Post Holdings, Inc.

Welcome to the Post Holdings First Quarter 2020 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer, and Jeff Zadoks, 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 800-585-8367. Again, the number is 800-585-8367. and the passcode is 1371013. 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 of Post Holdings for introductions. You may now begin.

Thank you. Good morning, and thank you for joining us today. With me are Rob Vitale, our president and CEO, and Jeff Zadoks, our CFO. Rob and Jeff will begin with prepared remarks and afterwards we'll have a brief question and answer session. The press release that supports these remarks is posted on our website in both the investor relations and SEC filing sections at postholdings.com. In addition, the release is available on the SEC's 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 reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Rob.

Thanks, Matt. Thank you all for joining us. I wasn't sure I was going to do this, but I think before I go into my prepared remarks, I'm going to share with you that I am about 90% of the way back from a domestic virus I've been fighting this week. So bear with me through hacks and other things as we share with you our results for the quarter. So with that, the first quarter came in largely in line with expectations. We communicated a 2020 plan with modest second half favorability. and in total, our quarter is consistent with our cadence expectations. As always, there are some puts and takes across the business. This morning, in my prepared remarks, I will provide some additional clarity around 2020 outlook, a brief business update and comment on capital allocation. To start, I want to give some additional detail around the quarterly cadence. While revenue is closer to evenly split between halves, our plan called for and continues to call for first half adjusted EBITDA to represent approximately 46 to 47% of the year. This compares to a first second half split in 2019 of 49.51. We expect the acceleration into the second half for the following reasons. A serial promotional calendar that is weighted to the second half. Navigating potato side dish production constraints that have resulted in customer allocations. The timing of pricing moves. Cycling startup costs for our Norwalk plant, back half cost reductions versus first half investment in cost reductions, and the timing of key promotional events for Bellring customers, coupled with heavy premier protein advertising spend in Q2. Turning to the business, Bellring is off to a great start. Their call is coming up shortly, so I won't steal any of their thunder. From a post perspective, the focus remains on how to best strategically manage the asset and allocate its capital. This will be a story in the making and one that looks quite promising. Our domestic cereal had an expected decline in consumption as we lapped aggressive promotional events in grocery and club. As I mentioned, our promotional calendar this year favors the second half. More structurally, we were early in license weeks and we are seeing the impact of competitive reactions. We have a promising innovation pipeline and continue to be confident in the near and longer term trajectory of the business. The category itself was a relatively bright spot this quarter. Inclusive of non-measured channels, it grew approximately 0.5%. Weedabix continues to perform well, and we would like to find a way to build around this team. Food service eggs and potatoes and Bob Evans side dishes had solid growth. However, we had weakness in retail eggs and cheese. Across the integrated supply chain, we incurred costs tied to supporting potato demand, and we are struggling with a labor shortage in some key rural markets. Both factors pressured profit growth in an otherwise solid quarter. Both issues will linger to a degree throughout the year. Eighth Avenue made solid progress to recover from a weak 2019. It also executed a strategic purchase in acquiring peanut butter manufacturing assets from ConAgra. We continue to expect adjusted EBITDA of $100 to $105 million before consideration of the ConAver purchase. Turning to capital allocation, our attempt to acquire the Treehouse private label serial assets met with opposition from the FTC. We believe it was the wrong conclusion, but we ultimately agreed with Treehouse that protracted litigation was in neither party's best interest. We continue to search for M&A prospects, but we always do so against an array of capital allocation choices, including buying our own shares. This quarter we acquired 2.2 million shares of Post. Despite the commitment to share repurchases, we ended the quarter at leverage levels that for Post are historically low. With that, I will now turn the call over to Jeff.

Thanks, Rob, and good morning, everyone. Adjusted EBITDA for the first quarter was $303.1 million, with consolidated net sales for the quarter growing 3.2% year over year. Post-consumer brands' net sales and volumes declined by 3.1% and 3.4% respectively. This volume decline is largely attributable to heavier promotional activity in the prior year period and lapping new product pipeline bills. Average net pricing improved 0.3% as we benefited from a full quarter of last year's price increases, but they were largely offset by unfavorable mix skewed to private label versus branded products. We had a 230 basis point improvement in gross margins driven by $5.1 million of cost savings from implementing our new integrated business planning process. These savings are incremental to our other continuous improvement initiatives. However, we had offsetting higher SG&A costs this quarter for consulting fees and warehousing costs related to implementing these new processes, including optimization of our inventory footprint. Net of all of these factors, segment-adjusted EBITDA declined 3.4% compared to the prior year. WeedVix net sales increased 0.6% over the prior year. This reflects an 8.7% improvement in average net pricing, partially offset by a 7.6% volume decline. Average net pricing benefited from targeted base price increases, less volume sold on promotion, and favorable mix. While solid volume growth in biscuits was offset by declines in non-biscuit products, resulting primarily from capacity constraints on extruded products. The average U.S. dollar to pound sterling exchange rate in the quarter was flat with the prior year, and as a result was not a significant variable in the year-over-year comparison. Overall, Weedabix segment-adjusted EBITDA increased 17.7%. Net sales in food service increased 3.1%, with volumes up 3%, driven by strong growth in both egg and potato products. Despite this volume growth, adjusted EBITDA declined 2.3% from the prior year, driven by higher integrated supply chain costs, including startup costs at our new precooked egg facility and unplanned downtime in our potato plants. Refrigerated retail net sales and volumes declined 4.5% and 7% respectively. Overall side dish volumes declined 5.2% driven by capacity constraints which led to customer allocations. However, Bob Evans granted side dishes grew 5.4% as we prioritized allocations to this faster growing portion of our business. Retail egg and cheese volumes declined approximately 10% and 9% respectively. Segment adjusted EBITDA declined 8.8% this quarter, driven by overall volume declines, higher integrated supply chain costs, as previously mentioned, and lower contribution from our cheese business, caused by lower sales volumes and higher commodity costs. These items were partially offset by an improved price-cost relationship for sausage products. Bellring net sales increased 31.3%, while adjusted EBITDA grew 40.9%. You can hear further detail about Bellring's results on their conference call later this morning. Turning to our capital markets activities, during the quarter, we repurchased approximately 2.2 million shares at an average price of $102.97 per share. Our remaining share repurchase authorization is approximately $368 million. During the quarter, we repaid our legacy term loan in full primarily for the proceeds of the bell ring transaction. And subsequent to the quarter, we retired our 8% notes, eliminating the one outlier to our bond by our pricing. As a reminder, neither bell ring nor post are obligors or guarantors of the other party's debt. Accordingly, we report leverage statistics for post independent of bell ring debt and adjusted EBITDA. Post pro forma net leverage on this basis was approximately five times as of December 31st. During the quarter, we generated $108.4 million of cash flow from operations, which was down from a year ago, driven primarily by $49 million in higher net settlements of our interest rate swaps and timing of working capital across several of our business segments. Capital expenditures were approximately $77 million, which included the purchase of our previously leased side dish manufacturing plant in Sulphur Springs, Texas, and completion of our growth capital projects in eggs. With that, I'd like to turn the call back to the operator for questions. Operator?

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. That's star, then the number one. Your first question comes from the line of Andrew Lazar with Barclays.

Good morning, everybody, and glad you're on the mend, Rob. Thank you. Two things, if I could. I guess first, you talked about volumes in cereal were lower year over year, as I think you expected, due to the timing of promotions and pricing moves in the period last year. I guess, would your expectation be that volume in sales begin to accelerate in this fiscal quarter, even in what looks to, and I think what you expected, to be a somewhat more competitive arena this year? And does sort of slight growth in EBITDA in this segment for the full year still seem to make sense in terms of how you're thinking about it?

Yes to both. I would say to give you a little more color, we expect a beginning of the acceleration this fiscal quarter, but to be more material next quarter. These were two relatively discrete large events last year, one of which is being repeated in the second half, one of which was a margin decision. So as we lap that event or as we execute that event in the second half, we should see some of that acceleration. And in terms of the projection on adjusted EBITDA, we fully expect to be able to maintain or grow from 2019.

Great. And then second would be fiscal 1Q, as you mentioned, was the second quarter in a row. in which Post bought back about sort of 3% of its share base or so. I guess can you talk a little bit about what this says or maybe doesn't say about the attractiveness right now of the various sort of core avenues that Post typically looks at around its capital allocation model? And I assume, I think the 46%, 47% EBITDA split is similar to what you had thought last quarter. I don't think there's a change to that, but just making sure. Thank you.

Yeah, in reverse order, it's the same as we thought last quarter. With respect to share buybacks versus other uses of capital, everything's a relative comparison. So if the market for M&A is 12 or 13 times and the multiple of posts is X, it's simply a comparison of would we rather invest in posts or something different. And it may not always just be a simple mathematical calculus. There may be capabilities that we're trying to buy or a market that has a different growth rate. But it starts with a relative analysis of Our business versus competitive alternatives.

Great. Thank you very much.

Thank you.

Your next question comes from the line of Chris Groh with Stiefel.

Hi. Good morning.

Good morning, Chris.

Hi, Rob. Hope you feel better there. I was curious about just a follow-up question on the post-consumer brands business. I think, Jeff, you mentioned some cost savings coming through, some integrated business planning type savings coming through. I assume those are sustainable and should continue. It's a lot of activity that occurred last year. Does that then kick up in Q2, 3, and 4, or are we hitting a run rate for those savings? Just curious how that influences EBITDA in that division.

Yeah, it's a progression throughout the year, so we would expect to build upon the savings that were achieved in Q1 with incremental savings throughout the rest of the year. And of course, some of that's necessary to offset inflation that we're seeing in the business, but definitely a progression. And that's one of the reasons that Rob called out for some of the second half loading of our overall plan.

Okay. And then just an idea, if I could, on the food service division on those costs for Norwalk. Did you quantify those in the quarter? If you could, it'd be great. And then just understand, it sounds like those continue a bit into Q2. Is there a number you're maybe given for the year in terms of the effect on that division's profitability?

There's two different buckets. One is just direct costs, which is roughly $3 million, but there's also ramp-up costs, which effectively are inefficiencies that we have not tracked and separately isolated, so that the difference between the factory running as fully operational versus the learning curve process to get there is a, you know, I would estimate in the and a low handful of millions of dollars.

Okay. Thank you for the time.

Thank you.

Your next question comes from the line of John Baumgartner with Wells Fargo.

Good morning. Thanks for the question. Hey, John. Rob, if we go to PCB and we look at your niche of the cereal category in that value segment, that's obviously been very stable, outperformed over time. And I'm curious, given this run we've had of stronger wage growth, that low-end consumer, Are you seeing any changes in terms of the dynamic? Are folks trading up? Are they trading out of the category? Or is loyalty, you know, generally pretty stable as it's ever been?

No, we're seeing good loyalty within the entire bag segment. So we haven't seen any changes of consumer trading up and out of it.

Okay. And then just, you know, follow up on food service. You know, wondering if you could speak high level in terms of any activity or level you're seeing from C-stores doubling down or, you know, QSRs doubling down on breakfast or C-stores coming in with prepared foods. How is the opportunity set emerging for you, pre and post Bobby, in terms of cross-selling or getting that new volume growth going forward?

Well, you've probably seen Wendy's has gone to breakfast and C-Stores have become a significant source of convenient breakfast, so we're continuing to see it as a material trend across the country. And where we have best seen the results of The Bob Evans acquisition and cross-selling is in our potato business where we're seeing really quite extraordinary growth rates. We have seen some in sausage, but it's a more competitive, a bit more commoditized business where we're really unique is in that sausage, excuse me, in that potato and egg category.

So you're ramping up the cross-selling pretty well already in that space?

Particularly in potatoes.

Great. Thanks, Rob.

Thank you.

Your next question comes from the line of Bill Chappell with SunTrust.

Thanks. Good morning. Good morning, Bill. Hey, I'm sorry. Can you just give me a little more color on the unplanned downtime at the plant or the refrigerated side and just what actual impact it had in the quarter and going forward?

So the unplanned downtime, we talked a little bit about that last quarter. It was some unforeseen mechanical failures that One of our plants in particular that required us to take down the plant in order to replace the I'm going to misspeak here, but it was a coil on a refrigerator of some kind. So we ended up sacrificing some downtime of a couple of days so that we could get that replacement in production. and then there were some other one-off events, weather-related events that also kind of hit us this quarter.

Any way to quantify what the impact was just for comparability?

I mean, it's really difficult to do that because it was a couple, two, three days of production, but translating that into what it might have been in terms of profit is really difficult. We know that it led to lost sales. But to further qualify, it's pretty hard to do.

Got it. And then just switching to 8th Avenue, it seemed like one of the better quarters 8th Avenue's had in quite some time. Is that kind of on the uptick as a business and with the acquisition, does that help the margins meaningfully?

I would say right now it is in stabilization. So we've kind of bottomed. and are making sure that we've got a stable foundation upon which to build. In terms of the second part of your question, it will certainly expand dollar profit. This is largely command business, so it will come at an average margin that's a bit lower. But a very high return on capital. Great. Thanks. That's what we paid for it.

Great. Thank you. Thank you.

Your next question comes from the line of Michael Lavery with Piper Sandler.

Thank you. Good morning.

Hey, Michael.

With the FTC's objections on Treehouse, how much visibility do you have on that? And specifically, what I'm trying to just make sure I have my hands around is how much of that is private label specific, or do you imagine this could sort of foreshadow any potential issues with any other serial deals?

No, we believe it is 100% private label specific, that they felt that the Combination of Posts and Treehouse would effectively eliminate competition in the private label subsegment. And what we felt was novel and, in our opinion, inappropriate was having such a narrow definition of the market that 7% of the market and drive competition in that big a category we found counterintuitive. And we argued that it was actually consumer-friendly but to no avail.

Thank you. That's really helpful. And then just on potatoes, they've turned much more inflationary. Can you just give us some color on how you pass that through and how manageable you see that being?

We have been able to pass through the ingredient inflation quite effectively. Where we're struggling a bit is some of the labor inflation unrelated to the potato crop but related to the potato factories.

And is that something you think might persist through the year?

We eventually should be able to price it, but it will persist for at least through the quarter.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of David Palmer with Evercore ISI.

Hi. Good morning. Good morning. Just a quick observation. It feels like there's breakfast wars going on inside the supermarkets but also in the restaurant channel, and you might have different feelings about either one, but you certainly are a participant in both. You're seeing Kellogg's trying to perhaps get in the game with the taste and fun cereals and perhaps teeing up more promotional activity this first half of the calendar year. and I suppose you're bracing for impact a little bit there, but also on the breakfast side away from home, not just Wendy's, but McDonald's is getting in the game there and obviously Dunkin' has a very successful new breakfast sandwich as well. So I would imagine you're looking at a very good demand year, perhaps a really special year on the food service side from a demand perspective, but The way that this is shaping up competitively in supermarkets might be tough for the next six months at least. What are your thoughts there?

Well, I think you said it fairly well. I think in my prepared remarks, I commented on that we were early in licensed suites with our Oreo product and had very good growth, let's say, 2018, early 2019. And there was a competitive reaction to that, as we would expect. and there was an onslaught of innovation based around license suites from both Kellogg's and General Mills. And we've seen just greater competitive intensity as that demand state gets potentially oversaturated. And what we need to effectively compete at the retail level is better, bolder innovation and that's nothing new. We've probably said that as long as the category's been around. We feel pretty good about our innovation pipeline right now, and I think what we're seeing in our immediate quarter is a conscious decision to cede some territory rather than fight for share in that environment in a category that is a bit overheated. So we're trying to pick our battles carefully, fight for the right share, not just all share, and be selective in retail. In food service, I don't have much to add to what you said. We're seeing very strong unit volume growth across most of our categories in support of the trend that you mentioned.

On the food service side, on the value-added egg side in particular, it seems like this next 12 months, if we get past some of these friction costs, should be a very good one for the incrementality of the new manufacturing and value-added eggs. I mean, you spent $60, $70 million on capacity there. I would imagine you're thinking that that could be a double-digit EBITDA millions boost at some point during this fiscal year. How should we think about that?

I don't think it's all unreasonable to think about it exactly as you just characterized it as a exiting the year run rate. Okay. Thank you. Thank you, David.

Your next question comes from the line of Ken Zaslow with the Bank of Montreal.

Hey, good morning, everyone. Hey, Ken. Can you talk about the dynamics, the serial dynamics in the UK? How is it I believe you were trying to take out some capacity there. Have you tightened that up and just give a little thought on the Weedabix business?

Yeah, the general demand is flat to slightly down. We have had a bit more decline in volume than the market because of our aggressive moves on prices we sought to restore. The traditional pricing dynamic and margin structure. We have taken out capacity. We may have overshot a little bit in taking out capacity because we're now putting a little capital back in to make sure that we keep our service levels where they need to be. But that has gone well, and we expect there to be some significant cost savings, again, like my last answer. as we approach the end of FY20 and having fully annualized in 21. Great. Greatly appreciate it. Thank you. Thank you, Ken.

Your next question comes from the line of Rob Dickerson with Jefferies.

We didn't hear the first part of your question, Rob.

No, I'm sorry. Yeah, just a question on SG&A, right, just in kind of trend cadence for the year. It was up a decent amount in Q1, you know, despite or let's say, you know, offset decent impressive gross profit growth. Is there any way you could just kind of simplistically bucket, you know, what's driving that increase in that SG&A and then why or why not that might ease as we go through the year? And then I have a quick follow-up.

Sure. There's no single significant driver, so it's several smaller items that tend to add up. As far as the segment that's driving most of it, it's the bell ring segment, and it's a handful of activities there ranging from some increased warehousing costs as their inventories have gotten more stabilized, some costs for some consulting not in Some costs and consulting activities around the company, as we mentioned in the PCB business. So it's really a handful of couple million dollars items. And I neglected to mention earlier on Bellring, there's some incremental public company costs as we did the IPO during the quarter. And that's the sort of thing that will be ongoing. The consulting fees we would expect to to diminish as the year goes on.

You finished the year decent cash balance, kind of as you have in the past. Like you said, leverage is low relative to history for you. And then, obviously, you don't pay a dividend. So you bought back some stock in Q1. You went through that rationale. Just kind of thinking forward, though, if your stock, let's say, were even less expensive or kind of where it is today, and the cash balance is still strong, is it rational to think that repurchase activity overall for the year could be up relative to history or do you just say, hey, obviously we're always opportunistic, we're always looking at the trade-off and our pipeline is very strong as of now on the M&A front?

Well, I would say the latter. The pipeline is strong, but we always look at it in the context of all of our choices for allocating capital. I wouldn't want to get into predicting what we're going to do next. I would rather just give you the conceptual framework and let you work from there.

Okay, fair. Thank you so much.

Thanks, Rob.

Your next question comes from the line of Brian Holland with DA Davidson.

Thanks. Good morning, gentlemen. Most of my questions have been answered. So, Rob, I think you alluded to this, though, in your prepared remarks. I'm curious about your thoughts on the M&A landscape right now in the U.K. Weedabix appears a solid beachhead for you. I presume valuation is perhaps more palatable there than here, but obviously a challenging market with perhaps lower visibility right now. So I guess just looking for a refresh on your thoughts about the landscape on that side of the pond.

Well, we're very pleased with the execution that the team has performed in the last two years. And it's a team that we think can do more, so we would like to give them the opportunity to do more. But at the same time, as you've just rightly highlighted, it's a choppy environment. It's incrementally less choppy now that we at least have clarity that Brexit is going to occur. We have another milestone in terms of understanding exactly how it occurs. So we're not We're not likely to rush in with both feet, but we wouldn't mind finding something small to tuck in under them and give them expanded dominion there.

Appreciate the call. Thank you.

Thank you. I think that's our last question, and I just want to, again, apologize for some of the coughing and hacking in the background here. So thank you, and we'll talk to you all next quarter.

Thank you for your participation in today's conference. You may now disconnect.