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spk00: Thank you for standing by and welcome to the post-holding second quarter 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentations, there will be a question and answer session. To ask a question at that time, please press star 11 on your telephone. As a reminder, today's call has been recorded. I would now turn the conference over to your host, Mr. Daniel O'Rourke, Investor Relations for Post Holdings. Sir, you may begin.
spk05: Good morning and thank you for joining us today for Post-Second Quarter Fiscal 2023 Earnings Call. With me this morning 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 answer your questions. The press release that supports these remarks is posted on both the Investors and the SEC 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 postholdings.com. 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. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Rob.
spk04: Good morning. Thanks, Daniel. 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 food service is enabling us to lean into incremental investment in our retail channel businesses, and it well positions us for fiscal 24. 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, as 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 1,100 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 700,000 shares, or about 13% of the number of shares issued. We paid an average price below the issue price in the acquisition. Our capital allocation priorities will remain opportunistically balanced among share repurchases, debt reduction, and M&A. Last night, we raised our guidance for the balance of fiscal 2023 to $1.09 billion to $1.13 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 in adjusted EBITDA. Moreover, it assumes full-year food service performance of roughly $40 to $50 million over its sustainable run rate. Recall last quarter we shared our estimated normalized run rate of roughly $85 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 food service over-earn, it would result in the baseline EBITDA outlook. Let me briefly comment on our segments. Starting with PCB, the U.S. Ready to Eat cereal category declined 4% this quarter as we lapped prior year Omicron lift. Post-branded market share has been quite stable at 19.5%. Meanwhile, our private label business grew volumes nearly 3%. Food service performance is supported by both attractive pricing dynamics as well as strong demand for away-from-home breakfast consumption. Our food service 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 abandoned low-margin business and have not yet lapped its exclusion. Second, our refrigerated side dish business is lapping an inventory build and has seen trade down to private label. We are countering this with a step up in advertising. The team has executed very effectively and supply chains are markedly improved over last year. We to Bix continues to operate well in a challenging environment. UK consumers remain under pressure from inflationary trends in food and energy. Consumer pressure has contributed to a trade down of private label. We are a large provider of private label biscuit, but it is margin diluted. Also, while small, UFIT 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 in interesting times in the capital markets. The increasing cost of debt, and 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 the May 28 deadline, we expect to terminate the SPAC this month. As I've said before, we believe a corporate-owned SPAC to be a good tool, but the timing was terrible. SPAC investors will receive their initial investment plus modest return. We will continue to seek creative ways to extend our capital deployment capabilities despite this particular structure not succeeding. With that, let me turn the call over to Matt.
spk01: 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 elasticity-driven volume declines and a shift to private label. On the other hand, food service volumes remained strong as the consumer continued to prioritize eating out, especially within the breakfast day part. Our supply chain performance and customer order fill rates continue to improve. However, both remain 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 and starting with post-consumer brands, net sales increased 5% and volumes decreased 6%. Average net pricing increased 11% driven by pricing actions, partially offset by unfavorable product mix and incremental promotions. We saw a strong growth in Peter Pan and private label cereal, which was offset by declines in mom bags, honey bunches of oats, and international. Segmented adjusted EBITDA decreased 1% versus prior year. as lower volumes, cost inflation, and higher manufacturing costs were mostly offset by pricing actions. During the Weetabix, net sales increased 7% year-over-year. A weaker British pound caused a foreign currency translation headwind of approximately 1,000 basis points. The increase in net sales was attributable to significant list price increases and contribution from last April's acquisition of the ViewFit brand. These benefits were partially offset by unfavorable mix towards private label biscuit. Excluding the benefit from UFIT, sales were flat and volumes decreased 2%. Growth in private label biscuit was not enough to offset declines in branded products, which were driven by inflation-related elasticities. Segmented adjusted EBITDA decreased 23% versus prior year. While foreign currency was the largest driver, higher input in warehousing costs outpaced pricing actions. As a reminder, we expect the challenging macro environment in the UK to compress our margins throughout the balance of fiscal 23. Food service net sales and volume grew 40% and 12% respectively. Revenue growth continued to outpace volume growth as revenue reflects the effect of commodity costs passed through pricing model and other pricing actions to offset higher product costs. Segmented adjusted EBITDA increased 100% from prior year. benefiting from improved average net pricing and volume growth, which mitigated the impact of higher costs to produce. As a reminder, prior year Q2 was still being significantly impacted by the COVID Omicron variant, 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 elasticities as customers shifted to private label and we lapped an inventory load in from the prior year. Egg volumes decreased as elevated egg costs and limited 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 continued to see additional inflation work its way into net working capital. As it appears inflation is leveling out, we expect second half operating cash flow to improve meaningfully. From a net leverage standpoint, we ended the quarter five times, which is then a pro forma 5.1 times for the impact of last week's pet food transaction closing, and approximately 5.4 times if you further pro forma for the normalization of food service performance. Moving to capital allocation, we stepped up capital expenditures to $81 million in Q2, driven by continued progress on the Bellring co-manufacturing facility, which remains on track for a Q4 startup. In addition, we repurchased 700,000 of our shares with an average price of $89 per share and $50 million of our debt at an average discount of 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.
spk00: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your telephone. Again, to ask a question, please press star 1-1. One moment for our first question. Our first question comes from the line of Andrew Lazor of Barclays. Your line is open.
spk09: Thanks. Good morning, everybody. Good morning, Andrew. 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 right. I guess based on your comments, it sounds as if sort of normalized EBITDA proposed if we take into account all of PET as well as the over-delivery in food service is now sort of call it 1.125 billion. Do I have that right? And if so, is that how we should think about sort of fiscal 24 as sort of like a starting point anyway?
spk04: Yeah, that's 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.
spk09: Okay. And I think maybe on the last call you had commented about expecting to maintain or grow overall EBITDA in 24, obviously excluding the acquisition. But now we've got this higher sort of expectation for 23 as a base year. So I didn't know how that affected, how current sort of results affected that commentary for next year. if at all?
spk04: Well, certainly impacts the growth rate. And 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 23 entering or exiting with a higher run rate even down margin, particularly within U.S. cereal. We do expect to see some normalization in food service. We expect to see some of the synergy flow from the pet acquisition begin in fiscal 24, although not be completed by the end of fiscal 24. So, you know, there's certainly a case for growth in 24 offset by where the ultimate over-earning in food service lands.
spk09: Yep. Got it. And then lastly, just 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. Well, I guess what drove the deceleration, and obviously it's in contrast to, generally speaking, the branded packaged food space at this point.
spk04: And, Andrew, I heard what drove the deceleration, and then you got cut off.
spk09: Sure, because it's in stark contrast to just what we're seeing from a margin recovery perspective across the broader packaged food space at this stage.
spk04: Most of the sequential deceleration is a result of timing of plant shutdown for maintenance that grows under absorption of fixed costs, we expect that to reverse the balance of the year. So it's not necessarily net. If you look year over year, there's expansion and we look forward both quarter over quarter and year over year, we expect expansion.
spk00: Thank you.
spk04: Thank you.
spk00: Thank you. One moment, please. Our next question comes from the line of David Palmer of Evercore.
spk02: Thank you very much. A couple questions for me. On refrigerated, you mentioned the SKU rationalization drag. Could you just remind us the size of that and when you lap that? And then just broadly, are there any plans to bolster trends within refrigerated and just your outlook for this segment?
spk04: Let me do those in reverse order. 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. So we are just reengaging advertising. We fully expect the trend line to resume to pre-COVID growth rates and growth rates that even existed well into COVID without advertising once we reengage because there are both distribution and velocity opportunities within the side dish brand. With respect to the volumes, we are laughing, Matt.
spk01: Yep. So we exited private label butter, which is a component of our cheese business, a quarter ago. So we'll continue to laugh that. It's not a huge pizza business, but it is about $5 million of sales a quarter.
spk02: And then on PET, we can obviously see the measured channels. Could you just talk about the all-channel trends for that business and where you see the biggest near-end opportunities or priorities for this business?
spk04: Thanks. One of the nuances of this business is most of its businesses track channels, unlike a lot of the other competitors in PET. We think one of the opportunities is to go beyond traditional FDM channels With respect to the near-end 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.
spk02: Okay. Thank you.
spk04: Thank you.
spk00: Thank you. One moment, please. One moment. Our next question comes from the line of Matt Smith of Steeple. Again, Matt Smith, your line is open.
spk03: Hi, good morning.
spk04: Good morning, Matt. Congratulations, by the way.
spk03: Thank you very much, Rob. I appreciate that. I want to ask about the pet transaction. One of the benefits of the way that it was structured was that it was essentially held your leverage stable which allows you to continue to pursue M&A. And you had some commentary about the financing environment and Post being a favored buyer because of the assurity of your financing and the ability to close. Does the pet transaction widen the funnel for M&A? Are you able to look at pet deals to bolt on to the transaction you just made, or do you need some time there?
spk04: Well, let me answer from two perspectives. The constraint around M&A is capital and people. From a capital perspective, there's really not a constraint. Attractive transactions can be financed readily. The constraint right now would be around the work going and integrating the existing acquisition. And that gets more to organizational design. We are open for M&A, particularly around opportunities within and without PET 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 existing opportunity or the recently closed opportunity. So it's somewhere in the middle. I mean, we have a lot of opportunities. As you would imagine, once we became an active player in pet, the opportunities for that kind of opportunity expanded and will, I expect, continue to expand. But we look through the lens of both human and financial resources when we start to think about what the next step should be.
spk03: Thank you for that. And just a quick follow-up then. You mentioned needing to improve the throughput in the existing manufacturing footprint of pets. 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?
spk04: In reverse order, we can certainly do it without M&A. M&A potentially accelerates it depending on the situation.
spk03: Thank you for that. I'll pass it on.
spk00: Thank you. Thank you. One moment, please. Our next question comes from the line of Michael Lavery of Piper Sandler. Your line is open.
spk08: Thank you. Good morning.
spk00: Hey, Michael.
spk08: Just wanted to touch on a couple cadence questions. You've talked about food service 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 a little sense of how the second half looks into next year as much as you have any visibility there. And related to that, you mentioned the shakes ramping up or getting going in 4Q. I think you'd said that it would likely hit its full run rate by 2Q24. 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?
spk04: We expect to see a glide path between here and year end to get to the exit run rate that would then translate into that 85 to 90 million per quarter x the manufacturing. We expect the manufacturing to come online roughly September. And there's really no change to the outlook we've previously provided with respect to when it's fully operational and providing product to Bellarine.
spk08: Okay, great. Thanks so much.
spk04: Thank you.
spk00: Thank you. One moment, please. Our next question comes from the line of Bill Chappelle of Truist. Your line is open.
spk07: Thanks. Good morning.
spk04: Hey, Bill.
spk07: Two questions, one on pet. Just 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 hasn't come out yet, like you see in cereal, but it's a little bit harder to 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 an expectation that you see promotions step up within the category as costs come down and they get a little more competitive? I understand the focus is on cash flow and improving the margins, but just trying to understand what kind of pressures you expect on the top line over the next couple of years.
spk04: 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 in the value sector because demand has exceeded our ability to supply, certainly over the last 12 months. With respect to promotions, just to clarify, you're just talking, Pat, now, not cereal, right? Correct, correct. Historically, a far less promotional category than cereal. We don't expect that to change. There are some capacity dynamics coming on board that will create a little more capacity in the next two to three years and have been the last, oh, half dozen or so. But we don't expect that if it changes the promotional dynamic to last very long.
spk07: Okay. And then just on the food service, just is there a way now at this point to kind of look back and understand with the grain-based contracts and higher egg prices kind of where from start to finish, what the, you know, if there's net benefit and how much you expect to kind of hold on to on an EBITDA basis as we move forward, just trying to, we look to 24 and things start to normalize, trying to figure out what the right numbers are.
spk04: Well, I mean, I think we laid it out with as much precision as we can, that there's, you know, $40 to $50 million of over-earning for year 24 and that the normalized run rate of the business is closer to 85 to 90 per quarter.
spk07: Gotcha. I guess the difference is I didn't know if that's kind of on a normalized volume basis during COVID.
spk04: No, that's what we believe with our existing volume, the baseline would be. And, of course, those volumes are expected to grow both with respect to just the sheer number and potentially the mix as we have a long-term strategy of moving up the value chain.
spk07: Okay. Thanks.
spk04: Thank you.
spk00: Thank you. One moment, please. Our next question comes from the line of Jason English of Goldman Sachs. Your line is open.
spk06: Hey. Good morning, folks.
spk04: Hey, Jason.
spk06: Good morning. Hi. A couple of quick questions. So first, the pet business used acquired. We've all viewed it as the problem child with Smucker. and the business has been suffering sort of chronic volume metric declines, yet you're talking about a business that's capacity constrained with demand that is exceeding your ability to supply. So how do we square that? 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?
spk04: So I think when you use the term capacity constrained, it implies that demand has grown and capacity has not. What has happened is demand has been flat and capacity has shrunk by virtue of some operational challenges, an array of things that we are addressing. So as the capacity has not kept pace with the, you know, flattish demand, that has resulted in a situation in which they've been unable to meet the constrained demand. So it's not a situation in which demand outpaced supply. Supply declined.
spk06: Okay. Is there a lot of capex that's needed to fix that, or is it just people, process?
spk04: 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 changes to people and process. some of the cultures within the plants. So there are an array of small changes and then some capital, but again, all baked into the original announcement and acquisition.
spk06: Okay. And then one more question on Pat. Lots of conversation today around what normalized EBITDA looks like. I think a lot of us are very surprised by the EBITDA for that business. It doesn't look normalized at all as we think about what profitability, what we believe profitability in the industry looks like. So Is this business, is the margin structure, are there structural reasons why it's so low? If so, what are those structural reasons? If not, 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 multi-part question, what does Bright look like? Thank you.
spk04: I'm going to answer the first question. question last and just revert to the announcement that we made in February that Bright is, you know, somewhere north of $130 million of EBITDA as we synergize business. Now, do we think there are opportunities beyond that? Sure, we do. We think there are opportunities to improve margins that are not structural. They're more, as you can imagine, as you deleverage the plant, the margins get hit. We think releveraging the plants restore those margins. And let's put a two-year timeline around that. To the very first part of your question, the semantics of the term normalized, we were really focusing more on making sure you understood the food service implication, not the long-term potential for improving the results of the pet food business.
spk01: Understood. Thank you.
spk04: Thank you.
spk00: Thank you. One moment, please. Our next question comes from the line of Andrew Liza of Barclays. The line is open.
spk09: Great. Thanks so much for the follow-up. Just, Rob, more of a higher-level industry question for you. You know, it looks as though we're sort of finally heading in earnest towards, you know, more of a normal operating environment following the past three years of all these sort of anomalous dynamics. And I guess I'm curious how you think this transition right back to normalcy will look, you know, maybe not just for post but more the industry as a whole. you know, do we, do we think this transition to normalcy can be made in a somewhat orderly way or should investors sort of have their expectations in check for, you know, maybe more uneven results for some time as sort of pricing has lapped and perhaps it takes more time for, for volumes to pivot more positively. I guess I'm just trying to assess whether we see like more of a harder or soft landing, if you will, for sort of the food manufacturers as we go sort of into the next phase.
spk04: Yeah. I think, uh, what we're beginning to see is a future that looks fairly close to the pre-pandemic past. And that what I would expect to see is mean reversions on volume with likely retention of the pricing that has been taken the last handful of quarters, if not years. So I'm not quite sure whether that qualifies as soft, hard, or somewhere in the middle. But what I would proffer is that some of the trial benefit that we may have hoped would convert has not been as sticky. And you're seeing it in benefit from our perspective in our food service business. I think that one of the underappreciated aspects of our food service business right now is how strong volumes are. So I think you're seeing, if you go back to pre-pandemic, we just hit an inflection point where half of consumption was away from home. And I think that is stickier than we expected it to be.
spk09: Appreciate your thoughts. Thank you.
spk04: Thank you.
spk00: Thank you. We have reached our allotted time for questions. This concludes our conference. Thank you all for participating, and have a great day.
spk04: Thank you all.
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