Post Holdings, Inc. Q3 FY2025 Earnings Call

Good morning. Thank you for joining us today for Post's Third 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. 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, and good morning, everyone. Before commenting on the quarter, I want to mention the leadership announcements from last evening. Jeff has decided to retire at the end of the year. Jeff and I started at Post the same day, and he has been instrumental to our success. While I'm happy for him, he will be sorely missed. Nico is being named COO effective at the same time. For the time being, he will also continue as CEO of PCB. Nico has done an outstanding job leading PCB, especially the integration of our Pet business. I look forward to working with him in this role. Turning to the business. We had strong results in Q3 despite the challenging macro environment with adjusted EBITDA approaching $400 million. Diversification in our business segments continues to benefit us as we sequentially saw significant improvement in our cold chain businesses, more than offsetting a pullback at PCB. While these dynamics were anticipated heading into the quarter, the magnitude of each was a bit bigger than expected. Rounding out the portfolio, Weetabix maintained a steady improvement from the first half that was impacted by their ERP conversion. Another highlight of Q3 was our acquisition of 8th Avenue, which closed on July 1. We are pleased to have the business fully back in the Post portfolio. And while we see very clear synergies to PCB within nut butter and granola, we are waiting until FY '26 to start integrating to provide some normalcy and stabilization for the business. Meanwhile, the broader M&A environment remains challenged given market volatility. However, we view the recently announced Kellogg's transaction as an encouraging sign, highlighting the potential for larger, more transformative transactions. Beyond M&A, we continue to be aggressive in share buybacks, having bought back 8% of the company fiscal year-to-date. Subsequent to the closure of the 8th Avenue transaction, we remain in a great spot from both a leverage and liquidity position to remain opportunistic with our capital allocation. While tariffs and regulatory changes to food ingredients continue to increase costs and create uncertainty, the recent tax law changes are projected to result in substantial financial benefits to Post. Specifically, bonus depreciation and interest deductibility changes will drive an estimated $300 million in reduction in cash taxes paid over the next 5 years. I am pleased with the overall state of our portfolio as we continue to perform well in a really tough environment. Foodservice has successfully navigated severe HPAI impacts this year and is executing a soft landing to normalcy. Pet is working through a challenging but much needed portfolio transition while continuing to sustain over 2x our acquisition underwriting pace. Meanwhile, on the grocery side of PCB, we remain focused on executing cost optimization to offset pressured cereal volumes. Finally, both refrigerated retail and Weetabix continue to pursue their pipelines for targeted volume growth and cost reduction. With that, I will turn the call over to Jeff.

Thanks, Rob, and good morning, everyone. Post Consumer Brands continued to face volume challenges in both Cereal and Pet, which drove the segment's performance decline. Cereal category volumes were down 4.1% year-over-year, and our branded portfolio was slightly behind the category with a 4.9% decline. We remain on track with our previously announced cereal plant closures at the end of the calendar year to optimize our cost structure, and we will continue to pursue additional cost-out opportunities to mitigate the current cereal category trajectory. In fact, cost optimization efforts already implemented, along with favorable product mix enabled us to maintain cereal profitability relatively flat sequentially despite the volume challenges. Our pet volume consumption was down 3.7% year-over-year versus a flat category as we saw continued Gravy Train price elasticities and accelerating declines in Nutrish from its relaunch. As we learned from our MOM cereal reset a few years ago, we expected short-term volume challenges as we overhauled the Nutrish brand, but the magnitude has been larger than anticipated. We're making some course corrections based on market feedback and therefore, expect the brand recovery timeline to be extended. With regard to Gravy Train, we have some price pack architecture changes hitting the market over the next few quarters, which we believe will set the proper balance between profitability and volumes for that brand. Turning to Foodservice. As expected, Q3 was a much stronger quarter sequentially driven by temporary Avian Influenza pricing to recover Q2 costs ahead of pricing and to offset continued elevated egg costs. In addition, we saw volume growth in both eggs and potatoes driven by improved market egg availability and improved breakfast food traffic for our end customers. We expect to wind down our temporary HPAI pricing and fully recover our egg supply by the end of Q4, setting us up to enter fiscal '26 at a normalized run rate. Although still early in our planning process, our early read of the normalized quarterly adjusted EBITDA run rate of our Foodservice business is approximately $115 million. Similar to Foodservice, Refrigerated Retail benefited in the quarter from temporary Avian Influenza-driven pricing adders in liquid eggs, along with the shifting of the Easter holiday into Q3. Volumes were higher in nearly all categories. We are progressing well on the integration of the recently acquired PPI business, seeing the benefits of optimized manufacturing mix and elimination of tolling charges. We are also seeing further benefit from warehousing and freight efficiencies. Turning to Weetabix. Our flagship yellow box product grew consumption volumes 2.4% year-over-year in a category that was down 1.8%. We attribute this to a return to marketing and promotion after limiting those activities in the first half of the fiscal year as we executed an IT systems conversion. In addition, UFIT had a strong quarter, growing volumes by 31% over the prior year. We are looking to expand the UFIT brand with new high-protein cereal and granola products that are now in stores. More broadly, we remain focused on executing our cost-out opportunities to drive our multiyear margin recovery. Despite the challenging macro backdrop, we are expecting a strong finish for fiscal 2025 as we remain focused on the things we can control, such as cost-out optimization and making targeted investments to drive volumes. With that, I'll turn the call over to Matt.

Thanks, Jeff, and good morning, everyone. Third quarter consolidated net sales were $2 billion and adjusted EBITDA was $397 million. Sales increased 2% as Avian Influenza-driven pricing and volume growth in our cold chain businesses was partially offset by lower pet food and cereal volumes. Turning to our segments. Post Consumer Brands net sales decreased 9%, driven by lower volumes in both Grocery and Pet. Cereal volumes decreased 6% due to category dynamics with private label seeing steeper declines than branded. In Pet, our volume declines accelerated to down 13%. As a reminder, we expected high single-digit declines for the second half of fiscal '25 until we lapped prior year profit-enhancing decisions and completed the relaunch of Nutrish. Bridging the additional decline this quarter is twofold. First are the incremental consumption declines Jeff discussed for both Nutrish and Gravy Train. And the second is the loss of some private label business for which we expect to replace by early FY '26. Segment adjusted EBITDA decreased 8% versus prior year as improved cost performance for both grocery and pet was not enough to offset the impact of lower volumes, particularly in Pet. One call out is the better cost performance is net of a $5 million severance charge taken this quarter as PCB optimized its SG&A workforce to better align with our smaller cereal footprint. Moving to Foodservice. Net sales increased 19% and volumes increased 7%. Excluding the impact of our PPI acquisitions, volumes increased 4%, driven by the inclusion of shake volumes in the quarter and higher customer food traffic benefiting both eggs and potatoes. Beyond volume, Avian Influenza-driven pricing drove the revenue increase. Adjusted EBITDA increased 32%, driven by increased pricing to recover elevated egg costs and continued volume growth in both our value-added egg and potato products. Refrigerated Retail net sales increased 9% and volumes, excluding the impact of PPI increased 1%. Volumes across all products benefited from the timing of Easter, which was in Q2 last year. Segment adjusted EBITDA increased 94% as we lapped a particularly weak quarter last year marked by trade overspend, while this year, we benefited from Avian Influenza pricing adders and Easter-driven volume increases. Weetabix net sales increased 1% versus the prior year. Foreign currency represented a tailwind of 560 basis points. Volumes decreased 3% driven by noncore discontinuations. However, as Jeff mentioned, our core products grew volumes 3% and UFIT grew volumes 31%. Segment adjusted EBITDA decreased 4% versus prior year, led by lower volumes and increased inflation-driven costs. Turning to cash flow. We generated $226 million from operations and approximately $95 million in free cash flow, net of accelerated capital spend on our key investments in both PCB and Foodservice. From a capital allocation standpoint, we have repurchased approximately 1.6 million shares since the beginning of Q3, bringing our fiscal year total to approximately $5 million or 8% of the company. Our Q3 results drove our net leverage down slightly to 4.3x. However, adjusting for the July 1 closing of 8th Avenue, our leverage is 4.5x. With our earnings release last night, we increased our adjusted EBITDA guidance range from $1.5 billion to $1.52 billion. At the midpoint, this suggests Q4 will be approximately flat to Q3 with the inclusion of a full quarter of 8th Avenue results, offsetting some normalization within the balance of the portfolio. Sequentially, we expect our cold chain businesses to decline as AI pricing adders wind down throughout the quarter. This will be partially offset by an increase in PCB due to back-to-school seasonality in cereal and the absence of Q3 severance charges. Thank you for joining us today, and I will now turn the call back over to the operator.

All the best on your retirement, Jeff, and congratulations to Nico on the COO role. Rob, I know it's early to provide specific guidance on fiscal '26, but maybe you can lay out some of the key puts and takes to consider I think obviously, as you've talked about foodservice has over delivered this year, suggesting maybe some giveback next year. Cereal category trends obviously have remained quite weak and the pet turnaround is taking more time. I guess on the flip side, you've got the contribution from 8th Avenue, cost saves from asset optimization moves and I think some contribution from the shake co-packing dynamic. So I guess, am I right on those? What others might I be missing? And then I guess when you net all these out, would you still anticipate at least some modest EBITDA growth in fiscal '26?

I believe you explained it quite well. We are still in the planning phase for 2026. Our perspective is that if we adjust Foodservice for the impact of AI, it essentially represents an algorithm year. However, I want to emphasize that we are still in the midst of planning. Beyond that, you outlined the various factors effectively. Is there anything else you would like to add, Matt?

No, no, I think you captured everything, Andrew. And like if you took fiscal '25 and put in a full year of 8th Avenue and then normalize our cold chain businesses for AI, Jeff laid out the run rate we see Foodservice at, and we think it can grow in accordance with algorithm from there, just given the value proposition and just where we sit in the marketplace. So I think we feel good about our prospects for next year off a normalized '25.

Great. Okay. And then I'm curious, Rob, can you provide a bit more detail on what you're observing in the cereal category at this time? Additionally, I'm interested in understanding why private label appears to be underperforming compared to branded products in this category.

Yes, it's a bit of a mystery to me as well. I think perhaps some of the degree of promotion is bringing the price gaps down a little more than it should. I think that the pricing opportunity for us there is still compelling, but it just is not as compelling as it has been compared to branded.

Yes. I think the only thing I'd add, Andrew, is that our private label in cereal is primarily targeted at Walmart, which has experienced a noticeable decline in food traffic. Therefore, we believe there is an impact on our performance due to this exposure.

I wanted to revisit the Foodservice performance for the quarter. There was a comment regarding the pricing reflecting the AI recovery. Pricing was up low double digits. Was that the full amount of pricing recovery for the costs you incurred in the second quarter, or was there some underlying pricing as well? I'm trying to understand in relation to the $30 million or $35 million you expected to recover, how much was delivered beyond that?

Yes. There were a couple of factors. One is the recovery in Q2 that mainly occurred in Q3. Additionally, we are still seeing high egg markets, which has allowed us to maintain pricing to recover from that. It's an ongoing process. As we improve our egg supply through Q4, we will need that pricing, and we'll start to see a more normalized perspective. Our goal is to recalibrate the business back to the $115 million that Jeff mentioned.

And then the only thing I would add is on a year-over-year basis, there's a normal pricing that we would take as we renegotiate contracts. So there's some of that phenomenon in place as well year-over-year.

And as a follow-up, I wanted to ask about the CapEx moving higher in the guidance for both the PCB projects as well as Foodservice investments. Is that incremental scope to these projects? Or has the cost gone up due to inflation? Just any color there would be helpful, and I'll pass it on.

No, it's really a matter of pacing that more than cost growth. So it's just we're spending a little faster. We have an opportunity to do that, and we want to accelerate those projects where we can. So it's not a matter of higher cost. It's just faster spend.

Congratulations to Jeff and Nico. I'd like to revisit the topic of M&A. You've recently completed the 8th Avenue deal, but it has had a minimal effect on your balance sheet. Can you share how much interest you still have in pursuing more acquisitions? What challenges, if any, are you encountering in the market? Also, what opportunities are on your radar? I know you've mentioned share repurchases as an alternative, which we will monitor if no deals are made. Any insights on the M&A landscape would be appreciated.

Yes. I mean I think if you look at some of the opportunities right now, they're impacted by the uncertainty of base earnings with tariffs and some of the impacts that could come from food ingredient changes that we called out in the prepared remarks. I think it's an interesting commentary that the two large transactions that have happened in the last couple of months or probably longer than that are both private companies buying public companies. So I think the transactions of public are impacted by the uncertainty I just mentioned. At the same time, multiples across the segment, including ours are quite low and the opportunity to use our stronger balance sheet to buy back shares is pretty attractive. So as we've talked about, I think, in the past, we look at it as a balancing process of what are the opportunities externally, i.e., M&A, what are the opportunities internally, meaning share buybacks and what do we need to do from managing our leverage perspective. So with all of that saying, we continue to be open-minded to transactions, small and large, and we just wait for the time to be right.

That's helpful. I have a follow-up regarding the Foodservice quarterly EBITDA run rate. It seems like there is potential for growth, especially as the mix continues to provide advantages and with stable pricing amid some temporary adjustments from the second quarter. Is the current stance a bit conservative in not increasing those expectations just yet? Are there any additional challenges we should be aware of? Also, could you share your assumptions about shakes and how they are performing or what your utilization expectations might be?

I'll start with the last part first. The contribution from shakes in that figure is quite modest, and while we're making progress, it's been a slow and steady process. We're still working towards what we believe will be normalized profitability. Over time, this should serve as a tailwind that we expect to lead to increased profits as we move through 2026 and beyond. Regarding the first part of the question, it reflects what we currently perceive as the business's run rate. However, we consider Foodservice to be a modest grower on a year-over-year basis, which has been true during our ownership and even before it. This is a snapshot in time, and we anticipate that growth will occur from this point onward.

I was hoping we could discuss some market insights regarding the main two categories within PCB. First of all, Jeff, congratulations on your retirement and best wishes for your future. Also, congratulations to you, Nico. Regarding Pet and Cereal, the Pet category is up by a couple of percent. Sales appear to be shifting quickly toward premium and private label options, while value brands and major brands are losing market share. I'm interested in your thoughts on this, aside from the dry versus wet dynamics and freshness considerations. In Cereal, the category is down by a couple of percent, and it's surprising that private label isn't seeing much benefit. It seems that tidy and low-carb smaller brands are thriving. I'm curious about how these trends are shaping your strategies and spending as we move into fiscal '26. Do you have plans in place to pivot and regain market share for each category? I'm particularly interested in hearing about your plans and spending levels.

I think starting with Pet, we have some profit-enhancing items and decisions from the beginning of the fiscal year that we won't fully see the effects of until we finish this fiscal year. In the recent quarter, sales were down 13%, and I'd say about half of that is due to these factors. As the year progresses, these influences will diminish, and we will be focused on the consumption trends and challenges, particularly with Nutrish and Gravy Train, which Jeff mentioned. We have strategies in place to address both issues. The Nutrish launch is underway, and we are making necessary adjustments, though it will take longer than we initially expected. However, we are optimistic about improving consumption trends as we move into fiscal '26. We also faced some losses in private label business, but we have a clear plan to replace that over the next few quarters. From a volume perspective, we believe we will be nearing flat levels compared to current figures by the middle of next fiscal year. In terms of spending, we are allocating funds specifically for Gravy Train and Nutrish to support the relaunch. Regarding Cereal, we are maintaining a rational approach to spending, supporting brands on a targeted basis. We see potential for further optimizing our network, potentially not at the plant level but possibly with additional lines. This has been a challenging year, but as we move into next year, I expect to see improvements year-over-year in the rate of decline we've experienced in cereal, and we will monitor this as we consider further optimization strategies.

First thing I wanted to ask about, you made a comment in the prepared remarks about some higher input costs because of product reformulations and some regulatory changes. So maybe just wondering if you can kind of walk us through how you're thinking about the shape of the portfolio and how you intend maybe to adjust the portfolio a little bit to meet some of these new trends and policy updates?

Well, I think we're going to certainly have some innovation. So to David's question before, one of the things that we're going to do is attempt some innovation in cereal that's more targeted at the types of products that are performing well, protein-enhanced cereals, that sort of thing. More broadly with regard to ingredients, I think we're going to take a pragmatic approach. You've seen some commitments from some of our peers to eliminate some of the ingredients. We're certainly going to look at reformulation of our products over time, but are going to take a pragmatic view as to how quickly we do that and whether we do that across the board or within certain products. So I think the short answer is to say we're going to take a tactical view. We're going to make tweaks along the edges, but we're not anticipating any major changes in particular in fiscal '26 with regard to those items.

I think you have a situation of one very large and very respected company being acquiring a smaller but also very well-respected company with the likely outcome being the category will be enhanced by the size of the acquirer. But I think until we actually see the transaction close, we would be hesitant to make further comment.

Jeff, congratulations on the retirement. I guess first on 8th Avenue, kind of two parts. How has that business in its categories been tracking over the last couple of quarters, top line and profitability? And you previously increased your outlook to account for the deal closing, the deal closed on time. Any change to your expected contribution for this year? And then going forward, any seasonality considerations for that business, should that track more or less in line with PCB?

No material changes to this fiscal year contribution. And then as the outlook for next year remains similar, I'd say what we found and not surprising as we watch the business is with the backdrop that was under over the last 6 or 9 months and uncertainty about where the business was going to land, I definitely saw a pullback in performance of the business here as of the last couple of quarters. We see a path to improvement in line with what we called out when we acquired the business for next year. But no seasonality I would really call out that's material within the business. And I don't know if there's anything else you'd add, Jeff, but I think that's.

No, I think that covers it.

Yes. So again, it doesn't really pull forward what the actions we're taking on the plant optimization. They're still on track for the end of the calendar year. And in terms of utilization, we would expect that would get us back up into the mid-80s. And then I think it's really a matter of, like I said, how does the cereal category perform? If it's more like this year, we'd have to move quicker on additional steps. If it levels out and becomes more normalized for what we've seen historically, then feel like we're in a good spot for next fiscal year.

And Jeff, congrats on retirement. I really appreciate all of your insights over the years. I guess first off for me in pet, I'd like to follow up there given the portfolio adjustments. It seems as though you had a fast start out of the gate rebuilding with existing customers in the old Smucker business. But as that's normalized, how do you think about portfolio balance at this point? Are there opportunities to maybe participate more heavily in different channels, e-commerce, specialty? Are there opportunities to have a presence in some of the specialized formulas? Just how do you envision the portfolio from where it sits today with steady-state brands and distribution and where it could maybe evolve from here?

Well, I think there are many opportunities to change the composition of the portfolio, whether it's channel or price point or even breed. So I think there are many opportunities there. However, I think the most important thing to realize is that we want to make sure that what we bought sticks and part of what we bought was a brand in nutrition that we knew needed work. So we will continue to make sure that Nutrish is where it needs to be before we do too much portfolio management.

Sure. We feel positive about our performance this quarter, especially with the boost from Easter. Last year, we faced some issues with trade that affected our base performance, but we've made the necessary corrections and are in a much better position this year. We are identifying additional opportunities and improvements in distribution and pricing. We are also exploring alternatives in our product offerings, similar to what we see in PCB. Looking ahead to next year, we are optimistic about potential top-line opportunities for that segment of the business.

Just a quick question. On the 8th Avenue acquisition, you're funding it with revolver and cash, but any thoughts about coming and issuing bonds to eventually or term loan to eventually put in longer-term financing for that?

Yes, it's something that we definitely obviously keep an eye on the markets really closely. I think right now, just more in a monitoring mode. But I think at some point, that certainly could be an option for us. But right now, we're in a really good spot from a cash flow liquidity standpoint. So in no rush, and I think we'll remain opportunistic.

And our first question is coming from Andrew Lazar with Barclays. We've reached the end of the Q&A session. Thanks for joining us. You may now disconnect.