Post Holdings, Inc.

Welcome to the Post Holdings Second Quarter 2022 Earnings Conference Call and Webcast. Hosting the call today for Post are Rob Vitale, President and Chief Executive Officer, and Jeff Zedokes, 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 800-925-9356. 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 Jennifer Meyer, Investor Relations of Post Holdings, for introductions. You may begin.

Good morning, and thank you for joining us today for Post's second quarter fiscal 2022 earnings call. With me today are Rob Vitale, our President and CEO, and Jeff Saddux, 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 the investor relations section 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 posted on our website. With that, I will turn the call over to Rob.

Thank you, Jennifer, and good morning, everyone. We had a successful quarter, and despite some near-term challenges, we remained quite upbeat about the year. I want to start by expressing my appreciation to our colleagues who worked towards the bell ring transaction. As you know, this quarter we completed the spinoff of 80% of our position. The transaction required an enormous effort from many people across our organizations, and I'm grateful to each person for their sacrifice and effort. I'm excited for the next chapter of the bell ring story. The Premier Protein brand remains the leader in the developing category with considerable runway for expanding household penetration and innovation. Dymatize has become a clear leader in sports nutrition. This business has tremendous fundamentals in terms of both growth and cash generation. We believe the transaction will also improve its technical support with greater liquidity in its shares. We are pleased with post-performance this quarter. Nonetheless, the business is not firing on all cylinders, and we are still earning below our potential. The expected second half increase reinforces that thesis. Meanwhile, labor conditions are improving. Controllable manufacturing performance is improving. Transportation is improving. I make the distinction about controllable manufacturing because we continue to face sporadic ingredient shortages that create inefficiencies in our factories and in our broader supply chains. Our procurement team has developed a triage approach to identifying flashpoints at the earliest possible moment, starting with better demand planning. However, because it is triage, it does lead to downstream inefficiencies. I expect the supply chains to continue to improve, and our management of shortages will continue to improve. But the combination of pandemic disruption, labor imbalance, inflation, and now geopolitical instability has led to a more lingering macro problem than we anticipated. Speaking of inflation, we have seen rampant cost increases across our business. For the most part, we have been able to raise prices to offset the cost increases, but the timing varies across our segments. Speaking briefly to each segment, most consumer brands had a solid performance. Again, it was not perfect as we managed both supply interruptions and the resulting inefficiencies. We have reversed distribution losses in our key multi-meal franchise with expanded distribution available in stores in April. And at the same time, we are continuing to see a modest shift towards value price consumption. Weedabix continues to navigate challenging waters exceptionally well. UK and European consumers are more directly feeling the impact of Ukraine-related disruption reflected in higher energy and food prices. Meanwhile, we will face a currency headwind as the pound has weakened against the dollar. Our refrigerated retail platform is improving nicely. Our side dish business resumed growth as capacity recovered. We are approaching a level of capacity at which we can resume our brand building efforts. On the other hand, we have struggled with commodity volatility in both our cheese and sausage categories. Food service continues to move towards recovery. Obviously, the $55 million in adjusted EBITDA reflects both a sequential and year-over-year improvement. We continue to expect to exit the year on an EBITDA run rate in line with our pre-pandemic level of profitability. We now expect this to occur at slightly lower volumes, with better margin as the business has modestly shifted to higher value added products. This spring, we have seen the first emergence of high pathogenic avian influenza since 2015. We have thus far depopulated two farms. We are working to mitigate the lost supply, albeit at materially higher prices. Last night, we affirmed our adjusted EBITDA outlook range of $910 to $940 million. These outlook numbers reflect the impact of known events which we do not expect to have a material effect. It does not incorporate a significant expansion in the direct impact on post supply. With one exception, our recent acquisitions are performing quite well. Henningsen, Private Label Cereal, and Eggbeaters are exceeding our underwriting case. Peter Pan is meeting expectations, but synergies begin to hit the P&L in 2023. Allmark is underperforming our underwriting case as costs have escalated faster than we have priced. While it is not terribly material, we hold ourselves accountable to getting these right and we expect to correct this in time. We were an active buyer of our shares again this quarter, although we had some constraints in our ability to acquire shares near the spend date. Since we last reported to you, we have repurchased an additional 1.2 million shares. Since 2017, we have now purchased approximately 23 million shares. you are all aware that borrowing costs are on the rise. Our capital structure anticipated this. Our long-dated and fixed-rate bond ladder positions us quite well to manage through increases in the cost of capital. The war in Ukraine has several impacts on our business. While we do not sell into Russia or Ukraine, both countries contribute to the global grain and energy trade. The realized and potential threat to Ukraine commodities and the potential sanctions of Russian energy will have a lingering impact on price and potentially availability. While the environment is choppy, our business is gaining momentum. I find it enormously encouraging because this is where we perform best, when volatility drives opportunities for significant change. We expect to find such opportunities on both a strategic and a tactical level. Thank you for your time this morning and your continued support, and with that, I will turn the call over to Jeff.

Thanks, Rob, and good morning, everyone. Before getting into the details of our quarter, I would like to remind you that Bellring has been presented as discontinued operations for all periods, and the consolidated figures I will discuss represent results from our continuing operations. Second quarter consolidated net sales were $1.4 billion, and adjusted EBITDA was $230 million. Net sales increased 17% and benefited from approximately $70 million of incremental sales from recent acquisitions, pricing actions across each segment, and volume demand recovery in the food service segment. Higher raw material, freight, and manufacturing costs continue to pressure year-over-year margins this quarter, although they improve sequentially. While internal and external labor shortages and supply chain disruptions improve throughout the quarter, we continue to see lower throughput and higher per-unit product costs. Similarly, our customer order fulfillment rates improved but we're still below optimal levels. Turning to our segments and starting with post-consumer brands, net sales and volumes increased 19% and 20% respectively. Excluding the benefit from the private label cereal and Peter Pan acquisitions, net sales and volumes grew 8.8% and 3.4% respectively. Cereal average net pricing increased 5.4% driven by pricing actions and favorable product mix. Pebbles and honey bunches of oats drove the volume increases. This growth was partially offset by year-over-year softness across value and private label cereal products and our exit of certain low margin business. As Rob mentioned, on a sequential basis, we have seen some improvement in value subsegment volumes. Adjusted EBITDA decreased 5% versus prior year, primarily driven by costs related to supply chain disruptions across freight, supplier reliability, and warehousing. These disruptions drove declines in throughput and fixed cost absorption, causing higher manufacturing costs per pound. WeedBix net sales and adjusted EBITDA increased 3% and 4% respectively. The weaker British pound created a headwind to these growth rates of approximately 280 basis points. Average net pricing increased 5%, reflecting both list price increases and modified promotional pricing. Volumes declined 2% as growth from private label distribution gains and new products was not enough to offset declines in other products. Recall, prior year benefited from COVID-driven at-home consumption. Supply chain disruptions, most notably in packaging and transportation availability, continue to suppress volumes in this segment. Our food service segment saw net sales and volume growth at 22% and 11% respectively, lifted by distribution gains and higher away from home demand. These gains were achieved despite the negative impact on demand caused by the Omicron variant in parts of January and February. Revenue growth continued outpaced volume growth as revenue reflects the impact of pricing actions and the effect of our commodity cost pass-through pricing model. Although we saw year-over-year growth this quarter, total segment volumes remain below pre-pandemic levels. Adjusted EBITDA grew 34%, benefiting from the volume recovery and improved average net pricing, which combined mitigated the impact of higher costs to produce. Q2 performance was also impacted by employee absenteeism resulting from the Omicron variant earlier in the quarter. Refrigerator retail net sales increased 12%, while volumes decreased 1%. Excluding the egg beaters and all-mark acquisitions and the divested Willamette egg farms, Net sales and volumes increased 7% and 2% respectively. Pricing actions drove increases in average net pricing across all products. Side dish volumes grew 5% this quarter, although supply chain constraints, most notably around labor availability, continued to suppress growth. Adjusted EBITDA decreased to $37 million and was pressured by significantly higher cheese and sow input costs, higher manufacturing costs, and increased freight. Moving to cash flow, we generated $144 million from operations in the first half of the year. Our net working capital increased, primarily reflecting the impact of inflation. As a result of our distribution of 80% of our interest in Bellring, we received net proceeds of approximately $260 million. Following the completion of the spinoff, we redeemed $840 million of our 5.75% senior notes due March 2027. Our net leverage at the end of the second quarter, as measured by our credit facility, was approximately 6.1 times. On this basis, we expect to further delever once we execute the intended debt for equity exchange of our retained ownership of 19.4 million shares of Bellring. With that, I would like to turn the call back to the operator for questions.

Thank you. At this time, if you would like to ask a question, please press the star and 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing the pound key. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. Thank you. Our first question will come from Andrew Lazar with Barclays.

Hey, everybody. Hey, Andrew.

How are you?

Good. Thank you. The full-year EBITDA guidance, is about, I think, at the midpoint, $5 million or so above what the implied range for RemainCo was prior to the distribution of Bell Ring shares. I was just hoping you could dig in a bit on what sort of areas in the business specifically gave you the most comfort in this range, particularly in light of all the unknowns still out there, and the fact that at the time, I think consensus is also at the sort of very low end of the range that you put out there.

Yeah, I think if you look at each of the components of the business, we feel a bit of a confirming with respect to our supply chain efficacy, even though there's still plenty of problems, I don't want to understate that. We feel good about the ongoing shift in some of the consumption behavior to more of our value-oriented products. We continue to feel good about the demand recovery and pricing stability and food service. So rather than pinpoint one thing, I would tell you it's a general sense of the business firming in the face of some ongoing challenges. And I want to put that, I would say, two things in context. One, we're talking about a fairly small change in that, so it's more of a refinement than a change. And secondly, we still think that despite the momentum improvements in the company and the firming of the guidance that the business is underperforming. So I don't want to suggest we're declaring victory by raising that guidance by a small amount. we're reflecting the realities we're seeing despite still seeing some pretty challenging situations around commodity pricing and supply chain throughput.

Got it. Thanks for that. And then this question, I know it's getting, I think, way ahead of ourselves clearly at the moment, but how do you see the sort of like the Goldilocks scenario for the food group moving forward regarding inflation? In other words, is it better to have the rate of inflation moderate even if costs stay at elevated levels, given a lot of the pricing is now getting better in place, or starting to see actual deflation, which can bring with it its own set of challenges to manage as well.

A. A. I got you. Okay. I appreciate it. Thanks very much.

Thank you. Our next question will come from David Palmer with Evercore ISI.

Hi, David. Hey, good morning. We could do, like, a multiple-choice version of this call.

It would really make things easier, if you don't mind. And he only gave two choices, so you can't go to four.

Right, right. None of the above. One of the things I was wondering about is, and as you're getting further into the year, you might have visibility into this as we experience a second wave of inflation and look back at some of the friction costs that you might have had with the employee outages you talked about with food service. You know, if we get to the end of fiscal 22, you know, how much of the friction costs do you think you will have had? That might be easy comparisons for your gross margins. And then And then in terms of pricing timing versus input inflation, we're hearing a lot about that. That could be another thing that you're looking back on as a favorability item. Some of that might actually be coming at you because we've had another wave of inflation that causes some pricing to catch up. But is there any way to quantify those two friction points or drags to gross margins for fiscal 22?

We're working through all of that, and I would say there's both puts and takes in a bit of reverse order. You're quite right to observe that inflation has come in waves, and I think we were in a pretty good spot prior to the invasion of Ukraine, and then we saw another wave of inflation, which will require further pricing movements. So I think one of the interesting things has been the wave pattern of the price-level movements throughout the last year. You were also quite right in saying there are improvements in the supply chains as we come off of some of the COVID costs, but to a fairly meaningful extent, some of those have been replaced with other costs around lack of ingredients that we have had to effectively, in my script, I called it to triage, to prioritize different products, to suboptimize our mix in order to move product or to ship product where it is rather than where it's supposed to be. So, you know, what I tried to say in my comments is that things are getting better, but they are not too bright yet. So we do have some opportunities to improve margins. We obviously do expect them to improve with efficiencies, but some of that is being offset by upstream supply chain challenges.

I mean, even if you were to talk about this sequentially, do those friction costs, how do you How would you express the pricing versus input cost mismatch and the friction costs going forward versus what we saw in the quarter?

Well, I don't want to add more quantification at that level beyond what we have embedded in our guidance. So what I would give you is directionally, we are continuing to see them improve where we can control it and they – and the problems seem to be moving upstream. So it just changes the way we manage them because what we are primarily doing is making sure we've got sourcing in the right position because I think we have managed well once the ingredients come into our factory and get them through our DC. So it just changes our behavior a bit. But beyond giving you the guidance number we've given in the aggregate, I wouldn't want to get into trying to parse out what does the immediate future look like for ingredient shortages versus pricing or efficiencies.

Okay, thank you. Thank you, Dave.

Thank you. Our next question will come from Chris Grohe with Stiefel.

Hi, good morning.

Hey, good morning, Chris.

Hi. I just want to ask you on the food service division, and just to understand kind of the pricing there, I think even pushing through some more aggressive pricing, I think even kind of beyond the grain-based pricing for things like transportation and logistics. And I think that sort of should start to pick up a little bit and help you overcome some of the incremental inflation in that business. Am I thinking about it the right way? Does that start to pick up a little bit in the third quarter, or is that already coming through by chance? I just want to get a sense of how that's phasing through the year.

You're 100% thinking about it correctly. We've seen substantial increases in costs and non-pass-through prices aspects of our cost structure, and you highlighted one of the biggest ones in transportation. So we started pricing that around the first of the year on through the first quarter, but the real impact of that doesn't flow until our fiscal Q3. Okay.

Thank you. And then I'm just – I know there's a bit of a timing element around the debt for equity exchange with the remaining bell ring shares. Is there a rough timeframe for when that can or will happen later this year?

The only timing we've provided is within 12 months of the spend. So it could be any time within 12 months.

Okay. Okay. Thank you very much for your time today.

Thanks, Chris.

Thank you. Our next question will come from Michael Lavery with Piper Sandler.

Thank you. Good morning. Michael? I just wanted to touch on food service margins and make sure to understand how that unfolds. And I know you've you gave some comments in your prepared remarks, but just thinking maybe through the rest of this year and a little bit beyond, partly wondering, you know, I said before that you think a return to normal margins probably wouldn't come until fiscal 23. I guess it's a little further out, obviously, but has anything changed? Would that maybe be, can it still happen in fiscal 23? How does it get there? And it was a little bit better in this quarter than we thought. You know, are you ahead of, track on terms of how it may go, just kind of an update on how that probably unfolds.

Yeah, let me make sure I'm clear on what I said or at least intended to say. We expect to get back to pre-pandemic levels of profitability on a run-rate basis by Q4 of fiscal 22.

Okay, great. It went a little fast, and so I wasn't sure if I caught that, and I wanted to just make sure that I heard that right. That's great.

Yeah, so that is not a change. That's just reinforcing what we had said previously. We do see a bit of margin improvement as our mix shifts to the higher value add, specifically pre-cooked product. And we do anticipate that there will be some long-term volume impairment in some of our smaller categories around travel and perhaps office cafeterias representing, you know, 1% of the business, a relatively small amount. So we fully expect to have profitability levels back to the 2019 levels in Q2, and barring something surprising, going to 23 with that expectation to reflect as a run rate.

Sorry, I might have misheard you just now. You said the 2019 levels in, did you say Q2, or do you mean Q4? Q4. Yeah, okay, great. And then just on the Weedabix business, your organic growth there was good, and it was pricing-driven, but just curious how the volumes have held up maybe in the last month into the third quarter. Just trying to understand how the UK and European consumer is holding up. Are you seeing a slowdown there yet, or how do we think about the rest of the year for modeling that segment?

We have not seen a meaningful slowdown in volumes yet, but what we are expecting is that there could be some shifts from branded to private label, of which we have a good position in both. So there could be some relatively modest margin dilution if that shift occurs with the consumer under some pressure from both energy and food costs.

Okay, great. Thank you.

Thank you. Our next question will come from Jason English with Goldman Sachs.

Hey. Good morning, folks. Good morning. I guess I want to dig in a little bit more into the impact of avian influenza on your results right now. You're reaffirming the comments you made last quarter that sort of back half Q4 run rate for profitability in food services is what you thought would be before. But it seems like you should be selling a lot of eggs at market-based price. I think you were selling 15% of your grain stock at market-based price pre-AI. You're probably selling at least 10, which would seemingly unlock a decent barb opportunity What's all set yet? Why is your profit outlook for the back half not changing?

We are procuring more of our eggs now on a spot basis with some of the losses in volume that have occurred, loss of supply volume that have occurred to date. So the effect to date has been negligible. There are some obvious puts and takes as pricing changes in the second half that could add some incremental support to that, and there are frankly some incremental risks if we lose more supply. So what we have attempted to do is give you guidance that is largely consistent with our guidance pre-AI. Our AI events to date have a negligible impact, and then to the extent AI takes a course that is materially different from our expectation or elevates prices beyond where it is, we could have some different puts and takes around it.

Got it. Yeah, I appreciate that things can still go worse. So it's better to put some buffer in there. But just to make sure I understand the math right, you were buying, you were selling 15% of your eggs, all grain procured at market. You've lost 5% of supply. So you should still at a minimum be selling 10% of your grain stock out at market base.

With the second farm, we've lost about 10%.

Got it. Okay. So none of that surplus has shrunk to 5% or so. Okay. Understood. And then, real quick, you mentioned we're going on a year now of you seeing losses on the value tier from multi-meal and private label. You mentioned some mom distribution gains. Can you expand upon that and whether or not, based on the sequential improvement you've seen plus the distribution gains, are we potentially at an inflection point for that consumer brands business in terms of the value tier moving higher?

We believe so. We have seen... a meaningful expansion of total distribution points in both mass and grocery. We do expect that the inflation rate will start to create some movement within category towards more of a value orientation. But to date, it has been modest. But going back to your first point, I'd say around November, December, we saw the bottom of the decline. And since November, December, the trajectory has been a slow move upward to the right.

Got it. Thanks a lot. I'll pass it on. Thanks, Jason.

Thank you. Our next question will come from Bill Chappelle with Truist Securities.

Thanks. Good morning.

Good morning, Bill.

Just following up on Jason's questions, and this maybe goes over to 8th Avenue, is the sense that private label and value is on an uptick or bouncing off the bottom. We're just trying to understand there have been some positive signs, but I don't know if that's the start of a trend or if we're too early to tell.

I think the answer is we're too early to tell, but it certainly has stopped getting worse, which is step one of improving. We do have some cause for optimism in both our ready-to-eat cereal portfolio as well as within 8th Avenue from a volume perspective. Within 8th Avenue, and I think broader private label, the challenge has been more making sure pricing is keeping up with the cost inflation. But volumes have not been as big of a problem, certainly of late.

That's good to hear. And then, Jeff, I think you talked about labor issues on the side dish capacity issue. Is that, you know, not just for that business, but for all the business? I mean, are you seeing the labor picture pick up where you can get to full capacity across the businesses, or is that a lingering problem?

The answer is a little bit of both, is that on a macro basis, it's much better. But we have some specific locations where we just have a real sticky problem, which I would offer everybody. becomes more an issue of geography and changing some of our hiring practice than it is a macro labor imbalance. I think the macro labor imbalance has improved, but we still do have some very specific local issues that we're working through.

Okay, thanks for the color. Thank you.

Thank you. Our next question will come from Ken Zaslow with Bank of Montreal. Hey, Ken. Hey, good morning, guys.

Good morning. How are you, Kim?

Good. Two questions. One is, you know, we've been through this AI before, but when you think about your long-term model, does AI have any impact on your earnings power in, you know, 2024, 2025, or is this whatever happens, either positive or negative, is simply just a temporal? Or do you think there's something that changes your algorithm or longer-term thought process?

Well, I think if you consider the position that our business holds in its category, a disruption like this generally over time improves the quality of the business because I think it highlights the value of our scale and our reliability. Because if you go into our customer base right now, the people that we are most working to make sure they are not affected are our customers going into this supply disruption. So I think it really highlights the value of being in the fold as a customer of a scale provider who can manage a situation like this with the most degree of alacrity and effectiveness. So I think while it's a situation that we certainly don't wish upon ourselves or anyone else, it reinforces the value of being a customer of ours.

The second question I have is, can you talk about your service levels? And as your labor comes back, have you seen improvements in your service levels? Where are they relative to where you want to be? And can you think about where they expect to be, say, in six months or nine months? How do you think that progress happens?

Yeah, I would say that right now we are fortunate that we're being graded on a curve, that our service levels are from a historical perspective, quite dreadful, but from a relative perspective across the CPG landscape, pretty decent, and that one of the more significant opportunities ahead is to get that customer fill rate back to historical norms, and it frankly starts with making sure we have ingredients coming in the door when we need them and where we need them to be.

And I'm going to slip in one more. I'm sorry. How is your innovation? Are you able to ramp up your innovation, or is the ingredients keeping you from doing that? To what extent is there a real shortage that is changing your business structure, or is it just, hey, it's more of a pain? And I'll leave it there, and I appreciate your time.

Yeah, it's a great question, and I would say it adds a bit of complexity to our innovation cycle because innovation, by definition, adds a little bit of complexity to our business, to our customers' business, and to our procurement efforts. So we've had You know, great success, for instance, on the demand side of the premier protein cereal. And we've had some challenges in getting enough product. And that's just one example. I would say, in general, it's a mixed bag. But the supply chain conditions, and when I say that, I'm not talking about post. I'm really talking about across the country and up and downstream, do make it marginally more difficult to effectively introduce new products. We've got a good pipeline. We think we're in good shape in terms of introducing good ideas, but we need the execution side to now follow.

Great. I appreciate it. Thank you, guys. All right. Thank you.

Thank you, ladies and gentlemen. This concludes today's event. Thank you for joining us. You may now disconnect.