Post Holdings Inc. Q2 2023 Earnings Call
Okay.
Thank you for standing by and welcome to the post Holdings second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session.
To ask a question at that time, Please press star one on your telephone.
As a reminder, today's call is being recorded.
I would like to turn the conference host Mr. Daniel O'rourke Investor Relations for post holiday.
Sir you may begin.
Good morning, Thank you for joining us today for Post's second.
2023 earnings call.
With me. This morning are Rob Vitale, our president and CEO and Mark Mader, our CFO and treasurer.
Matt will begin with prepared remarks, and afterwards, we'll answer your questions.
The press release that supports these remarks is posted on both the investors and the C. C sections of our website and is also available on the SEC's website.
As a reminder, this call is being recorded and an audio replay will be available on our website at post holdings Dot com.
Before we continue I would like to remind you that this call will contain forward looking statements.
Or 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 call and management undertakes no obligation to update these statements.
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 Rod good morning. Thanks.
Thanks, Danielle and thank you all for joining us.
We had a strong quarter and we feel confident in our performance for the balance of the year.
Continued strong performance in foodservice is enabling us to lean into incremental investment in our retail channel businesses in it well positions us for fiscal 'twenty four.
Last week, we closed on the acquisition of a handful of pet food brands from J M Smucker.
We are optimistic that this acquisition will open exciting doors for post does have all our previous transactions.
I want to thank the teams from both post and Smucker, who drove this deal to a successful closing.
I also want to welcome the 1100 colleagues, who have joined us from Smucker.
To complete the pet food acquisition post delivered $700 million in cash and approximately $5 4 million shares to smucker.
Even prior to closing the transaction this quarter, we repurchased 700000 shares or about 13% of the number of shares issued.
We paid an average price below the issue price and the acquisition.
Our capital allocation priorities will remain opportunistically balanced amount of share repurchases debt reduction and M&A.
Last night, we raised our guidance for the balance of fiscal 2023 to 1.09 billion to $1, one 3 billion.
This updated guidance reflects no change to our initial assessment for the acquired pet assets. It is simply five months of the forward 12 month estimate of $100 million and adjusted EBITDA.
Moreover, it assumes full year foodservice performance of roughly $40 million to $50 million over at sustainable run rate.
Recall last quarter, we shared our estimated normalized run rate of roughly $85 million to $90 million per quarter.
Before considering the benefit from ready to drink shake manufacturing that will commence at the end of the fiscal year.
To say this another way the legacy business outlook is increasing for the second half. It also includes five months of pet.
If you begin with our revised guidance and add approximately $60 million to account for the full year of pet and reduce it by approximately $45 million foodservice over it would result in a baseline EBITDA outlook.
Let me briefly comment on our segments.
Starting with PCB in the U S ready to eat cereal category declined 4% this quarter as we lap prior year Omicron left.
The branded market share it's been quite stable at 19, 5%. Meanwhile, our private label business grew volumes nearly 3%.
Foodservice performance is supported by both attractive pricing dynamics as well as strong demand for away from home breakfast consumption.
Our foodservice potato business has shown exceptional strength as well with gains in both distribution and consumption.
We continue to see pockets of labor constraints, but in general our supply chains are performing far better than last year.
Refrigerated retail is a bit of a mixed bag. Despite substantial pricing sales were down for two reasons first we have been in low margin business that have not yet lapped its exclusion.
Second our refrigerated side dish business is lapping an inventory built and has seen trade down to private label. We're countering this with a step up in advertising.
The team has executed very effectively and supply chains are markedly improved over last year.
Weetabix continues to operate well in a challenging environment U K consumers remain under pressure from an inflationary trends in food and energy.
Consumer pressure has contributed to a trade down to private label.
We are a large provider of private label biscuit, but it is margin dilutive also while small youth it continues to grow quite nicely.
Across the business EBITDA margins grew 80 basis points over last year. We expect continued margin expansion as we cycle the timing of pricing movements versus cost increases.
We are certainly and interesting times and the capital markets the increase in cost of debt.
The reduction in available credit will likely make M&A a bit more scarce in general.
However, we think post is positioned favorably as a buyer with greater financing flexibility and certainty of closing.
Our pipeline of opportunities seems to reflect this perspective.
On the other hand with a may 28 deadline, we expect to terminate this back this month does that.
I've said before we believe our corporate us back to be a good tool, but the timing was terrible span.
<unk> investors will receive their initial investment plus a modest return.
We will continue to see creative ways to extend our capital deployment capabilities. Despite this particular structure not succeeding.
With that let me turn the call over to Matt.
Thanks, Rob and good morning, everyone.
Second quarter consolidated net sales were $1 6 billion and adjusted EBITDA was $276 million net sales increased 15% driven by pricing actions in each segment, our retail business saw elasticities, driven volume declines and a shift to private label on the other hand foodservice volumes remained strong as the consumer continue.
To prioritize eating out, especially within the breakfast day part.
Our supply chain performance and customer order fill rates continue to improve however, both remained below optimal levels.
And while we incurred additional significant inflation in the quarter, there do appear to be signs of moderation.
Turning to our segments, starting with post consumer brands net sales increased 5% in volumes decreased 6% 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, which was offset by declines in mom bags honey bunches of oats and international.
Segment, adjusted EBITDA decreased 1% versus prior year as lower volumes cost inflation and higher manufacturing costs were mostly offset by pricing actions.
Turning to Weetabix net sales increased 7% year over year, a weaker British pound in constant currency foreign currency translation headwind of approximately 1000 basis points the.
The increase in net sales was attributable to significant list price increases and contribution from last April's acquisition other you've hit brands.
These benefits were partially offset by unfavorable mix towards private label biscuit.
Excluding the benefit from you said sales were flat and volumes decreased 2%.
Growth in private label desk, it was not enough to offset declines in branded products, which were driven by inflation related elasticities segment, adjusted EBITDA decreased 23% versus prior year, while foreign currency was the largest driver higher input and warehousing cost outpaced pricing actions.
As a reminder, we expect the challenging macro environment in the UK to compress our margins throughout the balance of fiscal 'twenty three.
Foodservice net sales and volume here to 40% and 12% respectively revenue growth continue to outpace volume growth as revenue reflects the effect of commodity cost pass through pricing model and other pricing actions to offset higher product costs.
Segment, adjusted EBITDA increased to 100% from prior year benefiting from improved average net pricing and volume growth, which mitigated the impact of higher cost to produce.
As a reminder, prior year Q2 was still being significantly impacted by the Covid omicron berrien, making for an abnormally low comp.
Refrigerated retail net sales and volumes decreased 2% and 11% respectively. The decline in net sales was driven by the decision to exit certain low margin products pricing actions drove increases in average net pricing across all products side dish volumes decreased 10%, reflecting price elasticity.
As customers shifted their private label and we lapsing inventory load in from the prior year.
Volumes decreased as elevated a costs eliminate cage free egg availability from avian influenza hurt both volume and margins.
Segment, adjusted EBITDA increased 7%, primarily benefiting from pricing actions to offset significant cost inflation incremental advertising and promotion spending was an offset to these benefits.
Turning to cash flow in the second quarter, we generated 100 million from continuing operations, which is up significantly versus prior year and driven by improved profitability and lower cash interest expense.
However, cash flow was flat sequentially as we continue to see additional inflation work its way into net working capital.
As it appears inflation has leveling out we expect second half operating cash flow to improve meaningfully.
From a net leverage standpoint, we ended the quarter at five times, which is then a pro forma five one times for the impact of last week's pet food transaction closing and approximately five four times, if you've further pro forma for the normalization of foodservice performance.
Moving to capital allocation, we stepped up capital expenditures to $81 million in Q2, driven by continued progress on the <unk> co manufacturing facility, which remains on track for a Q4 startup. In addition, we repurchased 700000 of our shares at an average price of $89 per share and $50 million of our debt at an average discount of <unk>.
13%.
We have $216 million remaining under our share repurchase authorization.
With that I'd like to turn the call back over to the operator for questions.
Thank you again, ladies and gentlemen, if you'd like to ask a question. Please press star one wondering your telephone again to ask a question. Please press star 111.
One moment for your first question.
Our first question comes from the line of Andrew Lazar of Barclays. Your line is open.
Thanks, Good morning, everybody good morning, good morning.
I wanted to come back a little bit to some of your initial comments on guidance and such just to make sure I have it have it right.
I guess based on your comments it sounds as if sort of a normalized EBITDA for post if we take into account all of pad as well as the over delivery in foodservice is now sort of call. It 1125.
Do I have that right and if so is that how we should think about sort of fiscal 'twenty four is sort of like a starting point anyway.
Thats precisely right at the midpoint of our guidance. So I think your math is you took the midpoint of our guidance and just added 60 and backed off 45, So that's precisely correct.
Okay.
And I think maybe on the last call you had commented about expecting to maintain or grow overall EBITDA in 'twenty four.
Obviously, excluding the acquisition.
Now we've got this higher sort of expectation for 'twenty three as a base here.
How that affected.
Current sort of result affected that commentary for next year if at all.
Well certainly impacts the growth rate I'd, rather than answering that precisely with a yes or no. Let me give you some of the puts and takes we expect to see margin expansion with <unk>.
'twenty three entering or exiting.
With a higher run rate EBITDA margin, particularly within U S cereal.
We do expect to see some normalization in foodservice.
We expect to see some of the synergy flow from the pet acquisition begin.
Fiscal 'twenty four although not be completed by the end of fiscal 'twenty four.
There is there is a certainly a case for.
Growth in 'twenty, four offset by where the ultimate over earning in foodservice lands.
Yeah got it and then lastly, just on <unk>.
I guess.
And I may have missed this I apologize if I did margin in post consumer brands were about 130 basis points lower in the fiscal second quarter than they were in the first quarter I guess, what drove the deceleration and obviously it's in.
Past dues.
Generally speaking.
The branded packaged food space at this point.
Andrew.
I heard what drove the deceleration and then you got cut off.
Sure.
Because it is in Stark contrast to just what we're seeing from a margin recovery perspective across the broader packaged food space at this stage most of the sequential deceleration as a result of timing of plant shutdown for maintenance that drove some under absorption.
Absorption.
Fixed cost, we expect that to reverse the balance of the year. So it's not necessarily that if you look year over year, there's expansion and we look forward both quarter over quarter and year over year, we expect expansion.
Thank you.
Thank you.
Thank you one moment please.
Our next question comes from the line of David Palmer of Evercore. Your line is open.
Thank you very much.
Couple of questions from me on refrigerated you mentioned, the SKU rationalization drag could you just remind us.
<unk> of that and when you lap that and then just broadly are there any plans to bolster trends within fridge or refrigerated and just your outlook for this segment. Let me do those in reverse order and Matt's going to pick up the first question in terms of the trends in the category we are leaving.
Two or three years of essentially no advertising because of the supply chain challenges that existed throughout COVID-19. So we are just re engaging advertising and we fully expect the trend line to resumed to pre COVID-19 growth rates and growth rates it even existed well into COVID-19 without advertising.
Once we re engage because they are both distribution and velocity opportunities within the side dish brand.
With respect to the volumes we have.
We are lapping that.
So we exited private label of butter, which is a component of our cheese business.
A quarter ago. So we'll continue to lap that it's not a huge piece of business, but it is about $5 million of sales in quarter.
And then on Pat.
Obviously, you see the measured channels could you just talk about the all channel trends for that business and where you see the biggest nearing opportunities or priorities for this business.
One of them.
<unk> wants to this business as most of its business is tracked channels. Unlike a lot of the other competitors in pet we think one of the opportunities is to go beyond traditional.
Sure.
At DM channels with.
With respect to the near in opportunities, though the biggest opportunity is to improve supply chain and deliver to the demand that exists already we are selling everything that we can make but we're not making enough. So step one is to drive throughput in each of the factories that we've acquired.
Okay.
Thank you.
Thank you.
Thank you one moment please.
One moment.
Our next question comes from the line of Matt Smith of Stifel again, Matt Smith Your line is open.
Hi, Good morning morning, Matt Congratulations by the way.
Thank you very much Rob I appreciate that.
To ask about the pet transaction one of the benefits of the way that it was structured with that it was essentially.
It helps your leverage stable, which allows you to continue to pursue M&A and you had some commentary about the financing.
Environment, and you and post being favored buyer because of the surety of your financing and your ability to close.
Does the pet transaction widen the funnel for M&A are you able to look at deals to bolt on to the transaction that you just made or do you need some time there.
Well, let me answer from two perspectives.
The constraint around M&A as capital on people from a capital perspective, there's really not a constraint attractive transactions can be financed runaway.
The constraint right now would be around the work going in integrating the existing acquisition.
And so as that gets more organizational design. We are we are open for M&A.
Particularly around opportunities within and without Pat that have the ability to be freestanding businesses within our portfolio, we would be a little bit more cautious on full integrations right now simply because of the amount of work that is being dedicated to the.
The existing opportunity or the existing or the recently closed opportunity.
So it's somewhere in the Bill I mean, we have a lot of opportunities as you would imagine once we became an active player in the opportunity set for that kind of opportunity expanded and will I expect to continue to expand.
But we looked through relenza, both human and financial resources, when we start to think about what the next step should be.
Thank you for that and just a quick follow up you mentioned needing to improve the throughput and you're just in the existing manufacturing footprint.
Is that an area, where you're interested in M&A or do you believe that you can improve the supply chain performance to meet the demand that's out there.
In reverse order, we can certainly do it without M&A M&A potentially accelerates it depending on the situation.
Thank you for that okay. Thank you.
One moment please.
Our next question comes from the line of Michael Lavery of Piper Sandler Your line is open.
Thank you good morning, Michael.
Just wanted to touch on a couple of cadence questions.
That you've talked about foodservice normalizing in 2024, but.
I guess just given the level it is at the moment.
How sort of smoothly or quickly does it get there.
Maybe just giving you a little sense of how the second half looks into next year as much as you have any visibility there.
Kind of related to that.
You mentioned the.
Shakes ramping up or getting going into <unk>.
I think you had said that.
It would likely hit its full run rate by <unk> 24.
Is that still is that timing still right for thinking of kind of how it's up to full speed or is it running ahead of schedule at all.
We expect to see.
Our glide path between here and year end to get to the exit run rate.
That would then translate into that $85 million to $90 million per quarter X the manufacturing.
We expect the manufacturing to come online.
Roughly September .
Theres really no change to the outlook, we previously provided with respect to when it's fully.
The operational and providing product development.
Okay, great. Thanks, so much thank you.
Okay.
Thank you one moment please.
Our next question comes from the line of Bill Chapell of Jewish Your line is open.
Thanks, Good morning.
Hey, Bill.
Hey.
Two questions one on pad.
I'm trying to understand I guess, what you factored into the acquisition in terms of long term growth I mean, it seems fairly clear that there was certainly a surge of dog and cat ownership over the past three years that maybe hasnt coming out yet like you see in cereal, but it's a little bit harder destock your pets than it is.
Your pantry and so is it an expectation you will see a slowdown in the category and on that same vein is there any expectation that you'd see promotion step up within the category as costs come down and you get a little more competitive just trying to I understand the focus is on cash flow and improving the margins, but just trying to understand what kind of pressures you would expect.
The top line over the next couple of years.
We don't see a substantial growth in demand for the value sector, but what we do see is a step up in the volumes that we have been able to service and the value sector because demand has exceeded our ability to supply over certainly over the last 12 months.
With respect to promotions.
Just to clarify you are just talking Pat now not serial right.
Correct correct, yes.
Historically, a far less promotional category then Pat we excuse me than cereal, we don't expect that to change there are some capacity dynamics coming onboard that will create a little more capacity in the next.
Two to three years and have been the last half dozen or so, but we don't expect that if it changed it support the promotional dynamic to last very long.
Sure.
Okay.
And then just on the on the foodservice.
Foodservice just is there a way now at this point to kind of look back and understand.
But with the grain based contracts and higher egg prices kind of where from start to finish what the.
If theres net benefit and how much you expect to kind of hold on to on the EBITDA basis. As we move forward just trying to as we look to the 24 and things start to normalize to trying to figure out what the right numbers are.
Well I mean, I think we laid it out.
With as much precision as we can that there is.
$40 million to $50 million of over earning full year 'twenty four and that the normalized run rate of the business is closer to 85% to 90 per quarter.
Got you I guess the differences I didn't know if there was a.
If that's kind of on a normalized volume basis during COVID-19 that was where it was.
Yes.
That's what we believe with our existing volume the baseline would be in <unk>.
Of course, those volumes are expected to grow both with respect to just the sheer number and potentially the mix as we.
I have a long term strategy of moving up the value chain.
Okay. Thank you.
Thank you one moment please.
Our next question comes from the line of Jason English.
Goldman Sachs. Your line is open.
Hey, good morning, folks Hey, Jason good morning.
Hi, a couple of quick questions so far.
First pet both of them.
Pet business you just acquired it we've all viewed as.
That was the problem child with Smucker and.
The business has been suffering chronic volumetric declines.
You're talking about a business that's capacity constrained with demand.
<unk> is exceeding your ability to supply.
So how do we square that.
It is the narrative around the business just too bearish has the growth actually been much better or are there operational constraints and issues that need to be resolved.
So I think when you use the term capacity constrained it implies that debt.
<unk> is growing in capacity is not.
What has happened is demand has been flat and capacity has shrunk.
By virtue of some operational challenges.
They are things that.
We are addressing so as the capacity has not kept pace with the flattish demand that has resulted in a situation, which they have been unable to meet the constraint demand. So it's not a situation, which demand outpaced supply supply.
Decline.
Okay is there a <unk>.
Lot of Capex, that's needed to fix that or is it just no people process.
I'm sorry.
No different than we had announced back in February .
I think we announced $35 million, we've seen no change in our expectation around that there are there are changes to people and process.
The cultures within the plants. So there are on a right.
An array of small changes and then some capital, but again all baked into the original announcement of an acquisition.
Okay, and then one more question on Pat Watson.
Lots of conversation today around what normalized EBITDA looks like I think a lot of us were very surprised by the EBITDA for that business. It doesn't look normalized at all as we think about what profitability.
We believe profitability in the industry looks like so.
Is this business.
Structure are there structural reasons why it's so low.
And if so what are those structural reasons, if not like what are the non structural reasons that are driving it so low and how do you rectify that and how quickly can you rectify that and just to keep piling on with a multipart question.
What is bright look like thank you.
I'm going to answer the first question last in just revert to the announcements that we made in.
February that bright is somewhere north of $130 million of Ebitdas, We synergize business now do we think there are opportunities beyond that.
Sure we think there are opportunities to.
Improved margins that are not structural they are more as you can imagine as you deleverage the plant and the margins get hit we think re leveraging the plants restore those margins and Thats, a let's put a two year timeline around that.
The very first part of your question.
The semantics of the term normalized we were really focusing more on making sure you understood. The foodservice implication not the long term potential for.
Improving the results of the pet food business.
Understood. Thank you.
Thank you.
Thank you one more please.
Our next question comes from the line of Andrew Lazar of Barclays. Your line is open.
Great. Thanks, so much for the follow up just Rob more of a higher level industry question for you.
It looks as though we're sort of finally heading in earnest towards more of a normal operating environment.
During the past three years of all the sort of anomalous dynamics and I guess I'm curious how you think this transition back to normalcy will look maybe not just for post but more of the industry as a whole.
Do you think this transition to normalcy can be made.
Orderly way.
Investors sort of have their expectations in check for.
Maybe more uneven results for some time as sort of pricing has lapped and perhaps it takes more time for volumes to pivot more positively I guess I'm just trying to assess whether we see like more of a hard or soft landing. If you will for sort of the food manufacturers as we go sort of into the next phase.
Yeah.
<unk>.
We're beginning to see.
As a future that looks.
Fairly close to the pre pandemic past.
And what I would expect to see as mean reversion on volume.
Likely retention of the pricing that has been taken the last handful of quarters, if not years, so not quite sure whether that qualifies as soft harder somewhere in the middle.
But what I.
Would proffer is that some of the trial benefit.
We may have.
Hoped would convert has not been as sticky and that the and youre seeing it and benefit from our perspective, and our foodservice business I think that one of the underappreciated aspects of our foodservice.
Right now as how strong volumes are.
So I think youre seeing.
Go back to pre pandemic, we just hit a inflection point, where half of consumption was away from home and I think that is stickier than we expected it to be.
I appreciate your thoughts thank you. Thank.
Thank you.
Thank you.
We have reached our allotted time for questions. This concludes our conference. Thank you all for participating and have a great day.
Thank you all.
Okay.
Okay.
[music].
Okay.