Terence E. Block - President, Chief Operating Officer and Director
Robert V. Vitale - Chief Financial Officer
Post Holdings (POST) Q3 2013 Earnings Call August 8, 2013 4:30 PM ET
Welcome to Post Holdings' Third Quarter 2013 Earnings Conference Call and Webcast. Hosting the call today from Post is Terry Block, President and Chief Operating Officer; and Rob Vitale, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 7:30 p.m. Eastern time. The dial-in number is (800) 585-8367 and enter pin number 24090132. [Operator Instructions]
It is now my pleasure to turn the floor over to Brad Harper, Investor Relations of Post Holdings, for introductions. You may begin.
Thank you, and good afternoon, everyone. Welcome to Post Holdings' conference call to discuss results for the third quarter ended June 30, 2013. With me today are Terry Block, our President and COO; and Rob Vitale, our CFO. During this call, we will review our financial results and initiatives through the first 3 quarters of our fiscal year. We will not be taking questions after the prepared remarks. This -- the press release that supports our remarks today is posted on our website at www.postfoods.com.
Before we continue, I would like to remind you that this conference call will contain forward-looking statements. These forward-looking statements are subject to risks and uncertainties, which should be carefully considered by investors as actual results could differ materially from these forward-looking statements. For more information regarding these risks and uncertainties, please visit SEC filings, which can be found in the Investor Relations section of our website. These statements speak only as of the date of this call, and management undertakes no obligation to update or revise these statements.
All forward-looking statements are expressly qualified in their entirety by this cautionary statement. As a reminder, this call is being recorded for audio replay. And finally, in this call, we'll discuss certain non-GAAP measures. For a reconciliation of non-GAAP measures to the nearest GAAP measure, please see our press release posted on our website.
With that, I will now turn the call over to Terry.
Terence E. Block
Thank you, Brad. Good afternoon, and thank you for joining us today on our earnings conference call. We will review the status of our business, both for the third quarter ended June 30, 2013, and for the 9 months of our fiscal year 2013.
Looking at the business retrospectively, the outcomes are materializing largely as we had anticipated, following our spin-out from Ralcorp in February 2012. We knew we had to lay the foundation for both reliability and operating free cash flow and growth, as both are essential to forward thinking optionality for the business.
To establish that foundation, recall we had to reverse multi-year negative share and revenue trends, accept some margin dilution to fund the ability to better compete, rationalize the product supply network designed when Post had much larger share of RTE, upgrade the contributions from the consumer demand generating processes of Post and define and execute an acquisition strategy and gained access to deal flow. Progress against the building of this foundation continues to offer encouragement.
Third quarter consolidated net sales were $257.3 million, an increase of 6.4% versus the same period last year. A breakout of revenue would have the established Post cereal business, which we will now be calling Post Foods, contributing $246.6 million in sales, growing 1.9% for the quarter, with Attune Foods delivering the difference or $10.7 million in revenue.
Please keep in mind that the Hearthside granola acquisition, which we are combining into Attune Foods, was consummated in late May 2013 and contributed only 1 month to the expanded Attune Foods third quarter sales. These Q3 shipments were against a challenged ready-to-eat cereal category, as measured by Nielsen, that was down, in dollars, 2.6% for the same 3-month time period.
For the 9 months, consolidated net sales grew 4.3%, reaching $742.4 million during the October to June time frame. Attune Foods accounted for $13.5 million of the total. Post Foods grew 2.4%, achieving $728.9 million in sales during the October to June time period. This shipment performance was against the category backdrop that declined 1.9% during that same 9-month period.
Post Foods' dollar market share, as measured by Nielsen, which, for clarity, excludes the Attune brands, was 10.6% for the 13 weeks ended June 29, 2013, up 0.3 points versus the same period a year ago. This is the highest quarterly dollar share for Post Foods since 2011.
Package share was also strong for Post, increasing 0.6 points to an 11% share. These higher shares are due to improvement in promotional execution, both feature and display at top customers. Additionally, consumers switching to a larger-sized Post item are a contributor to increased dollar share.
Great Grains and Grape Nuts increased consumption dollars in Q3, while HBO and Pebbles declined. Most notably, Great Grains continues to be a strong growth story with dollar volume up 19% for the quarter. New product distribution helped propel the growth with an average number of items increasing 45% versus last year.
Strong advertising on new Great Grains Protein Blends is helping as well, as Great Grains responds well to advertising. New product distribution was the driver of Grape Nuts' 5.9% dollar growth compared to last year's third quarter. New Grape Nuts Fit helped Grape Nuts grow distribution 37% versus last year, leading to Grape Nuts' highest share in 2 years.
Fruity and Cocoa Pebbles increased 1.8% in dollars versus last year due to better product, more appealing advertising and increased promotional activity. Quality promotions, that is, feature and/or display, on these items within the quarter increased 30% versus last year. The discontinuation of weak line extensions, Pebbles Boulders and Pebbles Marshmallows, at key customers is the primary driver of the overall Pebbles brand decline of 2% for the quarter.
HBO dollar consumption declines, as measured by Nielsen, have moderated, but were still down 4.2% for the quarter. High levels of competitive set activity detracted from HBO's consumption takeaway. Conversely, net factory sales increased 1.6% with growth driven by major promotional support within non-measured channels; June pipeline volumes supporting the introductions of both HBO Greek Mixed Berry and HBO Granola; and increases in overall base pound share.
HBO requires sharper end market execution. This includes better support for new product launches, shelving and assortment, pricing and merchandising support and, in particular, gaining fair share display activity. Plans are unfolding to address these needs.
Post has become more competitive and is turning the corner with regard to revising long-term negative share and revenue trends. The combined contribution of the generating demand processes, marketing, sales and R&D, coupled with manufacturing, is evidencing itself in the marketplace. However, this is a category where competition battles over tenths of a share point, seeking more and better needs to be constant. 1 product platform where Post is adding more and making product better is our protein platform. Protein provides the building blocks for our bodies to function properly, assists lean muscle mass development and aids satiety, leading to healthier lifestyles. Post is creating more higher-protein options across the portfolio.
In 2013, Post launched Grape Nuts Fit with 6 grams of protein and relaunched original Grape Nuts with 8 grams of protein. We also launched Great Grains Protein Blends with 8 grams of protein and Honey Bunches of Oats Greek, which launched with 5 grams. This is when most breakfast cereals contain only 2 to 3 grams of protein. Post is continuing to provide more options for our consumers' healthy lifestyles.
This December, we'll be launching Honey Bunches of Oats Morning Energy [ph], which will deliver 6 grams of protein and more than 2/3 of your day's whole grain in every serving. Additionally, in 2014, we'll be taking a page from our Attune Foods business and reformulating Grape Nuts and several Great Grains formulas to be non-GMO.
Finally, on the lighter side, Pebbles will be literally -- Pebbles will literally be creating an explosion in every spoonful with the introduction of new Poppin' Pebbles [ph] this December. The reaction by kids and the retail trade has been extremely positive to Poppin' Pebbles [ph].
Attune Foods, formed from 2 recent acquisitions, is our on-trend, organic, non-GMO cereal/snack business and is comprised of the Erewhon, Uncle Sam's, Peace, Sweet Home Farm and Willamette Valley brands plus a fantastic private-label granola business, servicing a number of pre-eminent retailers.
To put a scale and perspective, if annualized, Attune Foods would equal approximately 8% of projected FY '13 Post Holdings sales.
Attune Foods affords Post an improved footprint and the opportunity to participate in the higher-growth organic, all-natural, non-GMO verified cereal and adjacent categories. Attune Foods, for the quarter, exceeded plan and was significantly ahead of a year ago.
The recently acquired Hearthside Foods granola business recorded a record month in June and surpassed the key monthly volume hurdle for the first time. The strong results were driven by strength in organic, non-GMO, gluten-free cereals especially the recently introduced Erewhon Supergrain line.
We expect to see continued strength on the top line, as we launch 2 new Supergrain cereals in August. Additionally, Peace Cereal expanded distribution with key retailers in the natural specialty channel, and the private-label granola business benefited by adding new customers and receiving promotional activity from the existing customer base. Momentum on the business remains positive.
Finally, with regard to Attune, the integration of the operations in San Francisco and Eugene, Oregon, are progressing smoothly, and we expect Attune will be fully integrated into 1 organization by calendar year end. Again, Attune will be operated independently from Post Foods, receiving back-office support where appropriate.
We've stated that we are actively executing against a strategy to better address the economically stressed consumers with quality Post Cereal alternatives. The ongoing Post Good Morenings test has provided learnings with regard to our product mix, product placement, size mix and marketing. The Good Morenings product lineup is being reduced to reflect those learnings. Capitalizing on those same Good Morenings learnings, this summer, we'll be expanding our efforts to address this growing household segment, estimated to be about 25% of all U.S. households with the limited introduction of large bagged items of Fruity and Cocoa Pebbles, Honeycomb and Golden Crisp. Shipments are scheduled to begin in September. This is in addition to the continued Good Morenings test and a select private-label program that is in its infancy but is demonstrating progress.
The previously announced Modesto plant closure is proceeding on schedule with Phase 1 expected to be completed by November 2013 and is projected to provide 20% of the planned $14 million in savings that have been identified upon completion of both Phases 1 and 2. It's expected that Phase 2 will be completed by September 2014.
As mentioned, Post has been adding more protein to some cereals, increasing the attractiveness of those formulations to consumers seeking to actively manage aspects of better health. The recently announced acquisition of Premier Nutrition Corporation, PNC, furthers that ability and importantly provides a foothold into a category with attractive growth dynamics. The Premier Protein brand participates in the approximately $9 billion sports nutrition and weight loss category, which has grown over 10% annually over the past 3 years. And importantly, continues to attract increasing demand from mainstream consumers.
Premier Nutrition's brands are well positioned to benefit from the broadening mainstream consumer adoption of health and wellness trends in everyday food and nutrition choices. This active nutrition and supplement business, consisting of Premier Protein shakes and bars, has high levels of protein and superior ratios of protein to calories, carbohydrates, sugars and fats at its foundation, coupled with exceptional taste. Premier Protein products deliver convenient, on-the-go lean protein to consumers when they need it. Premier Protein's marketing message of energy for every day embodies the brand's mission and differentiates it from other brands, which have deep roots in either muscle building or weight loss.
The category is in an expansive mode with no single brand yet dominating all others. It's segmentable, responsive to innovation and responds well to targeted consumer marketing techniques. PNC's Joint Juice brand is the pioneer in joint health beverages and is designed to provide a convenient liquid-based solution to help people stay active without the burden of a daily pill regimen. The combination of a brand and category exhibiting dynamic growth, with an outstanding entrepreneurial management team, made us comfortable that acquiring Premier Nutrition Corporation would afford Post the ability to generate long-term returns in excess of our cost of capital.
As with Attune Foods, Premier Nutrition will be operated independently from Post Foods, receiving back-office staff support where appropriate.
I'll now turn to Rob Vitale, our Chief Financial Officer, to discuss our financial results and guidance.
Robert V. Vitale
Thanks, Terry. As Terry mentioned, consolidated net sales increased $15.4 million for the quarter, including $10.7 million from current year acquisitions. Post Foods, which excludes acquisitions, improved $4.7 million or 1.9% over last year. The improvement resulted from a 7% increase in pound volume, offset by a 4.8% decline in average net selling prices. In Q3, HBO led pound volume increases with a 7.1% improvement, an improvement not reflected in consumption data because growth was primarily in non-measured channels.
Approximately 2/3 of the quarterly net pricing decline is attributable to a shift in product mix towards value packages. The remainder results from higher trade spending. On a year-to-date basis, consolidated net sales increased $30.7 million, including $13.5 million contributed from current year acquisitions. Excluding acquisitions, Post Foods net sales improved $17.2 million or 2.4% compared to the prior year, driven by a 5.1% higher volume and 2.6% decrease in average net selling prices. Year-to-date, volume improvements have been driven by growth in the Great Grains and Grape Nuts brands and growth in revenue from co-manufacturing agreements.
Q3 gross margin was 43.2%, down 220 basis points from the prior year. This excludes the impact of acquisitions and accelerated depreciation related to the Modesto restructuring. Virtually the entire decline in margin is a result of the lower overall net pricing. As expected, we continue to see higher commodity costs for grains and fruits compared to prior year. However, for Q3, these increases were offset by lower costs for sugar and nuts. Manufacturing fixed cost absorption is consistent with prior year.
On a comparable year-to-date basis, gross margin declined 170 basis points to 43.1%. Once again, lower margins are a function mostly of mix driven by declines in average net selling prices. Unlike the quarter commentary, the higher commodity costs, while in line with our expectations, negatively impacted the year-to-date results. These cost increases were largely mitigated by favorable cost absorption on higher volumes.
Third quarter SG&A increased $7.9 million to $73 million for the third quarter versus prior year. Approximately 1/3 of the increase resulted from Q3 lapping the prior year quarter, in which AOC was unusually low. For AOC, the year-to-date comparison is considerably more meaningful. The remaining increase is incremental corporate cost, including M&A transaction cost, stock-based compensation and SG&A of acquired businesses. Year-to-date, SG&A increased $12.4 million to $215.2 million. This was driven primarily by incremental holding company costs and $2.9 million from acquired businesses. These costs were largely offset by lower overall advertising and consumer expenses in the current year, as we continue to balance our advertising and trade spend dollars. For reference, our separation and integration costs have begun to normalize compared to prior year. These costs were $2.4 million in both the third quarter of 2013 and 2012.
The financial statement impact of our determination to close the plant in Modesto, California was significant in the third quarter. Resulting from this decision, we incurred $4.8 million of accelerated depreciation and $3 million of employee termination benefit costs. We expect to incur additional accelerated depreciation expense of $13.3 million through the completion of the project in September 2014 and an additional $2.1 million of employee termination benefit costs.
For the fourth quarter of 2013, we estimate incurring another $4.8 million of accelerated depreciation and $700,000 million (sic) [$700,000] of employee termination benefit costs.
Consolidated adjusted EBITDA was $56 million for the quarter, a decrease of $5.4 million from prior year. On a year-to-date basis, adjusted EBITDA was $159.5 million, down $1.6 million from prior year. Acquisitions completed in 2013 contributed $1.7 million in adjusted EBITDA. As Terry mentioned, the Hearthside assets acquired at the end of May contributed the vast majority of the $1.7 million, and this reflects only 1 month's performance.
Interest expense was $19.2 million for the quarter compared to $16.1 million for the prior year quarter. This increase is due to the issuance of $250 million of tack-on financing to our senior notes dated October 2022.
Income tax expense was $1.6 million for the third quarter, an effective income tax rate of 32%. This compares to a rate of 37.8% for the same period last year. For the 9 months ended June 30, 2013, income tax expense was $7.3 million, an effective income tax rate of 31.2% compared to an expense of $24.3 million, an effective income tax rate of 38.3% for the 9 months ended June 30, 2012. The decrease in the current quarter and the year-to-date effective income tax rates are primarily the result of the impact of an uncertain tax position taken on our 2012 short-period tax return and, specific only to the year-to-date rates, the effect of certain nondeductible transaction costs incurred in the prior year.
Net earnings available to common stockholders were $1.1 million or $0.03 per diluted common share for the third quarter. For the 9 months ended June 30, 2013, net earnings available to common stockholders were $13 million or $0.40 per diluted common share.
Adjusted net earnings available to common stockholders and adjusted diluted earnings per common share for the quarter were $9.5 million and $0.29, respectively. Adjusted net earnings available to common stockholders and adjusted diluted earnings per common share for the 9 months ended June 30, 2013, were $25.8 million and $0.78, respectively. The reconciliation between adjusted and GAAP calculations are included in yesterday's press release.
As we have discussed in prior calls, we continue to carry excess cash to support anticipated M&A investments. This results in a significant, though temporary, carrying cost that impacts EPS.
Working capital, excluding acquisitions, declined significantly in the third quarter. We had indicated that timing had resulted in higher AR balances last quarter. And as anticipated, the balance is reduced this quarter. We had also mentioned that inventory would continue to be elevated through the quarter in anticipation of our IT conversion and the potential to need to draw from safety stocks.
Our IT conversion occurred in July. This was a significant milestone for Post, as we transition away from Ralcorp's system and processes. The conversion process required significant time, effort and resources. And the fact that the transition has gone so smoothly is a real testament to the great work of the entire project team.
With respect to strategic activities, in the third quarter, we completed the acquisition of the private-label and branded cereal, granola and snack business of Hearthside Food Solutions for $160 million. This acquisition supports our strategy of expanding our footprint in the more rapidly growing areas of the overall food segment, namely the natural and organic channels. This acquisition is very early in demonstrating results, but so far is encouraging.
As Terry discussed earlier, on August 2, we announced our planned acquisition of Premier Nutrition Corporation for $180 million. This will be financed from the cash previously raised. On a full year basis, this transaction is expected to contribute approximately $130 million to $140 million to net sales and approximately $17 million to $20 million to adjusted EBITDA.
Due to the structure of the transaction, we also expect to assume PNC's net operating loss carryforwards and other tax benefits, which we estimate to be in the range of $22 million to $26 million on a net present value basis.
Following the completion of this transaction, we expect to have cash on hand of approximately $400 million. We do not expect this transaction to diminish our appetite for pursuing attractive investment opportunities. We continue to actively pursue M&A, both tactical and strategic, as a means of continuing to drive shareholder value.
Finally, with respect to our adjusted EBITDA estimates for the balance of 2013, we continue to expect the end of the year within the range of $214 million to $220 million, as previously announced.
Thank you for listening to our call today, and we look forward to providing more updates next quarter.
Thank you. This does conclude today's conference call. You may now disconnect.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!