Post Holdings, Inc. Q2 FY2025 Earnings Call

Welcome to the Post Holdings Second Quarter 2025 Earnings Conference Call and Webcast. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. I would now like to turn the call over to Daniel O'Rourke, Investor Relations for Post.

Good morning, and thank you for joining us today for Post’s second quarter fiscal 2025 earnings call. I'm joined this morning by Rob Vitale, our President and CEO; Jeff Zadoks, our COO; and Matt Mainer, our CFO and Treasurer. Rob, Jeff and Matt will make 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 filings portions 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. 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.

Thank you, Daniel. Good morning, all. I'm going to make some thematic comments, and Jeff and Matt will take you through the quarter. First, we performed well in a difficult environment. I expect that to continue. Second, trade policy and regulations continue to grab headlines. We will manage those as they develop. Third, consumer sentiment is weak. We expect we will need to focus on demand drivers and flawless supply chain execution. First and last, uncertainty in the capital markets complicates M&A valuations. With that, I will turn the call over to Jeff and Matt, who will take you through the quarter. Jeff?

Thanks, Rob, and good morning, everyone. Given the volatile macro backdrop and challenges associated with Avian influenza, we are especially pleased with our Q2 results. Our Foodservice team did a fantastic job navigating incredibly difficult egg markets as they prioritize customer supply while at the same time, mitigating some of the expected net cost impact. Meanwhile, our retail businesses offset volume pressures with cost control and supply chain execution. As a reminder, last quarter, we guided that Q2 would be down $30 million to $50 million compared to Q1 as a result of Avian influenza cost ahead of pricing impacts on Foodservice. Actual Q2 Foodservice adjusted EBITDA was approximately $20 million lower than Q1 as $30 million of costs ahead of pricing impact were partially offset by manufacturing and supply chain performance improvements. Setting aside the temporary impact of Avian influenza, underlying business trends versus last year remain encouraging despite a backdrop of poor foodservice foot traffic. Our selling proposition continues to prove out as our mix of higher value-added egg products grew once again. Looking to the balance of the fiscal year, additional Avian influenza pricing became effective starting in April, and our flock repopulation is on track. Assuming no additional outbreaks in our network, we expect to balance our egg sourcing and demand by Q4, and we continue to expect we will recover the unfavorable cost ahead of pricing impact we saw in Q2 during the remainder of fiscal '25. Moving on to Post Consumer Brands. We had a solid quarter while navigating volume declines in both grocery and pet. In grocery, our cost structure continued to benefit from last September's plant closure. However, the cereal category declines accelerated to down 3.7% with our branded portfolio slightly behind at down 4.5%. Category declines continue to pressure our manufacturing utilization and cost structure, which drove our recent decision to close two more plants by the end of the calendar year. Our pet volume consumption was down 4.5% versus a flat category as we continue to face declines in Nutrish demand and distribution and Gravy Train price elasticities. We were able to offset these lower pet volumes with improved supply chain and SG&A cost performance. Finally, a relaunch of the Nutrish brand is certainly hitting the shelves. And while it is very early, the first reactions are encouraging. Turning to Refrigerated Retail. Q2 adjusted EBITDA was down versus the prior year primarily because of Easter timing, which fell during Q2 a year ago. In addition, similar to our Foodservice business, we experienced costs ahead of pricing in eggs with pricing taking effect in April, which will benefit Q3. Our focus continues to be on driving volumes in our sides business, driving lower costs and integrating our newly acquired PPI business. At Weetabix performance improved after our ERP conversion last quarter. While we see limited promotional activities in Q2, we saw yellow box consumption relatively in line with the category, which was down 1.5%. We expect to improve margins in the back half of the year through sequential volume growth as we ramp up marketing with targeted activations and further execute our cost-out initiatives. Before turning the call over to Matt, a couple of comments on M&A and capital allocation. The recent tariff actions and volatility in capital markets have slowed what was an active M&A pipeline for us. The uncertainty in this environment points to smaller tactical transactions, such as our recent acquisition of PPI or transactions where we have clear line of sight to synergies. With that said, we have continued to lean into share repurchases and have now bought approximately 6% of the Company since the beginning of the fiscal year. From both the leverage and liquidity position, we remain very well positioned for opportunistic capital allocation. With that I’ll turn the call over to Matt.

Thanks, Jeff, and good morning, everyone. Second quarter consolidated net sales were $2 billion and adjusted EBITDA was $347 million, sales decreased 2% as lower overall volumes in our retail businesses were partially offset by elevated Avian influenza-driven price in foodservice and volume growth in shakes. Turning to our segments. Post Consumer Brands net sales decreased 7%, driven by lower volumes in both cereal and pet. Cereal volumes decreased 6%, primarily due to category dynamics. Pet volumes decreased 5% as we continue to lap reductions in lower-margin business and Gravy Train pricing elasticities along with lower consumption, particularly in Nutrish. As expected, these pressures were partially offset by customer inventory recovery deloading last quarter due to our TSA cutover. Segment adjusted EBITDA increased 2% versus prior year as we benefited from improved cost reform for both grocery and pet. Foodservice net sales increased 10% and volumes increased 3%. Revenue reflects elevated Avian influenza driven pricing and higher shake sales. Excluding shakes, volumes were down by 1% driven by HPAI dynamics impacting eggs and lower customer foot traffic impacting both egg and potatoes. Adjusted EBITDA decreased 6%, driven by Avian influenza cost ahead of pricing, partially offset by improved manufacturing and supply chain performance. Refrigerated Retail net sales decreased 7% and volumes decreased 5%. Volumes across all products were affected by the timing of Easter, which was in Q2 last year. Egg volumes were impacted further by limited availability due to Avian influenza. Segment adjusted EBITDA decreased 14% driven primarily by lower volumes and costs ahead of price on eggs and sauce. Weetabix net sales decreased 5% versus the prior year. Foreign currency represented a headwind of 70 basis points. Volumes decreased 7%, driven by lower promotions due to our Q1 ERP conversion, non-core product discontinuations and elasticities related to pricing decisions, which we will lap later in the fiscal year. Segment adjusted EBITDA increased 9% versus prior year, led by increased net pricing from our prior year profit-enhancing decisions, partially offset by increased input costs and lower volumes from promotional blackouts. Turning to cash flow. We generated $160 million from operations and approximately $70 million in free cash flow net of CapEx spend. This was a decrease sequentially from last quarter, which is primarily due to working capital timing. Year-to-date, free cash flow was $240 million. From a capital allocation standpoint, we favored share repurchases as we repurchased 1.7 million shares at an average price of approximately $110 per share. In addition, we spent $124 million to acquire PPI. The net effect of our capital allocation versus free cash flow this quarter increased our net leverage slightly to 4.5x. With our earnings release last night, we increased our adjusted EBITDA guidance range to $1.43 billion to $1.47 billion. While we plan to recover Q2 foodservice costs ahead of pricing in the second half, we expect this to be largely offset by lower performance in PCB from continued elevated cereal category volume declines and anticipate disruption in Nutrish as we fully ramp its relaunch. Thank you for joining us today, and I will now turn the call back over to the operator.

The floor is now open for questions. Our first question is coming from Andrew Lazar with Barclays. Please go ahead.

Post has already raised several times its view on the structural run rate it expects from the Foodservice unit and looks at the underlying segment EBITDA, again, sort of excluding the cost ahead of pricing piece was again above that level. Is the long-term run rate here now even higher than you thought previously? Or are there other reasons why maybe it came in so much better than we and some others had modeled this quarter?

Andrew, I think it's hard to completely parse out Avian influenza, but I think your comment that I indicated 126 relative to the 105 we've talked about in the past. I think in reality, it's somewhere between those two numbers. We need a couple of quarters of normalcy, get the Avian influenza behind us and back in balance in terms of our supply and demand and then we can make a better call on what that run rate is, but clearly higher than $105 million.

And then in the quarter, it looks like you were able to maintain pretty solid margins in PCB despite the volume declines you saw in ready-to-eat and pet. I guess, would your expectation be that the recent announcements you made around the incremental asset optimization moves in cereal, should allow you to maintain strong profitability in this segment going forward, even if sort of cereal category volume trends remain as challenged as what we saw this past quarter?

So, Andrew, the goal is to effectively manage our costs to sustain profitability. If we're experiencing declines of 4% or 5% year-on-year, it will be a challenge. We anticipate that in the medium term, this decline will stabilize, and we should return to a decrease of 1% to 2%, likely not in the latter half of this year, but eventually. If we can bring the category back to its historic decline rates, we believe these measures will help us maintain our margins in addition to our regular cost reduction efforts.

And your next question comes from the line of David Palmer with Evercore ISI. Please go ahead.

Building on Andrew's question, I'm considering PCB for fiscal '26 and your overall outlook. With the plant closures and ongoing advantages, along with the major focus on pet products and cereal, I envision that cereal may improve gradually. This could potentially balance out some of the challenges discussed regarding the co-man agreements and the gains in Nutrish. It seems feasible that your pet business could counterbalance cereal next year. How do you view your operations within PCB and the potential for some EBITDA growth from PCB next year?

I think you laid it out exactly how we're thinking about it. This year has been a transition year for Pet. So, we had to get off the TSA with Smucker. We had to do some of the heavy lifting on the brand relaunch for Nutrish. And obviously, we expect that those activities will bear some fruit into next year and would enable us to offset some of the headwinds that we're seeing in the cereal business. At the same time, we're going to do what we can on the cereal side to manage our costs, look to innovation and renovation to drive some volume even if the category continues to be challenged. So, the combination of those things, we think, will enable us to mitigate the headwinds we're seeing to the best of our ability.

And our next question comes from the line of Ken Goldman with JPMorgan. Please go ahead.

On PCB, the price/mix downturn this quarter, I'm just wondering if you could elaborate a little bit on the key drivers there and how we might think about that line item ahead for the rest of the year?

Yes. I think as I talked about second half PCB down over first half, it's going to offset some of the pricing recovery we have in Foodservice. And our expectation in the near term as the category remains where it's at for the balance of the fiscal year, which will put some pressure on cereal year-over-year for sure. Again, we've seen in terms of a mix standpoint this past quarter, we saw customers shift to larger pack sizes, which hurts mix a little bit. I think for right now, we're kind of holding firm to what we saw in Q2 for the balance of the year.

And our next question comes from the line of Michael Lavery with Piper Sandler. Please go ahead.

I would like to understand better the savings from the cereal plant closures you just announced. We have some idea about the timing since it's the end of the calendar year. However, are there any potential offsets or magnitude you can share regarding the impact of this decision?

Yes. I think we called out about a $20 million annualized benefit from the plant closures. Does that happen? Those are on track for the end of the calendar year. So, you would get 3/4 of that next fiscal year. I think if the category slows down to a more normalized down 1% to 2%. That's going to be in line with what we're seeing on the volume decline impact versus the cost savings of the plant shutdown. I think the challenge is the category doesn't slow down, then we've got some more optimization to do and we have some more levers we can pull.

And I guess maybe specifically, I was trying to get at how much that's net or gross relative to things like operating deleverage or just the lost volume piece. Is that just the gross piece from the facility savings? Or does it kind of bundle it all together?

That would be the gross savings. So, to the extent that there's incremental deleveraging beyond that, that would be an offset.

Yes. And to be fair, we are in the early stages of our planning for FY '26. So, we don't want to run our plan and expose it until we're ready.

No. Fair enough. Regarding the pet segment of the business, if consumers are becoming more cautious, I know you have several brands positioned differently, but how would you describe the benefits of customers trading down? Would this generally be a positive outcome? How do you view the impact of these share shifts, given a more stretched or cautious consumer overall?

Yes, there's a significant shift occurring that would likely benefit us because many of our brands are positioned on the value side. While we do have some brands in the premium segment, our focus tends to be across the value spectrum, with a particular emphasis on lower-priced products, especially in dry dog food.

And wouldn't it be fair to characterize it similar to cereal, where obviously you could lose some share on the branded side but more than make up for it with what you gain on the low end?

Well, that depends on a lot of variables. I mean, clearly, in cereal, we have a much higher percentage of the low end of the value chain, given our position in private label as well as bag cereal. Our position in pet on the low end is not nearly the same market share that we have in cereal.

And our next question comes from the line of John Baumgartner with Mizuho Securities. Please go ahead.

I wanted to revisit the Refrigerated Retail segment and the Bob Evans side dishes. Expansion opportunities have been a key goal over the years, and we've observed some innovation and focus across different segments. Generally, we've noticed positive trends in retail volume over the past few quarters. Could you share your insights on category expectations for distribution expansion in the next 12 months, considering what your supply chain can support and the outcomes of recent efforts and innovations? I would appreciate your broader thoughts on retail expectations moving forward.

Yes. The PPI acquisition has increased our capacity in several ways that we weren't able to achieve before. We've also enhanced our capacity through improvements in our existing plants, even before the PPI acquisition. If you recall, there were times when we had to stop producing certain products because we couldn't satisfy customer demand. Those days are over. Now, we can take a more proactive approach than in the past. We're noticing a shift in the category with private label gaining traction, something that didn't happen in the past. Previously, private label products lacked quality and were inconsistent, but now they have improved quality and are attracting some consumer demand away from our products. With the new capacity we have, we can explore opportunities in other categories, consider the viability of entering the private label space, and evaluate options along the value chain while maintaining our significant market share with the Bob Evans brand. Regarding innovation or renovation in that brand, we had to pause much of our work due to COVID-related challenges and issues leading up to it. Now that we have the necessary capacity, we expect to start focusing on those efforts in the latter half of this year and into next year.

Okay. And then to come back to PCB and some of the cereal category headwinds, I mean, I think you had seen this about a decade ago where birth rates were down. You had some shift to up two products. I think back then, it was frozen breakfast and restaurants. Now you could argue it's more protein shakes. So, the macro headwinds we've seen these cycles before. And I'm curious, if you put that to the side, do you see anything else fundamentally having changed, whether it's post inflation price points for the category whether it's a broader shift towards protein that's stickier this time around? I guess is there anything in the environment that's maybe more structurally changed that would sort of change how you grow the category, your aspirations for the category, your ability to kind of circle the wagons on the value price point?

There is definitely an impact on the demand for GLP-1s, and I anticipate that some adjustments will need to be made over the next 6 to 18 months. This is a notable difference from the previous decade.

And your next question comes from the line of Scott Marks with Jefferies. Please go ahead.

First one I wanted to ask about is we've heard from some of your competitors recently notably in cereal about more so increasing promotional activity to drive value for consumers. And I don't think I heard that mentioned kind of in your prepared remarks, more so around innovation and renovation. So just wondering, if you can share any color on your thoughts on kind of the trade spend piece.

So, our view of the category, cereal we're talking about is that the promotional activities are what we would call normal levels. Certainly, go through ebbs and flows in a given year or a given time period within a year where one producer might be promoting more than others not and vice versa in subsequent periods. So, we haven't seen anything that we would consider to be out of the ordinary for any significant stretch of time. Our personal approach is to continue to do the types of programs that drive value. So, we have seen that promotion's sake does not generate the return in volume that you give up in price. So, you have to find the sweet spot that works for your products and works for your profitability and the plan that we have now and going forward.

Got it. And then last one for me. I know it's still early in the acquisition of PDI, but just wondering if you can share any color on initial learnings or insights that you have from that and how you plan on leveraging that?

Yes, it is early. I think there are some synergies that we may not have realized are present that will become apparent in the medium to long term. Another insight is that the initial integration caused some disruption among our employees, which was probably more significant than we anticipated. As a result, the ramp-up will be slower than we initially expected. However, it will integrate well into our network and provide us with opportunities to approach that category differently than we have in the past due to some constraints we faced before acquiring it.

And your next question comes from the line of Marc Torrente with Wells Fargo. Please go ahead.

I guess just first, grocery in general, category volumes remain under pressure. A lot of that's consumer pressure that we're seeing out there. But thinking more in terms of relative performance, who are you seeing outperforming? Is it more value in private label? Is it smaller players? And then since quarter end, have you seen any sequential improvement in any of your category trends?

So, regarding the first part of your question, it really presents a contrast. Take the cereal category, for example. We see that some premium organic products, marketed as healthier options, are quite expensive but are performing well, even though the overall category is struggling. This indicates that there is a segment of consumers who are willing to spend on what they believe is better for them, regardless of the cost. On the other hand, there are consumers who are significantly cutting back, reducing their pantry stock, and buying less often, which impacts the usual demand we see for cereal. Typically, people would have products in their pantry that they consume when available, but now they are depleting their supplies because they lack the funds to restock. I'm sorry, I lost track of the second part of your question.

Yes. Just any sequential improvement since quarter end in any of your categories?

Yes. The improvement is not significant, but the worst months for cereal were February and March, with a slight improvement in April. However, we are clearly not in a position to declare success in that area.

And your next question comes from the line of Carla Casella with JPMorgan. Please go ahead.

One follow-up from Ken's question about 8th Avenue. What are the options there? And is there a scenario where you buy and reconsolidate that business?

Well, I think I would start with recalling that we wrote this to zero, two or three years ago. With that, we consider it like a new investment opportunity with which we have a great deal of prayer experience and knowledge. Beyond that, I'm not going to comment on the various iterations of opportunities that could exist for the Company.

Thank you. This concludes today's Post Holdings Second Quarter 2025 Earnings Conference Call and Webcast. Please disconnect your line at this time, and have a wonderful day.