Post Holdings, Inc.

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 Maynor, 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 800-839- 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 first quarter fiscal 2023 earnings call. With me today are Rob Vitale, our President and CEO, and Matt Maynor, our CFO and Treasurer. Rob and Matt 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 Investors and the 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-GET measures. For reconciliation of these non-GAP measures to the nearest GAP 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, food service 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 food service 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, but fill rates continue to be below pre-pandemic levels. As I have mentioned, we view supply chain recovery as more of an ongoing process than a singular event we 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, food service remains 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 clearer and informs 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. Liquid eggs remain under pressure as high path avian influenza costs have driven up pricing and resulted in elasticities among the highest in grocery. Weedabix continues to be well-managed in 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, the impact on consumers drives mixed towards private label. Our small acquisition of the UFIT brand 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 M&A. We remain interested in opportunities, both large and small, that could complement an existing business or provide entry to a new category. This quarter, our capital allocation skewed towards bond rather than share repurchases, as that same debt market volatility created unusually attractive prices. This quarter, we sold our remaining stake in Bellring 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. Their future is bright, and I'm excited to see the Bellring story continue to develop. Last but not least, we revised our guidance yesterday evening. we increased our outlook to an adjusted EBITDA range of $1.025 to $1.065 billion to reflect year-to-date results and an increased optimism in the condition of the business. While we have yet to plan fiscal 24, our initial thinking is that despite some non-repeatable current year 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 sales increased 17% driven by pricing actions in each segment as overall volumes were relatively flat. Certain pockets of our business saw a modest shift to private label. We continue to see incremental improvement in supply chain performance and customer order fill rates. However, both remain below optimal levels. And while significant inflation continued in the 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 are 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 1,400 basis points. Net sales benefited from significant list price increases and contribution from last April's acquisition of the UFIT brand. These benefits were partially offset by unfavorable mix reflecting growth in private label products. Excluding the benefit from UFIT, sales declined 6% and volumes declined 1%. Growth in private label was not enough to offset decline in branded products, which were largely driven by supply chain constraints and related shortfalls in order of fulfillment. Segmented adjusted EBITDA was 18% lower than prior year, primarily because of foreign currency translation headwinds. Additionally, our adjusted EBITDA margins stepped down as supply constraints were compounded by higher input and warehousing costs. Given the challenging macro environment in the UK, our overall outlook assumes margins are compressed throughout 2023. During the food service, 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 effect of our commodity pass-through pricing model, and avian influenza-driven pricing actions to offset higher costs to procure eggs on the spot market. Segmented adjusted EBITDA grew to $109 million, benefiting from improved average net pricing and volume growth, which combined mitigated the impact of higher costs to produce. Refrigerated retail net sales increased 7% while volumes decreased 5%. Note that excluding the divested wool and egg farm business, net sales increased 10% and volumes increased 1%. Pricing actions drove increases in average net selling, I'm sorry, average net pricing across all products. Side dish volumes increased 12%, reflecting improved inventory levels that allowed us to meet demand for the holiday season. Egg volumes declined as elevated egg costs 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 leverage. The reinstatement of advertising and promotion was an offset to these benefits. Turning to cash flow, in the first quarter, we generated $98 million from continuing operations and was driven by higher profitability year-over-year versus higher working capital. Our net leverage decreased half a turn this quarter to 5.1 times, driven by growth and adjusted EBITDA. Moving on to capital allocation, in the first quarter, we repurchased 300,000 of our shares in at an average price of approximately $85 per share and $71 million of our debt and 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 1 on your touchtone phone. You may remove yourself from the queue at any time by pressing star 2. Once again, that is star and 1 to ask a question. We will 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, Andrew. Good morning.

I guess to start, Rob, I think in fiscal 4Q, you talked about the food service segment. It obviously was well ahead of what you see as a normalized run rate. And I think for 1Q, you said you didn't expect it to be as strong as 4Q, but still elevated. And obviously the first quarter did come in similarly strong as 4Q. So I'm trying to get a sense of a little bit more color on what drove that outperformance. Was it the same drivers as in 4Q or different? And I guess what would keep that business from delivering this level of EBITDA into fiscal 2Q or beyond?

The drivers were virtually identical, 4Q to 1Q. And I think the reality is that some of the avian influenza impact has persisted longer than we expected. There's 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 4Q and 1Q.

And those conditions, Rob, I think last quarter you said part of it was just being able to take advantage of, let's say, competitors that weren't as advantaged a supply position as you were. 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 you could get into just a little bit of detail on the pricing versus what you need to pay in the spot market for procurement and how that helps drive the profitability higher, at least for a shorter-term period of time.

Well, prices continue to remain elevated. There's been some decline in the cost of breaking stock. You know, 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, I thought it was interesting that mom bag cereal brands' volume was down, even though you've talked, obviously, previously about trading down and 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 you're seeing trade down, just given some of the trends you pointed out in private label.

I think 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. The other dynamic is simply, you know, the MOM bag, 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 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.

Thank you.

Thank you, Andrew.

We'll take our next question from Chris Groh with Stiefel.

Hi, good morning. Good morning, Chris. Hi. Hi. obviously you had a nice EBITDA guidance here, an increase early in the year, and obviously projects a lot of confidence in the business. And, Rob, you mentioned that food services are obviously performing to high expectations, which clearly is 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 the potential for a little stronger EBITDA performance for the year than what you initially expected.

Yeah, well, I would say there's – three items. One is the Q1 beat, so we want to make sure to reflect that. But then we also increased our expectation for the remaining three quarters. The second is that, you know, we have revised our estimate for currency translation given the fairly significant move in the pound sterling the first quarter. And then the last would be we have still taken a meaningful amount of pricing that has yet hit the P&L. The uncertainty, of course, is ongoing elasticities, but I think the potential upside-outside of Weetabix in food service, Weetabix specifically in U.S. dollars, would be the relationship between incremental pricing and elasticity. Chris? All right, go ahead, Operator Rick.

We'll take our next question from Jason English with Goldman Sachs.

Hey, good morning, folks. Thanks for slotting me in. Hey, there. A couple quick questions. So, thank you so much, by the way, for the caller on food service. Very helpful. Sticking with food service, you mentioned incremental source of growth coming from the shake capacity. Can you bring us up to speed on how that's progressing? When do you expect it 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?

In reverse order, we've talked about it being 15 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. We are building a factory in times that are challenging. We've met every milestone so far, but I'm going to hedge that a little bit and say that give it to the end of the calendar year and that we'll be up and running at full capacity by early 2024, early calendar 2024. Hopefully we'll do a little bit better than that, but I 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 and mounting threat to your business. Can you put more context around that and talk about how you're looking to defend what we should expect from a P&L impact and whether or not there's going to be some price getback, 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 widespread as it is. So, you know, we would expect to be successful in managing that incremental competition, but we wanted to highlight it because it is relatively new.

Cool. And last question on the cereal side. I think a lot of us are looking at U.S.-centric food, and we see the baiting cost curve, and we see residual pricing, and we're expecting decent margin recovery. Are those expectations founded in serial, or should we be a bit concerned about maybe the rising cost to compete, which I think you 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 is a bad thing for our position in the category. I think we need that kind of support in order to maintain interest in the overall category, and we will compete with different forms, you know, in terms of packaging and on in-store marketing. So I don't necessarily view that in any way as a negative. You know, we're far more sensitive to promotional intensity than advertising intensity, and I think that's, you know, within the normal range.

Makes sense. Thank you.

Thanks, Jason.

We'll take our next question from Michael Lavery with Piper Sandler.

Michael, thank you. Thank you. Good morning. Good morning. Just a helpful color on fiscal 24, even though it's obviously super early, but just a quick clarification on that. where you said even with some of the one-time lifts in this year, you would think it'd 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?

You know, we're not to that level of granularity that I can say within $10 or $15 to $20 million, particularly when you factor in that it's not going to be for the full year 2024, whether that will matter. What we were trying to communicate is that, you know, 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, you know, whether that incorporates the in-year effect of the incremental capacity, that's a level of precision we haven't yet achieved.

No, fair enough. But, yeah, good colors, Phil. When you talk about the pressure on Weedabix margins, obviously we see that in this quarter. Is the magnitude likely to moderate at all, or how do we just think about kind of the run rate over the rest of the year? Is 1Q indicative 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 more. with inventory levels, but I think we can maintain that EBITDA margin, you know, plus or minus. Longer term, we think it'll be restored, but, you know, we face a choppy year there.

Okay. No, that's helpful. And just one last quick one. You mentioned some pricing that hasn't 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 refrigerator retail.

and can you give any sense of the magnitude uh no i'd rather not get into that level of pricing discussion in this form okay thanks so much thank you we'll take our next question from david palmer with evercore isi hey david thanks thanks good morning rob uh

I'm curious about the way this year is shaping up and the way that it provides insights about your earnings power as you look ahead to fiscal 24. I know we're not going to get into guidance for an out year, but I would imagine that supply chain improvements will be something that's continuing to happen, particularly in refrigerated, and that there's going to be some price net of commodities catch up progressing in consumer brands, but perhaps some give back in food service. But those are all hunches. I'm just wondering if you could maybe give a sense of the way this year is going and ways it could leave an imprint for 24. Thanks.

I don't think I could answer the question any better than you asked it. The cadence and variables you just went through are spot on.

Okay. Well, that was quick. As far as the timing goes on the pricing of the commodities front for You don't have to be down to a quarter, but when do you think that that will start to get better? Is that a... Correct. How soon? Per quarter.

So that starts now and builds throughout the year.

Okay. 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. Bye.

That concludes today's teleconference. Thank you for your participation. You may now disconnect.