet to planned fiscal 'twenty for our initial thinking is that despite some non repeatable current your benefit we expect to maintain or grow overall EBITDA in fiscal 2024.
With that let me turn the call over to Matt who will go into more detail on the quarter.
Thanks, Rob and good morning, everyone first quarter consolidated net sales were $1 6 billion and adjusted EBITDA was $270 million net.
Net sales increased 17% driven by pricing actions in each segment as overall volumes were relatively flat.
Pockets of our business saw a modest shift to private label, we continue to see incremental improvement and supply chain performance and customer order fill rates. However, both remained below optimal levels.
And while significant inflation contained in a quarter there do appear to be signs of moderation.
Turning to our segments and starting with post consumer brands net sales increased 9% and volumes decreased 1%.
Average net pricing increased 11% driven by pricing actions, partially offset by unfavorable product mix and incremental promotions.
We saw strong growth in Peter Pan and private label cereal. These gains were offset by declines in honey bunches of oats government bid business and mom bags, adjusted EBITDA increased 5% versus prior year as our pricing actions outweighed significant cost inflation and higher manufacturing expenses.
Weetabix net sales were flat year over year in local currency. However, sales were up approximately 14% a significantly weaker British pound caused a foreign currency translation headwind of approximately 4500 basis points net sales benefited from significant list price increases and contribution from last April's Act.
Of the you said Fran.
These benefits were partially offset by unfavorable mix, reflecting growth in private label products.
Excluding the benefit from you said sales declined 6% and volumes declined 1% growth in private label was not enough to offset decline in branded products, which are largely driven by supply chain supply chain constraints and related shortfalls in order fulfillment.
Segment, adjusted EBITDA was 18% lower than prior year, primarily because of a foreign currency translation headwinds. Additionally, our adjusted EBITDA margins stepped down as supply constraints for a compounded by higher input and warehousing costs.
Given the challenging macro environment in the U K, our overall outlook assumes margins are compressed throughout 2023.
Turning to foodservice net sales and volume grew 37% and 4% respectively revenue growth continued to outpace volume growth as revenue reflects the impact of inflation driven pricing actions the effects of our commodity pass through pricing model and avian influenza driven pricing actions to offset higher cost to procure.
Eggs on the spot market.
Segment, adjusted EBITDA grew to $109 million benefiting from improved average net pricing and volume growth, which combined mitigated the impact of higher cost to produce.
Refrigerated retail net sales increased 7% while volumes decreased 5% note.
Note that excluding the divested Willamette egg farm business net sales increased 10% and volumes increased 1%.
Any volumes decline as elevated a cost and limited cage free availability from avian influenza hurt both volume and margins.
Segment, adjusted EBITDA increased 12%, primarily benefiting from actions to offset significant cost inflation higher volumes also drove improved manufacturing levers the reinstatement of advertising and promotion wasn't offset to these benefits.
Turning to cash flow the FERC in the first quarter, we generated $98 million from continuing operations.
And was driven by profitability offset by excuse me higher profitability year over year versus a higher working capital our net leverage decreased half a turn this quarter to $5 one times driven by growth in adjusted EBITDA.
Moving on to capital allocation in the first quarter, we repurchased 300000 of our shares at an average price of approximately $85 per share and $71 million of our debt at an average discount of 15%.
We have $276 million remaining under our share repurchase authorization.
With that I would like to turn the call back over to the operator for questions.
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 star to once again that is star and one to ask a question, we'll pause for a moment to allow questions to queue.
We'll take our first question from Andrew Lazar with Barclays.
Good morning, everybody Hey, good morning, good morning.
I guess to start Rob I think in fiscal <unk>.
You talked about the foodservice segment EBITA, obviously was well ahead of what you see as a normalized run rate and I think for <unk>. You said you didn't expect it to be as strong as <unk>, but still elevated and obviously the first quarter did come in similarly strong as <unk>. So I'm trying to get a sense of a little bit more color on what drove that outperformance was it the same drivers.
<unk> <unk> were different than I guess, what would keep what would keep that business from delivering this level of EBITDA in to fiscal two <unk> or beyond.
The drivers for virtually identical for two two per SKU.
And I think the reality is that some of the avian influenza impact has persisted longer than we expected. There has been some occurrences that are outside the normal seasonal patterns that have caused that to linger a bit longer so that could persist a bit longer we have tried to strip that out and give you a perspective on.
What we think is.
Non related to that and giving you a sustainable EBITDA number.
But the conditions that are driving the business really have not changed between <unk> and one.
And those condition dropping I think last quarter, you said part of it was just being able to take advantage of let's.
Let's say competitors that werent in a.
The advantage of supply position as you were so that's one of the things I guess, that's driving it but then the other piece is just the pricing part I was hoping to get into just a little bit of detail on the pricing.
Versus what you need to pay on the spot market for procurement and how that helps drive the profitability higher at least from a shorter term period of time.
Well prices continue to remain elevated there has been some decline in the cost of breaking stock.
What we have tried to do is separate that.
So that you can get visibility into the small piece of it that is affecting the quarter.
But I don't want to get more detailed around pricing dynamics.
And then last just on I thought it was interesting that mom bags.
Cereal brands volume was down even though you've talked obviously previously about trading down an incremental shelf distribution I guess is that purely a function of just pricing and elasticity or is there something else there because it still sounds like youre seeing trade down just given some of the trends you pointed out in private label.
We.
We had some price gaps between private label and mom brands that needed to be fixed those have since been fixed and you should expect to see some correction of that dynamic going forward.
Other dynamic is simply the mom bags, while on a per ounce price point is quite attractive as a.
Steeper pure entry price, so we're seeing a bit of a migration more towards opening price point.
<unk> levels.
But I would expect as we go throughout the balance of the year you see some of that dynamic with mom brands start to reverse.
Okay. Thank you thank.
Thank you Andrew.
We'll take our next question from Chris Growe with Stifel.
Okay.
Hi, Good morning, good morning, Crisp alright.
Alright.
Obviously, you had a nice EBITDA guidance here and increase early in the year.
You can produce a lot of confidence in the business and Rob you had mentioned that foodservice is obviously performing ahead of expectations, which clearly as you know in our model as well.
I think you indicated that was probably the main driver of the higher guidance for the year I just want to get a sense of any other businesses that you would cite whether it be PCB or even refrigerated retail where you're seeing.
For a little stronger EBITDA performance for the year than what you initially expected.
Well I would say there is.
Three items one is the Q1 beat so we wanted to make sure to reflect that but then we also increased our expectation for the remaining three quarters. The second is that we have revised our estimate for currency translation given the fairly significant move.
And the pound Sterling and the first quarter.
And then the last would be we have still taken a meaningful amount of pricing that it's yet too.
It hit the P&L the uncertainty of course is ongoing elasticities, but I think the potential upside outside of the outside of Weetabix in foodservice Weetabix, specifically in U S dollars would be the relationship between incremental pricing any elasticities.
Chris and we will take.
Alright, I'll go ahead operator.
We'll take our next question from Jason English with Goldman Sachs.
Hey, good morning folks.
Jim.
Hi, there.
Couple of quick questions. So.
Thank you so much by the way for the.
Mueller on foodservice very helpful.
Sticking with foodservice you mentioned the incremental source of growth coming from the the shake capacity.
Can you bring us up to speed on how that's progressing when do you expect to be up and running how long will it take to get to run rate levels and.
Most importantly, how much profit do you expect that business to throw off for you.
And in reverse order, we've talked about it being $15 million to $20 million of incremental EBITDA.
The expectation currently is that we are going to be online right around the very end of the year. So September 30 ish or so.
Hum.
We are.
Building a factory in times that are challenging we met every horizon every milestone so far.
But I'm going to hedge that a little bit and say that you know.
Give it to the end of the calendar year and that will be up and running at.
At full capacity by early 2020 for early calendar 2024.
So we will do a little bit better than that but I don't want to hedge that a bit.
Yeah I appreciate why you would.
And the private label launches into refrigerated side dishes. It sounds like that's sort of a new in mounting threat.
To your business.
Could you put more context around that.
And talk about how youre looking to defend what we should expect from a P&L impact and whether or not there's going to be some price get back more promotional intensity et cetera. Thank you.
Well, our first levers would be more traditional.
Continued innovation continued revisions of pack sizes and expanded advertising all of which we think the brand would warrant irrespective of the.
Presence of private label private label has been tried a number of times in the category and not worked.
We've been quite successful in managing that.
We are highlighting it because we're in a bit of a different environment than we've ever been in this category with inflation as a widespread.
<unk> spread as it is so we would expect to be successful in managing that.
That incremental competition, but we wanted to highlight it because it is relatively new.
And last question on the cereal side I think a lot of us are looking at U S centric food and we see it we see it abating cost curve, when we see residual pricing than we're expecting.
Recent margin recovery.
Are those expectations founded in cereal or should we be a bit concerned about maybe the rising cost to compete.
I think you've sort of alluded to when you mentioned, you're seeing more advertising coming in.
I don't necessarily think that incremental advertising coming from category leaders as a bad thing for a car position in the category I think we need that kind of support in order to maintain.
Maintain interest in the overall category and we will compete and with different forms you know in terms of packaging it on.
In store marketing, so I don't necessarily view that in any way as a negative we're far more sensitive to promotional intensity and advertising intensity and I think that's within the normal range.
Makes sense. Thank you.
Thanks, Jason.
We will take our next question from Michael Lavery with Piper Sandler.
Michael Thank you. Thank you good morning.
Sure.
Hum.
Color.
On fiscal 'twenty, four even though it's obviously, it's super early but.
Just a quick clarification on that.
Where he said even with some of the onetime lifts in this year you would think it would be flat to up next year would that be sort of like for like excluding the shake capacity or with that driving a little bit of a lift.
We're not to that level of granularity that I can say within 10 or $15 million to $20 million, particularly when you factor in that it's not going to be for the full year 2020 for whether that will matter.
What we were trying to communicate is that to the extent that there is some uncertainty around sustainability of the overall EBITDA level, we don't share that concern as we sit here today, but whether that incorporates.
And your effect of the incremental capacity, that's a level of precision we haven't yet achieved.
No fair enough, but but yeah. Good good colors, though when.
When you talk about the pressure on Weetabix margins, obviously, we see that in this quarter is the.
Magnitude likely to moderate at all or or how do we just think about kind of the run rate over the rest of the year is <unk>.
Dave of what to expect or might that get a little bit better.
At the EBITDA level, I think it's indicative of where we will be at the gross margin level. It may fluctuate a bit.
With inventory levels, but I think we can maintain that EBITDA margin plus or minus longer term, we think it'll be restored, but we face a choppy year there.
Okay. No that's helpful and just one last quick one you mentioned some pricing that hasnt hit the P&L yet.
I may have missed it if this was clear, but is that which segment or segments would that apply to.
PCB and refrigerated retail.
And can you give any sense of the magnitude.
No I'd, rather not get into that level of pricing discussion in this form.
Okay. Thanks, so much.
Thank you.
We will take our next question from David Palmer with Evercore ISI.
Hey, David.
Thanks, Good morning, Rob.
I'm curious about the way this year is shaping up in the way that it provides insights about your earnings power. As you look ahead to fiscal 'twenty four I know, we're not going to get into guidance for an out year, but.
I would imagine that supply chain improvements.
I'll be something thats, continuing to happen, particularly refrigerated and if theres going to be some price net of commodities catch up progressing in consumer brands, but perhaps some give back in foodservice, but those are all hunches I'm. Just wondering if you could maybe give a sense of the way. This year is going in ways that could leave it and in print.
24 things I don't think I can answer the question any better than you asked it.
The.
Cadence and.
Variables you just went through are spot on.
Okay, well that was that was quick I with as far as the timing goes on the pricing on the commodities front for cereal you don't have to be down to a quarter, but when do you think that that will start to get better is that oh.
One how soon our quarter, so that starts now and builds throughout the year.
Thank you very much thank you Dave.
We have reached the allotted time for Q&A I will now turn the program back over to our presenters for any additional or closing remarks. Thank you all for joining us and we'll speak with you soon goodbye.
That concludes today's teleconference. Thank you for your participation you may now disconnect.
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