Post Holdings, Inc. (NYSE:POST) Q1 2024 Earnings Call Transcript

Post Holdings, Inc. (NYSE:POST) Q1 2024 Earnings Call Transcript February 2, 2024

Post Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to Q1 2024 Post Holdings Earnings Conference Call. At this time, all participants earn a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Daniel O’Rourke, Investor Relations for Post. Please go ahead.

Daniel O’Rourke: Good morning and thank you for joining us today for Post First Quarter Fiscal 2024 Earnings Call. I’m joined this morning by Robert Vitale, our President and CEO, Jeff Zadoks, our COO, and Matt Mainer, our CFO and Treasurer. Rob, Jeff, and Matt will make prepared marks, and afterwards we’ll answer your questions. The press release that supports these remarks is posted on both the investors and the SEC filings sections of our website, and is also available on the SEC’s website. As a reminder, this call is being recorded and an audio replay will be available on our website at postholdings.com. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements.

These forward-looking statements are current as of the day of this call, and management undertakes no obligation to update these statements. This call will discuss certain non-GAAP measures. For reconciliation of these non-GAAP measures to the nearest GAAP measure, CR Press Release issued yesterday and posted on our website. With that, I will turn the call over to Rob.

Robert Vitale : Thank you, Daniel, and good morning. As Daniel mentioned, we’re dividing the call a little bit differently this morning. I will make some opening comments about the state of the business. Jeff will provide more detail overview of the segment performance, and Matt will provide his customary overview of the financial results. The business is off to a tremendous start to fiscal ’24 with an exceptional first quarter, vastly improved manufacturing performance, and disappointed pricing and cost management enabled us to continue the momentum we built through the back half of fiscal ’23. Our business continues to benefit from diversification in product, channel, and price point. As a result, our volume story is a bit more of a mixed bag.

We saw volume decreases across our branded retail businesses, but foodservice remained resilient, our value offering benefited from consumer trade-down, and we saw encouraging stabilization of our refrigerated retail side business. Both the grocery and pet division of our consumer brand’s platform performed well. We continue to be extremely pleased with our investment in the pet category. We expected to see expanded margins. However, we have seen decent volume growth despite a slow build in the incremental investment. We will still incur some incremental cost, but our confidence is growing with respect to our ability to sustain higher volumes and higher margins in our underwriting case. Our grocery business is well-positioned in value and is holding share in premium.

Our foodservice business continues to drive mix and shows promise in terms of increasing its stabilized run rate. Refrigerated Retail has dramatically improved the supply chain, and Weetabix continues to perform well in the challenging environment. Suffice to say, each business contributed to exceeding expectations, and each business contributes to our confidence in raising our outlook. Jeff will go into greater detail in his comments. From a consumer standpoint, while the rate of inflation and interest rates have pulled back, there remain significant cumulative inflation and higher interest rates. Moreover, economically sensitive consumers face reduced benefit support. We continue to see shoppers be more selective with their spend. In an interesting dichotomy, we see those same shoppers prioritize convenience and on-the-go purchasing.

As far as capital allocation in the first quarter, we prioritized M&A over share or debt repurchase, as we spent approximately $250 million on two tuck-in acquisitions. Despite funding these transactions with debt, we reduced our net leverage to 4.5 times. With the Smucker pet acquisition and two tuck-in transactions, we have integration commitments as priorities. However, the broader capital markets have seen a significant reduction in long-term fixed rates. We monitor this cost closely as it underpins our allocation decisions with respect to share buybacks, debt reduction, or further M&A. This trend, lower rates, in tandem with our strong operating performance and reduced leverage, results in post-having greater optionality than in almost any time in our corporate history.

With that, I will now turn the call over to Jeff.

Jeff Zadoks : Thanks, Rob, and good morning, everyone. Beginning with PCB, both pet food and grocery had a strong quarter. Pet food exceeded our expectations as strong manufacturing performance supported growth in our value brands, and we saw encouraging signs of stabilization in our premium brands. We began making the investments in this business that we spoke about last quarter, however, some costs ramped up slower than we expected. For grocery, the main profit drivers were carryover pricing and strong cost performance, which enabled us to recover some gross margin loss to inflation. U.S. cereal category dynamics remained relatively unchanged, with volumes down 5%, although the rate of category volume decline moderated late in the quarter.

Our expectation remains that the category will return to its pre-pandemic volume trends as we lap the pullback in SNAP benefits in March. From a dollar share perspective, we were pleased to hold share versus prior year, ending the quarter at 19.1%. From a network and supply chain perspective, we are focused on optimizing our cereal manufacturing network. Similarly, for pet, we are working on optimization as we prepare to come off the contract manufacturing agreement with Smuckers and integrate Perfection Pet into our network. Shifting to foodservice, we had a very strong quarter driven by continued volume growth, especially in our higher margin pre-cooked egg products, and a significant improvement in our service levels. We’ve had no additional avian influenza outbreaks within our egg network beyond the two reported in December.

We remain confident that we can mitigate any cost impact with modest pricing. This will develop over the course of the year and may contribute to some quarter-to-quarter volatility. Lastly, we began selling RTD shakes to BellRing in January, and we continue to ramp up production. Turning to Weetabix, manufacturing performance improved, and UFIT continued to provide a nice source of volume growth to the business. However, the operating environment continued to be challenging. A Refrigerated Retail business entered the fiscal year poised to take advantage of the peak first quarter holiday season with stable manufacturing and improved inventory levels. This enabled us to meet customer demand with less reliance on third-party co-packers. Additionally, the cost performance within our manufacturing facilities was outstanding.

The combination of these factors translated to strong profit performance for the segment. Overall, fiscal year 2024 is off to a fast start, although we continue to face the same retail volume challenges as most of our peers, our diversified business model continues to provide us pockets of growth. We are most encouraged by supply chain performance across the company, which is paying significant dividends. With that, I’ll turn the call over to Matt.

Matt Mainer: Thanks, Jeff, and good morning, everyone. First quarter consolidated net sales were $2 billion, and adjusted EBITDA was $360 million. Net sales increased 26% driven by our recent acquisitions. Excluding these acquisitions, retail volumes decreased, driven by continued declines in U.S. and U.K. cereal. On the other hand, foodservice volumes continued to increase driven by our higher margin products and improved service levels. Across the portfolio, we saw a sequential improvement in our supply chain performance and customer order fill rates. However, we still have opportunities, especially in our Pet Food and Weetabix businesses. Inflationary pressures persisted in areas such as sugar prices and labor costs, partially offset by improved grain and freight costs.

Finally, SG&A cost increased across the business as we continue to see our targeted marketing investments in our retail businesses and incurred charges for scheduled closing of our cereal manufacturing facility in Lancaster, Ohio. Turning to our segments and starting with post-consumer brands, excluding the benefit of the Pet Food acquisitions, net sales increased 1% and volumes decreased 7%. Average net pricing, excluding Pet Food, increased 8%. We saw volume declines in branded and non-retail cereal and peanut butter. Segment and adjusted EBITDA increased 68% versus prior year as we benefited from strong contribution of Pet Food and improved grocery performance. Weetabix net sales increase 9% year-over-year, benefited by lapping a week of British pound which led to a foreign currency translation tailwind of 590 basis points.

On a currency and acquisition neutral basis, net sales increased 2%, attributable to list price increases, while volumes decreased 2% driven by decline in branded products. Segment and adjusted EBITDA increased 3% versus prior year as increased net pricing and favorable FX were partially offset by lower volumes and increased manufacturing costs. Our margins remain compressed. They are in line with our multi-year recovery plan. Foodservice net sales declined 6% and volumes increased 4%. Revenue reflects the elimination of avian influenza pricing premiums and the past-through of lower grain costs. Volumes reflect strong demand and improved service levels over a prior period impacted significantly by avian influenza. Adjusted EBITDA decreased 3% as favorable volume freight costs and a mixed shift to precooked eggs were offset by the elimination of prior year HBAI price premiums.

Refrigerated Retail net sales and volumes, both decreased 4%, however, side dish volumes were flat in the quarter with side dish average net selling prices up 6%. Segment adjusted EBITDA increased 34% led by improvements in plant cost performance, commodities and freight. Turning the cash flow, in the first quarter we generated $174 million from operations driven by increased profitability in the quarter. Our net leverage decreased a tenth of a turn to 4.5 times. In the quarter, we repurchased 400,000 shares at an average price of $84.28 per share. In addition, we purchased approximately $26 million of worth of our debt at an average discount of 13%. Our board approved a new $400 million share repurchase authorization that begins next week.

Capital expenditures in the quarter were approximately $81 million driven by the expansion of our Norwalk Iowa precooked facility and new protein shake co-manufacturing facility. And then finally, given the strong start to the year, we raised our guidance significantly. Within this new guidance range, we see the remaining quarters of the year is fairly balanced to each other. With that, I will turn the call over to the operator for Q&A. Thanks for joining us today.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Andrew Lazar from Barclays.

Andrew Lazar: Great. Good morning everyone. And Rob, just really, really great to have you back.

Robert Vitale: Thank you.

Andrew Lazar: My first question is just thinking through what pet margins look like in the quarter and sort of where we go from here. Maybe just back at the envelope, if we put a mid-20s EBITDA margin on the legacy PCB business excluding pet, that’s kind of a high end of the Company’s sort of low to mid-20s normalized range to just about $140 million of EBITDA for PCB-ex pet, and that would mean about $50 million EBITDA contribution from pet or about a 12% EBITDA margins. And I know last quarter margins were also in that 12% range, but you would kind of warned it might be a bit transitory due to some benefits in the quarter. I think you had a pipeline fail, and you’ve talked about the need for some incremental investment moving forward.

And so it sounded to us at least as if that would revert the margins anyway beginning in the first quarter. So I guess first, just wondering if my math is reasonably accurate. And then second, I guess what drove the strong performance and with two quarters at this level now under your belt, is it fair to assume this sort of margin level moving forward for pet?

Robert Vitale: I think your math is more than reasonably accurate. We can’t report beyond what we do for segment purposes. And as I mentioned in my comments, and both Jeff and Matt reiterated, we do continue to expect to see required incremental investment, but it is pacing at a slower cadence than we expected. And meanwhile, we’re seeing some benefits of expanded manufacturing capacity at a time when demand is moving in our favor. So we’re seeing better volume in some of our value products. At the same time, we’re putting some incremental investment into relaunching our premium brands. So the margin structure you articulated is reasonable, but should see some pressure on a percentage basis while we seek to grow the dollars by growing volumes.

Andrew Lazar: Great. Thank you. And then I guess second, a number of food companies have talked about, consumers stretching their food budgets at home, but also having not seen any real benefit at least yet from the shift from away-from-home to at home eating. I guess with your sort of foot in both worlds, is that consistent with what you’re seeing too? It sounds like it is. And I guess if so, why do you think that’s the case? Thanks so much.

Robert Vitale: If I could give you an emoji, a shoulder shrug, we’re not quite sure emoji would be what I would use, but the — I think your reference price piece was interesting in terms of I think consumers are still trying to find that historical reference price and are changing behaviors until they gain some familiarity with the new pricing environment. At the same time, in terms of our away-from-home business, we see breakfast, which I think behaves a little bit differently than some of the other day parts. And we’re continuing to see some pretty good strength in that day part, even as some of the away-from-home businesses and other day parts may start to soften. So, it’s still a bit of a head scratcher in terms of the total volume story. Jeff mentioned SNAP. We think SNAP is a big component of it. Maybe student loan resumptions are a component of it, but there’s a lot of them, but no one’s still out there.

Andrew Lazar: Yes, got it. Thanks so much. Appreciate it.

Operator: Thank you. One moment for our next question. Our next question comes from the line of John Baumgartner from Mizuho Securities.

John Baumgartner: Good morning, thanks for the question. And Rob, really great to hear from you. Welcome back.

Robert Vitale: Thank you.

John Baumgartner: I guess first off, coming back to Pet Food, in your initial underwriting case, you weren’t really assuming material sales growth, but looking at the premium segment struggle, subsequently acquisition and your opening comments today about volume growth in your brands, I’m wondering to what extent you might now be reevaluating that underwriting case for any stronger revenue opportunities going forward going to be your first thought, given the value propositions for Nutrish and recipe?

Robert Vitale: Well, I think to be fair, we didn’t underwrite growth, but we did expect with the changing economic environment there to be some opportunities in the value segment. It was a bit of a contrarian position at the time, because all the growth had been in the premium segment at the expense of the value segment and we somewhat anticipated that that could be at an inflection point. So, we continue to be cautious on growth just because constitutionally we tend to be cautious on growth and we focus on margin and cost and we’ll continue to do so, but we do think that there are some opportunities to expand in some of the value offerings. There are some capacity constraints which will inhibit some of that. Those constraints can be relieved over time.

And if the demand equation continues to move in favor of value, we will do so, but we’ll do so somewhat cautiously. So it’s not terribly different than our underwriting case, but our underwriting case contained a considerable amount of caution.

John Baumgartner: And on Weetabix, some nice sequential margin recovery this quarter, but the business is still far below at 30% normalized rate we saw prior to fiscal ’23. Can you break out where the business stands at this point in terms of the drag on margin mix from private label and the extent to which either business improvements or execution can sort of restore more profit in that segment going forward?

Jeff Zadoks: So John, we were certainly encouraged by the performance in the first quarter. We think there’s going to be choppiness along the way in terms of the margin recovery. Ultimately the expectation is we can return, if not fully to bright, very close to bright, but it’s going to be a multi-year process largely driven by cost out activities, which you can imagine are multi-quarter, sometimes multi-year activities, so what we would expect to see, even though there will be sequential perhaps choppiness along the way, that the trend line will go from where we are today towards those 30% low 30 margins over the next couple of fiscal years.

John Baumgartner: Thanks Jeff. Thanks, Rob.

Operator: Thank you. One moment for our next question. Our next question comes from the line of Michael Lavery from Piper Sandler.

Michael Lavery: Thank you. Good morning and welcome back, Rob. Great to have you.

Robert Vitale: Thanks.

Michael Lavery: I would love to understand how much of the margin strength had any one-time benefits versus being more sustainable. And I guess maybe specifically would love to start on Refrigerated Retail. You mentioned a better share of in-house production, but that obviously is the way that you have some flexibility. Is that something that looks pretty sticky? How do we think about the run rate there and that as a piece of it in terms of the in-house versus outsourced volume?

Jeff Zadoks: The first thing to keep in mind is our fiscal first quarter is the seasonal peak for that business. So we get a lot of good leverage in our manufacturing costs. So I wouldn’t necessarily say that first quarter is something that you should consider from a margin and certainly not from an absolute dollar perspective considered a repeat. But generally speaking to your specific question about the manufacturing performance, we believe that that portion of it is very sticky. Now people have been floated with leverage in terms of the volumes that we run through the plants. And again, first quarter is going to be the high-level, high-water mark for that. But the fundamental cost performance, the efficiencies in the manufacturing footprint that we have for that business we think is, I hesitate to use the word permanently, but we believe we’ve right-sized and set that up to be successful quarter-after-quarter.