Earnings Call
Post Holdings, Inc. (POST)
Earnings Call Transcript - POST Q3 2021
Operator, Operator
Welcome to Post Holdings Third Quarter 2021 Earnings Conference Call and Webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer; and Jeff Zadoks the Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 p.m. Eastern Standard Time. The dial-in number is 1 (800) 585-8367 and the pass code is 9633789. 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 Third Quarter Fiscal 2021 Earnings Call. With me today are Rob Vitale, our President and CEO; and Jeff Zadoks, our CFO. Rob and Jeff will begin with prepared remarks and afterwards we'll have a brief question-and-answer session. The press release that supports these remarks is posted on our website in both the Investor Relations and the SEC filings sections at postholdings.com. In addition the release is available on the SEC's website. Before we continue I would like to remind you that this call will contain forward-looking statements which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call and management undertakes no obligation to update these statements. As a reminder, this call is being recorded and an audio replay will be available on our website. And finally this call will discuss certain non-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. Good morning. Thank you all for joining us today. In total, our results for the quarter were largely in line with expectations. But that belies considerable volatility in the environment and in our results. BellRing outperformed as demand for our core shake product continues to grow rapidly. Meanwhile, the balance of the Post portfolio was a bit soft as we continue to navigate through very challenging macro factors, such as shortages in labor, transportation and packaging, as well as the timing of cost inflation versus pricing recovery. We expect the current environment to persist through the fourth quarter and as we enter fiscal 2022. My comments on outlook assume that we do not have a major economic disruption arising from the Delta variant. Despite the challenges, we expect the full year results to be largely consistent with our guidance, albeit with a different mix. And as you have seen, we lowered the top end of the guidance range from $620 million to $610 million. Post Consumer brands had a soft volume quarter largely attributable to what we believe is a temporary consumer shift towards premium purchasing. Post branded products performed in line or better than the category. Post branded products now have a market share of 12.5% driven primarily by exceptional performance of our Pebbles brand. However, we saw weakness in our value portfolio, which includes mom branded bags and private label. We believe recent increases in discretionary income have produced a trade-up effect. We expect that to normalize and we further expect that cost reduction enabled by our recent acquisition of two cereal plants from TreeHouse will provide us further differentiation opportunities in the value segment. Our biggest challenge this quarter was in the Refrigerated Retail segment. I expect that to be the case in the fourth quarter as well. While demand remains strong, most notably on Bob Evans sub dinner size and sausage. Manufacturing constraints resulting primarily from labor availability have reduced internal capacity. While we've expanded our use of external supply chain partners, they too face similar challenges with labor and come at a higher cost. The combined manufacturing network was not able to service the full customer demand in Q3 and will further pressure Q4 in the holiday season. Last, we continue to see extraordinary volatility in shop pricing. We've taken steps to offset inflation led by significant pricing. But of course pricing lags cost. Foodservice continues its track to recovery with solid sequential gains. Setting aside uncertainty around the Delta variant, we remain extremely encouraged by the progress. We continue to look to 2023 for full recovery to baseline 2019 with continued progress in 2022. Margins are lagging volume recovery as a result of product mix within channels, overall channel mix, labor pressures and the timing of inflation recovery. Anecdotally, we have 22 precooked egg lines including the three we built in Norwalk, immediately prior to the pandemic. Currently we can staff more than 17. As a result, we had to allocate demand to our capacity. As you may imagine, this creates inefficiencies and overall cost absorption. Weetabix just keeps rolling along another solid quarter, we tried to add something fairly significant to it but maintained our pricing discipline and we were outperformed. We will keep trying to expand their purview. We see less labor pressure in the UK but an equal amount of transportation challenges and a greater level of challenges in obtaining packaging materials. We took guidance down at 8th Avenue while retaining investment as it is not material, the option value of growing the business remains important to us. In short, our outlook was predicated on an expansion of our Alabama facility to meet strong peanut butter demand, a combination of labor challenges at capital equipment manufacturers, our own labor shortages, and overall poor execution in the expansion. We incurred approximately $7 billion in unusual costs and we're working to remedy this particular issue in an accelerated fashion. In addition, cost pressures on manufacturing are hitting the entire network and will be ongoing in the fourth quarter. We are aggressively taking price but it will not be effective until October. Meanwhile, 8th Avenue did close on Ronzoni Dry Pasta acquisition and is off to a fine start. As you saw, BellRing continues its terrific performance and I will let Darcy provide details on her call. In short, we are navigating a challenging environment reasonably well. The pandemic and the public policy reactions have stressed our supply chains and produced some really unusual results around consumer behaviors, labor availability, commodity volatility, and so forth. We believe many of these challenges are transitory and the most likely planning scenario for 2022 is a continuation of elevated price levels, and a flattening of the rate of inflation. Regardless of the transitory or permanent nature of some of these items, we are aggressively attacking productivity opportunities. Additionally, we are creating more bench strength in management to enable greater resource deployment when we do face bespoke issues within our supply chain or elsewhere. And finally, we expect to see mean reversion across categories with respect to value shoppers. Turning towards capital allocation, we've been active in M&A. In addition to the TreeHouse assets, we've also acquired the Egg Beaters brand from Conagra in the third quarter. Meanwhile, to maintain appropriate leverage, we were not active in share repurchases this quarter. This quarter we closed on the IPO Post Holdings Partnering Corporation. We are encouraged by the volume of opportunity we are seeing and are optimistic about executing a transaction that results in value creation for both Post and PHPC shareholders. Last night, we announced our intent to fully distribute our position in BellRing Brands. We consider this natural evolution in the already remarkable BellRing's story. It will enable shareholders to choose greater exposure to BellRing, if they so desire. Operationally, this is a non-event. BellRing will continue to be managed exactly as it is today with a strong team led by Darcy Davenport. With a base case plan of distribution, it could be impacted by changes in market conditions during the dependency of the transaction. Therefore, we will provide these details as we approach the actual distribution timing. With that I will turn the call over to Jeff.
Jeff Zadoks, CFO
Thanks Rob, and good morning, everyone. In the third quarter, we continue to lap prior year COVID impacts. Our cereal and Refrigerated Retail businesses are lapping strong volume lifts while our Foodservice business is lapping significant declines in demand for its products. Consolidated net sales were $1.6 billion and adjusted EBITDA was $302.6 million for the third quarter, and sales increased 19% compared to prior year including $78.5 million from our recent acquisitions. Net sales also reflect the pass-through pricing of commodity cost increases in our Foodservice business. Turning to our segments and starting with Post Consumer Brands, net sales and volumes both declined 11%, combined the private label cereal and Peter Pan acquisitions contributed $38 million in net sales and provided an 860 basis point benefit to the volume growth rate. The sales and volume declines in the cereal business primarily resulted from lapping COVID-related increases in at-home consumption in the prior year. While our exit of certain low-margin business accounted for approximately 300 basis points of the volume decline. Volumes were also pressured by demand softness in the value sub-segments of the category to which our portfolio over indexes. Pebbles continued to be a bright spot growing 10% year-over-year despite the challenging comps. Average net pricing improved 1.2% driven by favorable product mix, partially offset by a higher trade rate. Recall, we virtually eliminated promotions in the prior year in light of the elevated demand. Adjusted EBITDA decreased 23% compared to the prior year, but is roughly flat to 2019 and was pressured by volume declines, unfavorable fixed cost absorption, and freight inflation. While we were largely able to offset commodity costs inflation this quarter with continuous improvement and other cost reductions, we have implemented base price increases which will benefit the fourth quarter. Weetabix net sales increased 10%; this growth was driven entirely by a stronger British Pound to US dollar exchange rate. Volumes decreased 2% lapping COVID-related increased at home consumption and participation in a government-backed food program in the prior year, partially offsetting these declines was growth in private label, new product introduction, and drink products. Adjusted EBITDA declined 7% driven by the volume decline, lower realized average net pricing, and modest raw material inflation, partially offset by the favorable currency exchange rate. Our Foodservice business saw net sales and volume growth of 80% and 56% respectively; as we lapped significantly lower away from home demand in the prior year. As I mentioned earlier, revenue growth outpaced volume growth, as revenues reflect the impact of our commodity cost pass-through pricing model. Although, we saw year-over-year growth this quarter, total volumes remain below pre-pandemic levels. Volume growth this quarter was constrained by below normal service levels in our supply chain driven by labor and freight shortages. We expect this pressure to continue in the fourth quarter and constrain our recovery trajectory. Adjusted EBITDA improved to $60 million driven by the higher volumes. Average net pricing increased, but was only able to partially offset increases in grain and freight costs. We expect the price-cost relationship to progressively improve as our past repricing catches up with grain cost increases. Results also benefited from improvements in contribution margin and fixed cost absorption, which like volumes remain below pre-pandemic levels. Refrigerated Retail net sales and volumes decreased 12% and 10% respectively. The volume declines resulted from reduced side dish and sausage service levels primarily driven by labor shortages, as well as lapping COVID-related increased at-home consumption in the prior year. Average net pricing improved for side dish, sausage, and cheese products as a result of price increases taken late in the third quarter. Adjusted EBITDA decreased to $33 million and was negatively impacted by the lower volumes, significantly higher sales of cheese and egg input costs, increased freight, and higher manufacturing costs, which resulted from supply chain inefficiencies. BellRing net sales and adjusted EBITDA increased 68% and 83% respectively. Performance was strong for both premier protein and Dymatize and the year-over-year comparisons also benefited from lapping unfavorable COVID impacts in the prior year. Premier Protein sales increased 65% benefiting from distribution gains, strong velocities, promotional activity, and higher average net selling prices. Dymatize net sales increased 98.5%, driven by distribution gains, strong velocities, and favorable mix. Higher freight and raw material costs further decline and stagnant gross margins. You can hear further detail about BellRing's results on their conference call later this morning. Turning to cash flow; we had a strong quarter generating $233 million from operations including $72 million from BellRing. We have favorable working capital trends and benefited from the timing of interest payments which are lower in our first and third quarters. Our net leverage at the end of the third quarter as measured by our credit facility was approximately 6.1x. Keep in mind this excludes the value of our BellRing stake. With that, I'd like to turn the call back over to the operator for questions.
Operator, Operator
The first question is from Andrew Lazar with Barclays.
Andrew Lazar, Analyst
Good morning, everybody. Rob, I guess I want to start off, I know you've talked about this BellRing share distribution is kind of a natural evolution which makes sense. I want to get a better sense from you also on what type of advantages or benefits this action would accrue, ultimately to Post shareholders as we go forward kind of as you think about it.
Rob Vitale, CEO
Well, I think that to Post shareholder; let me seek clarification. You mean Post shareholders after the transaction or Post shareholders as of today?
Andrew Lazar, Analyst
After that, I mean, I guess it involves a bit of both, actually, because I recognize there are several things that can occur afterward as well. This leads to the question of why now, and what this ultimately means for a Post shareholder.
Rob Vitale, CEO
Yes, there's, I think there's two questions, why, why now and what it means for the relative securities. And the why is kind of a natural evolution of something that we have been fairly transparent about for quite some time, well, before the IPO. But as you look at a portfolio of businesses with varying multiples, sometimes, and certainly in this case, the best way to reflect value is to allow for direct investment into that disparate multiple segments. So in this case, BellRing which we produced with the IPO and the IPO was always a step toward a second step. And this is the natural second step, which will allow its fullest distribution of shares to get the liquidity needed into those shares, and allow it to be as aggressive as it ought to be, with respect to using its own currency independent from Post objectives. So there's many reasons executed on it, tailoring perspective, during the dependency and as on the distribution, I would say, from a Post shareholder perspective, they get exactly what they have today simply in two different pockets as to reallocation of value at a change in value, in terms of giving Post shareholders exactly what they already own. Prospectively after the transaction, I think it allows simplification of the Post business in terms of reporting, perhaps some deleveraging, depending on the execution of the transaction, but I think the primary benefit is clarity and transparency for the Post shareholders.
Andrew Lazar, Analyst
Got it. And then, I guess with yesterday's announcement, it naturally gets me thinking a little bit about potential next steps. And what it means for Post going forward for instance, on the sum-of-the-parts basis Post current valuation for some time now, it placed a pretty severe discount on, let's say, your Foodservice business relative to similar businesses. And so, I'm trying to think about next steps in terms of what might need to happen to propose to be able to create further value, right through portfolio change, are there areas where you feel like you need more scale, or less scale, and I don't know exactly where I'm going with this other than I know, you typically think several steps ahead, and I'm just trying to keep up.
Rob Vitale, CEO
You give us too much credit; we're just trying to execute the transaction right in front of us. And what we will promise you is we will keep thinking about these things, but we're going to execute this one and then turn to the next one.
Operator, Operator
Your next question is from the line of David Palmer with Evercore ISI.
David Palmer, Analyst
Thanks, good morning. But essentially the same line of questioning, Post this BellRing send-off, and I know the stock is going to be much cheaper than even some of the center's store grocery peers. But I know investors are going to be thinking about the top line growth in the long term, top line growth and pricing power of the company and essentially wondering about whether there's sustainable profitable growth. Of course, the value did seem to be limited right now, if people believe your value trap with regard to margin. So what's your thinking about that? What would you say to reassure people that some of your core remain companies have that pricing power and growth? Thanks.
Rob Vitale, CEO
Well, I mean, it's a challenging environment, there's no question. But I think that if you look over a long period of time, we have solid brands, we have solid positions in our markets. Most of our businesses have good proxies that you can look to their pricing power and infer something about ours. And I would tell you that we continue to believe that we have the ability to maintain and hopefully with some better execution, expand our margins. But that proof will be in the pudding.
David Palmer, Analyst
One business that I wonder about is the cereal business. Recently we've seen some improvement by one of your Michigan-based competitors has gotten some of its revenue splitting there. At least in the scanner data. What is the outlook for cereal and do you feel like the pricing power is going to be there, is it the outlook for pricing is going to be helping in that segment?
Rob Vitale, CEO
So I think the outlook for cereal is somewhat clouded right now by some unusual behavior. So if you look at the data going back to 2019, comparing it to 2021, I think at the category level, you can get perhaps some false conclusions. Because if you strip out value, which is mostly us, the branded portfolios have done very well, including ours, we have grown substantially within our Post portfolio or that timeframe and gained share, as I called in my prepared comments, particularly pebbles. Where the category and again contributed mostly by us is seeing some headwinds, is in this unusual behavior in the traditional value consumer. And we have hypotheses about that related to blips in discretionary income, all the things you already know about. And we expect that to be transitory. And assuming that that is transitory, we feel very good about the long-term defensibility. And slow profit growth and even slower volume growth of the category. But the one area we're focused on is what is really happening in that value consumer.
David Palmer, Analyst
Yes. I wanted to ask one last one on Foodservice, you obviously have a lot of exposure to the morning day part that's been in one of the more lagging day parts for restaurants out there. If you had to have us track, or think about your segments and exposure for that business and recovery path to pre-pandemic levels, what segments would you point us to in the coming quarters and the recovery path of each of those segments? Thanks.
Rob Vitale, CEO
Well, I would look, if you're looking for direct proxies, I would look at the big coffee shop operators, which, of course, are Starbucks and Dunkin. And then you could look at some of the restaurant chains like a Darden. What we are seeing in that segment is very strong recovery. We are seeing some weakness in more of the independent operators that survived the pandemic. We're continuing to see some weakness in travel and lodging, which is entirely consistent with where we expect it to be at this point in the recovery curve. So on balance, we're quite encouraged. We have not seen substantial weakness in the breakfast day part because of our commitment and partnership with each of those chains. We've seen good recovery, in lunch and dinner in our potato business. So what is causing us just lingering recovery timing issues is the anticipated lag in travel and leisure. And of course, we have a big education business that we expect to come back in well, this month, the next month depending, whatever happens around this delta variant.
Operator, Operator
The next question is from the line of Michael Lavery with Piper Sandler.
Michael Lavery, Analyst
Good morning, thank you. Can you just touch on Howard's new role as COO and what if any change this signals for a maybe a transition from your holding company model to more integration?
Rob Vitale, CEO
Yes, in reverse order, I would say it doesn't affect the business model; we view that as something that is sacrosanct, which is the ability of strong operators to manage their business with sufficient autonomy to be close to the consumer close to the customer and to make fast real-time decisions. So we're not changing that model in any way. What we are trying to do is to take the operational talents that Howard has and apply them to some bigger challenges which are finding ways across the Independent Business platform and this could potentially also include these back partners to improve those activities. Whether that's improved costs through better collaboration on buying, whether it's to have improvement in sales execution through the way we look at specific customer relationships, or to share ideas across that platform. There are very substantial long tail projects that we think will be considerably value-adding but need operational direction with a very strong operator like Howard from the center. So a further example of supply chain, as you have seen, not only Post but across the segment, we have real challenges with supply chain all around and many of those problems have common core issues that in a time of challenge like this can be better served by coordination rather than separation. So what we're trying to do is create that bench strength so that we can have an additional level of resources to deploy against situations like that. And then to think longer-term about how can we look at our supply chains, preserve the independence while driving some benefits of collaboration and cooperation. I'm not exactly sure what the differences between those two. And then lastly we are like every other company, looking at our overall approach to data analytics and IT which are long tail projects and saying, where are we on that journey from adequate to state of the art and where do we want to be. So projects like supply chain, IT transformation, better coordination among the companies, additional bench strength are all what that transition was aimed to address but it is not, in the slightest way, an attempt to change the business model because we firmly believe in the delegated model with very strong operators controlling their individual destinies.
Michael Lavery, Analyst
That's a really helpful color. Thank you. And can I just add a follow up on cereal, you've mentioned before the decision to exit some of the low margin, private label business. And so on the surface, it might make the TreeHouse private label acquisition a little bit unexpected. Can you just maybe compare and contrast how those are different than what some of the rationale that their thinking is right to do that.
Rob Vitale, CEO
A good portion of the business we exited was hot cereal as opposed to the ready-to-eat cereal that we acquired with TreeHouse, so we didn't share the cost opportunities that will result from synergizing the TreeHouse plans. It was a very one-off line of business that we largely exited, and then there were some specific accounts that we just were not making any money on.
Michael Lavery, Analyst
Okay, great. Thank you very much.
Rob Vitale, CEO
And lastly, Michael, there was timing; at the time, we didn't have the opportunity to execute against TreeHouse.
Operator, Operator
Your next question is from the line of Christopher Growe with Stifel.
Christopher Growe, Analyst
Hi, good morning. I just had a question for if I could first on the follow up on the BellRing distribution, you'd mentioned, Rob, that you have a base case scenario, does base case, I'm sure we won't get the exact details of that today. But does that incorporate using all the levers or all the potential opportunity you have to distribute shares? So split off shares, spin off shares. Did you expect to incorporate all those in your distribution of the shares?
Rob Vitale, CEO
Well, I would say we expect to consider all those; what we actually execute against are market dependent.
Christopher Growe, Analyst
Okay, got it. And then as a follow up, we've been hearing about labor issues from Post in parts of your business even before the pandemic. And I guess I'm just curious, is it come to a head at the point that I've not talked to you before about it, but is there capital you can deploy maybe the more aggressive rate that would allow you to be less reliant on labor and fixing these issues and say, Foodservice or Refrigerated Retail that have seemed like they've lingered even for a while?
Rob Vitale, CEO
You're quite right. And the answer is yes. And that's what I was referring to when I suggested that whether it's transitory or not, we know it's a lingering issue because exactly as you point out, it predated the pandemic as well. So I'm losing clarity on what year but right before going into the pandemic, we had started a process of scouring our capital expenditure projects to try to lower some of our IRR thresholds, given the argument that capital was very cheap and labor increasingly dear. So we have been going through that process for some time of identifying those opportunities. Because of the pandemic that got delayed, we didn't want to be implementing capital projects at the same time, we were trying to meet the surge demand. And now we are facing an entirely different dynamic of challenges just in getting capital goods out of the countries in which they tend to be manufactured and getting them into the US and moving them around. So your premise is right on. We've been challenged in executing for what seems to be a bit of a game of whack-a-mole in terms of the nature of the problem, but we hope we are close to the end of that and can deliver upon that productivity.
Christopher Growe, Analyst
Is that a multi-year effort? Is there a lot higher CapEx as a result of that not getting numbers but just get perspective on then?
Rob Vitale, CEO
No, it's a bunch of small projects, but it's many small projects, not single big ones.
Christopher Growe, Analyst
Okay. I just want to follow up if I could or one final question, which would be just to understand. And I know if it's possible to answer on a general basis for the business rather than going through each business, but from like a peanut standpoint, your pricing net of your costs, and we realize there's a little lag in the egg business is an example. But where you can control that, do you expect pricing to be mostly caught up with inflation as you exit fiscal '21?
Rob Vitale, CEO
Yes. But I think the comment I made in my script was that there's three scenarios we are both see inflation, and disinflation, or plateau at current levels, and we're planning plateaus. So if that is the scenario that develops, yes, but I don't feel terribly confident; we know that better than anybody else.
Operator, Operator
Your next question is from the line of Robert Dickerson with Jefferies.
Robert Dickerson, Analyst
Great, thank you so much. Rob, this just kind of a general question. Going forward.
Rob Vitale, CEO
Hey, Rob, your phone, it's picking up? I'm not able to hear you.
Robert Dickerson, Analyst
Can you hear me now?
Rob Vitale, CEO
That's better.
Robert Dickerson, Analyst
Okay, sorry about that. Yes, I just wanted to ask kind of your general thoughts. Or let's say perspective on how you think about the total value of Post inclusive of Act of Nutrition BellRing on some of the parts variable. This is obviously something we've talked about we all talked about for some time. As we think through kind of the distribution of the incremental BellRing shares, kind of Post distribution, I was just wondering kind of how you think of the sum of the parts Post distribution and kind of how that value starts to come into Post shareholders with the actual distribution, if that makes sense.
Rob Vitale, CEO
Yes, it makes total sense; I hope my choice to avoid the question makes equal sense. We are going to kind of show you our wares and let you figure out what they're worth rather than try to tell you what they're worth. So we obviously have thoughts on the matter and try to act to increase it. But no, we don't want to be in the practice of telling the market what we think is worth.
Robert Dickerson, Analyst
Alright, that makes sense. It appears that the distribution involves an exchange of shares, and in the base case, a special dividend is anticipated. It seems like the funds from the release will be used to reduce debt moving forward. If there is additional cash available, as discussed previously, it seems like the stock price might still be undervalued. I’d like to hear your thoughts on future mergers and acquisitions in relation to ongoing buybacks. Thank you.
Rob Vitale, CEO
I would respond in the same way I have in the past, indicating that these two activities compete with each other and with deleveraging as options for capital allocation. Our discipline will remain consistent with our historical approach. We will assess our comfort level with leverage based on the current refinance market. If we are comfortable, which we are, we will evaluate the landscape of M&A opportunities and compare them to the potential in our own shares, making that decision on a daily basis. There is no change in our capital allocation strategy as a result of the spin.
Operator, Operator
Your next question is from the line of Bill Chappell with Truist Securities.
William Chappell, Analyst
Thanks, good morning. Rob, I'm having a tough time. This concern carries over from TreeHouse earlier this week regarding the unusual shift away from private label or value brands in a short time. Specifically, considering your mother brands, it seems there's been a behavior change where people who have been purchasing bags for years suddenly received stimulus checks and chose to switch to boxes and brands. This situation doesn't entirely make sense. If you could provide any additional insights on this and whether you've noticed a continuation of this trend as we've moved away from the checks, I would appreciate it. Do you anticipate this change to persist at least through the rest of the year? Any information would be helpful.
Rob Vitale, CEO
Unfortunately, we are discussing this matter without much clarity, as the questions you are asking are the same ones we have been pondering. It is indeed a peculiar scenario, and we are navigating through hypotheses and speculation instead of concrete data at this moment. If you analyze traffic patterns during COVID, there was a noticeable shift away from larger outlets that typically carry value products to smaller ones. I'm speaking from speculation, as we're observing a fairly quick pullback. The fluctuations in discretionary income have made me consider the chart presented by TreeHouse, which illustrates the impact on the value segment, as it closely resembles what we are experiencing. There appear to be both channel and consumer-related issues, but they seem to be temporary. I often dislike using the term "feel," but that's the best I can offer right now. We require more data to determine if these trends will continue or reverse. In the meantime, our planning includes scenarios where these conditions last longer than anticipated and scenarios where they improve quickly so we are prepared for any challenges that may arise. Please stay tuned for updates on this.
William Chappell, Analyst
And I mean, yes, this is best anybody could again, I can think it's unusual, as you said, so we're just trying to figure it out. Switching to 8th Avenue and I know it's a small investment, but it's also kind of in the way of shareholder improving shareholder returns. It's a similar opportunity, like BellRing. I mean, do you feel like the business took some steps back this quarter? Because I know the numbers have been choppy over the past couple years, but it felt like it was getting kind of back on plan and things were moving in the right direction over the past two quarters. So just helps us understand like, is this just operational supply chain issues that are quickly fixed? Or is this still a work in progress?
Rob Vitale, CEO
No, I believe we took a step back. We anticipated completing the expansion of our factory in Troy, Alabama, moving the remaining equipment acquired from the manufacturing agreement with Conagra, and increasing our output to meet strong demand for our nut butter business. However, the expansion faced several problems, including delays in securing equipment, labor issues, and some missteps in planning on our part. We are now looking at a timeline of three to six months before we reach full capacity. Additionally, we'll need some time to rebuild inventories and ensure we have enough safety stock to meet customer expectations comfortably. I feel confident about our core businesses and believe our position in those markets is strong. However, we did not manage the expansion well due to both internal and external factors, and we need to address that. I expect we will resolve these issues, but I will be more cautious regarding the timeline. While I will say six months, I believe our business prospects remain the same, just postponed.
Operator, Operator
Our next question is from the line of Jason English with Goldman Sachs.
Jason English, Analyst
Hey, good morning, folks. A few quick questions for me. First, on the BellRing announcement, I want to make sure I'm doing my math right. And I know there's a lot of moving pieces. So lock and change. But you've got a base plan out there that says you're going to retain somewhere around 19.5 million shares. So I'm looking at the math suggesting that every Post shareholder is going to receive around 1.2 shares of BellRing. A is that math, right? And B you're talking about recapitalizing BellRing to issue a special dividend. Would it be imprudent to first for a working scenario right now to assume that there's going to be somewhere around three turns leverage on BellRing post that?
Rob Vitale, CEO
So what we have tried to do is set guardrails rather than intentions. And the guardrail that I will tell you is that the 19.5 shares is a maximum position that we can retain, but there's no obligation to retain that 19.5 million. So that's a choice. And the rationale for that is that in order to qualify as a tax-free distribution, we have to distribute 80% of our position. So that's statutory, we would not expect to take the leverage multiple of greater than the IPO level; the ultimate determination of what that is, will be market-based at the time of the transaction. So again, what we're trying to do is give you limits rather than direction. Because of the time involved in executing the transaction, there are enough potential changes in the market that we are going to be sensitive to changes in whatever happens in the market and respond accordingly. And as we approach timing, we will give you far more detail about the actual mechanics of the transaction.
Jason English, Analyst
Okay, I appreciate that, Rob. I definitely get there's a lot of moving pieces. So coming back to the basics fundamentals, I was hoping you could quantify a couple of things for me. First, the lead lag on grain price in the past through in Foodservice, what was the deficit that you suffered this quarter on that? And then secondly, you specified sales shortages due to low service levels, because of labor and freight issues in both Refrigerated and Foodservice? Again, can you give us sort of size of the bread box? How big was the shortfall related to those? And how big do you expect it to be in the fourth quarter? Thank you.
Rob Vitale, CEO
Yes, I'm going to break the circle, in terms of some of the volume shortfalls, particularly in Bob Evans, it's a bit hard to quantify because we did things like stop advertising, not trying to expand distribution. So we had more capacity, I think we could have had significantly better volumes, our marketing has been working, our household penetration has been growing, our distribution has been growing. So I think it's a significant number, but one that would be very challenging to quantify. Because if you then look at our existing customers, what we did was we have an order and do not order that skew arrangement. So we don't, we're no longer able to attract to do not orders. So I'm going to give you descriptors rather than amounts within Bob Evans, but the descriptor isn’t a significant amount of volume miss on Bob Evans versus what it could have been with additional capacity. And I will say significant; it's probably somewhere in the 5% to 10% range. On Foodservice, the calculation is with if you give me a fairly broad range of latitude in the quarter is probably $3 million to $5 million.
Jason English, Analyst
Got it, so that's essential.
Rob Vitale, CEO
Well on it, annualized, I guess it gets to be a pretty big number.
Jason English, Analyst
Sure, but we can't annualize that, right? I mean, that's a catch up. That's you should close that gap this quarter.
Rob Vitale, CEO
Correct. But the way we're thinking about Foodservice recovery is we're looking at quarter by quarter and annualized.
Jason English, Analyst
Understood, particularly applicable for.
Operator, Operator
Our final question is from the line of Kenneth Zaslow with BMO.
Kenneth Zaslow, Analyst
Hey, good morning, everyone. I just am circling back on just one or two questions. Everything's been asked, to be honest with you. Going back to Chris's question, can you give some anecdotes of the creative solutions you're going to think about when you're trying to save labor going forward? And just from anecdotal, but is it more innovation? Is it retooling some of the facilities? Just how do you think about that and just giving a little bit more meat to the bone on that?
Rob Vitale, CEO
Yes, I mean, it's not. This is not anything all that creative. It's more about choices. And internal capital allocation is driving automation, doing things like robotic processes, things that have that result in better execution, lower labor, direct hours and potentially higher direct labor wages. So what we're trying to do is take out some of the more repetitive motions that become bottlenecks in the processes, where we have the highest turnover, and find a better solution for those kinds of activities.
Kenneth Zaslow, Analyst
When you think about that, from today to like, three years from now, is there some sort of quantification of what you're trying to achieve in terms of reducing manual labor hours by x percent, or just some sort of framework?
Rob Vitale, CEO
Not that I would want to go into in this kind of format, but certainly, we are looking at the totality of the workforce and trying to make set objectives around it for that timeframe.
Kenneth Zaslow, Analyst
Okay and then just another follow up question is on inflation, have you taken pricing across the entire portfolio? Are there any areas that you can't take pricing? And if you've taken the pricing, if you believe that inflation has leveled, and just assuming that at this point, have you taken enough where, by 2022, your relationship would be more in line, and there would be no more compression on margins? And I'll leave that there. And I appreciate it.
Rob Vitale, CEO
I believe we have addressed the situation. The hedges for some of these commodities are very volatile. A prime example is the sales of sows, which have fluctuated from 25 to 75 to 50 to 85. While you assume that commodities are stable, the reality is quite different. I would emphasize that it's unlikely for these commodities to remain completely stable, as many exhibit significant volatility. It's not just about the level but also the shape of the curve. Rapid changes in prices, such as with sows, can create additional pressure on margins until there is long-term stabilization.
Kenneth Zaslow, Analyst
I agree with you on the inflation, I was just trying to figure out where you are in that time zone. And how you did that, but I appreciate your candor. Thank you very much.
Operator, Operator
Ladies and gentlemen, that concludes the end of our Q&A session.
Rob Vitale, CEO
Great, thank you all and we will talk to you next quarter. Bye-bye.
Operator, Operator
Thank you all for participating in today's conference call. We ask that you now disconnect your lines.