Earnings Call Transcript - POST Q1 2023

Operator, Operator

Welcome 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 Mainer, Chief Financial Officer and Treasurer. Today’s call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Time. The dial-in number is 800-839-6136. No pass code 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.

Jennifer Meyer, Investor Relations

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 Mainer, our CFO and Treasurer. Rob and Matt will begin with prepared remarks. And afterwards, we will 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 filings section at postholdings.com. In addition, the release is available on the SEC’s website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call, and management undertakes no obligation to update these statements. As a reminder, this call is being recorded and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For 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.

Rob Vitale, CEO

Thanks, Jennifer, and thank you all for joining us. Post had quite a solid quarter, while all segments performed well. The Foodservice 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 Foodservice 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, though 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 category, it is 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, Foodservice remained 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 clear and forms 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 our pricing and resulted in elasticities among the highest in grocery. Weetabix 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 mix towards private label. Our small acquisition of the UFIT brands 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 in 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. The 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 billion 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 for fiscal 2024, our initial thinking is that, despite some non-repeatable current year benefits, 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.

Matt Mainer, CFO

Thanks, Rob, and good morning, everyone. In the first quarter, consolidated net sales were $1.6 billion, with an adjusted EBITDA of $270 million. Net sales rose by 17%, driven by pricing strategies across all segments, although overall volumes remained relatively unchanged. We noticed a slight shift towards private label products in some areas of our business. There has been a gradual improvement in supply chain performance and customer order fill rates, though both still fall short of optimal levels. Even though significant inflation was contained during the quarter, signs of moderation are emerging. Looking at our segments, starting with Post Consumer Brands, net sales increased by 9%, while volumes fell by 1%. Average net pricing went up by 11% due to our pricing strategies, which were somewhat offset by an unfavorable product mix and increased promotions. Strong growth was observed in Peter Pan and private label cereal, but this was counterbalanced by declines in Honey Bunches of Oats, government business, and MOM bags. Adjusted EBITDA rose by 5% year-over-year because our pricing strategies outweighed substantial cost inflation and higher manufacturing expenses. In the Weetabix segment, net sales remained flat compared to last year. However, in local currency, sales saw a 14% increase, with a significantly weaker British pound creating a foreign currency translation headwind of about 1,400 basis points. Net sales benefitted from notable list price increases and contributions from last April's acquisition of the UFIT brand, though these benefits were partially offset by a less favorable product mix due to growth in private label items. When excluding the benefits from UFIT, sales dropped by 6%, and volumes decreased by 1%. The growth in private label could not compensate for the declines in branded products, which were mostly caused by supply chain constraints and related order fulfillment challenges. Segment adjusted EBITDA fell by 18% compared to the prior year, largely due to foreign currency translation headwinds. Additionally, our adjusted EBITDA margin declined as supply constraints were intensified by rising input and warehousing costs. Given the tough macroeconomic conditions in the U.K., we anticipate that margins will be compressed throughout 2023. In the Foodservice segment, net sales and volumes increased by 37% and 4%, respectively. Revenue growth continued to outpace volume growth, reflecting inflation-driven pricing actions, our commodity pass-through pricing model, and pricing adjustments due to avian influenza that helped mitigate higher spot market egg procurement costs. Segment adjusted EBITDA rose to $109 million, benefiting from improved average net pricing and volume growth, which together lessened the impact of higher production costs. In the refrigerated retail segment, net sales grew by 7%, while volumes fell by 5%. Notably, when excluding the divested Willamette Egg Farms business, net sales increased by 10%, and volumes grew by 1%. Pricing adjustments led to increases in average net selling prices across all products. Side dish volumes rose by 12%, aided by improved inventory levels that helped us meet demand for the holiday season. Egg volumes decreased as high egg costs and limited availability due to avian influenza negatively affected both volume and margins. Segment adjusted EBITDA rose by 12%, primarily benefiting from measures to offset significant cost inflation. Increased volumes also improved our manufacturing efficiencies. However, the reinstatement of advertising and promotions did not fully counterbalance these advantages. Regarding cash flow, we generated $98 million from continuing operations in the first quarter, reflecting higher profitability year-over-year despite increased working capital demands. Our net leverage decreased by half a turn this quarter to 5.1 times due to growth in adjusted EBITDA. In terms of capital allocation, we repurchased 300,000 shares at an average price of approximately $85 each and bought back $71 million of our debt at an average discount of 15%. There is still $276 million available under our share repurchase authorization. With that, I will hand the call back to the operator for questions.

Operator, Operator

We'll take our first question from Andrew Lazar with Barclays.

Andrew Lazar, Analyst

Good morning, everybody.

Rob Vitale, CEO

Hey, good morning, Andrew.

Matt Mainer, CFO

Good morning.

Andrew Lazar, Analyst

I guess to start, Rob, I think in fiscal 4Q, you talked about the Foodservice segment EBITDA was obviously 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?

Rob Vitale, CEO

The drivers were virtually identical from 4Q to first Q. And I think the reality is that some of the avian influenza impact has persisted longer than we expected. There have 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.

Andrew Lazar, Analyst

And those conditions, Rob, I mean last quarter you said part of it was just being able to take advantage of let's say competitors that weren't in as advantageous a supply position as you were. So 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 can 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?

Rob Vitale, CEO

Prices continue to remain elevated. There has been some decline in the cost of breaking stock. 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 into more details around pricing dynamics.

Andrew Lazar, Analyst

Okay. 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?

Rob Vitale, CEO

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 the MOM bag, while on a per-ounce price point, is quite attractive as a steeper peer entry price. So we're seeing a bit of a migration more towards opening price point levels. But I would expect that as we go through the balance of the year, you see some of that dynamic with MOM brands start to reverse.

Andrew Lazar, Analyst

Yes. Thank you.

Rob Vitale, CEO

Thank you, Andrew.

Operator, Operator

We'll take our next question from Chris Growe with Stifel.

Chris Growe, Analyst

Hi, good morning.

Rob Vitale, CEO

Good morning, Chris.

Chris Growe, Analyst

Hi. Obviously, you had nice EBITDA guidance here and increased early in the year and obviously, it predicts a lot of confidence in the business. And Rob, you had mentioned that Foodservice is obviously performing ahead of 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?

Rob Vitale, CEO

Yes. Well, I would say there are 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 we have revised our estimate for currency translation given the fairly significant move in the pound sterling in the first quarter. And then the last would be, we have still taken a meaningful amount of pricing that has yet to hit the P&L. The uncertainty, of course, is ongoing elasticities, but I think the potential upside outside of Weetabix and Foodservice, Weetabix specifically in U.S. dollars, would be the relationship between incremental pricing and elasticity. Chris?

Operator, Operator

And we'll take…

Rob Vitale, CEO

All right. Go ahead, operator.

Operator, Operator

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

Jason English, Analyst

Hey, good morning, folks. Thanks for the color on Foodservice, very helpful. And sticking with Foodservice, you mentioned incremental sources 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?

Rob Vitale, CEO

In reverse order, we've talked about it being $15 million 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 around September 30 or so. We are building a factory in times that are challenging. We've met every horizon and 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 will be up and running at full capacity by early 2024. Hope we will do a little bit better than that, but I want to hedge that a bit.

Jason English, Analyst

Yes, 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 give-back, more promotional intensity, et cetera? Thank you.

Rob Vitale, CEO

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 has 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 we would expect to be successful in managing that incremental competition, but we wanted to highlight it because it is relatively new.

Jason English, Analyst

Cool. And last question on the cereal side, I think a lot of us are looking at U.S.-centric food and we see it abating cost curve and we see residual price seen, and we're expecting decent margin recovery. Are those expectations founded in cereal? 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?

Rob Vitale, CEO

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 in terms of packaging and in-store marketing. So I don't necessarily view that in any way as a negative. We're far more sensitive to promotional intensity than advertising intensity, and I think that's within the normal range.

Jason English, Analyst

Makes sense. Thank you.

Rob Vitale, CEO

Thanks, Jason.

Operator, Operator

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

Michael Lavery, Analyst

Thank you. Thank you. Good morning.

Rob Vitale, CEO

Good morning.

Michael Lavery, Analyst

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 would 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?

Rob Vitale, CEO

We're not to that level of granularity that I can say with certainty, 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 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 whether that incorporates the effect of the incremental capacity, that's the level of precision we haven't yet achieved.

Michael Lavery, Analyst

No, fair enough. But yes, good color still. When you talk about the pressure on Weetabix margins, obviously, we see that in this quarter. Is the magnitude likely to moderate at all? Or how do we just think about the run rate over the rest of the year? Is 1Q indicative of what to expect, or might that get a little bit better?

Rob Vitale, CEO

At the EBITDA level, I think it's indicative of where we will be. At the gross margin level, that may fluctuate a bit. With inventory levels, but I think we can maintain that EBITDA margin plus or minus. Longer-term, we think it will be restored, but we face a choppy environment here and there.

Michael Lavery, Analyst

Okay, that's helpful. Just one last quick question about the pricing that hasn't impacted the profit and loss statement yet. Can you clarify which segment or segments that relates to?

Rob Vitale, CEO

Post Consumer Brands and refrigerated retail.

Michael Lavery, Analyst

And can you give any sense of the magnitude?

Rob Vitale, CEO

No, I'd rather not get into that level of pricing discussion in this forum.

Michael Lavery, Analyst

Okay. Thanks so much.

Rob Vitale, CEO

Thank you.

Operator, Operator

We'll take our next question from David Palmer with Evercore ISI.

Rob Vitale, CEO

Hey, David.

David Palmer, Analyst

Thanks. Good morning, Rob. I'm curious about the way this year is shaping up in 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 giveback in foodservice, 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 that could leave an imprint for ’24? Thanks.

Rob Vitale, CEO

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.

David Palmer, Analyst

Okay, that was quick. As for the timing on the pricing of commodities for cereal, you don't need to narrow it down to a quarter, but when do you think that will start to improve? How soon will that happen?

Rob Vitale, CEO

Current quarter. So that starts now and builds throughout the year. Thank you very much.

Operator, Operator

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.

Rob Vitale, CEO

Thank you all for joining us and we'll speak with you soon. Goodbye.

Operator, Operator

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