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Post Holdings (NYSE:POST)

Q4 2013 Earnings Call

November 21, 2013 4:30 pm ET

Executives

Brad Harper

Terence E. Block - President, Chief Operating Officer and Director

Robert V. Vitale - Chief Financial Officer

Operator

Welcome to Post Holdings Fourth 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 10262969. [Operator Instructions]

It is now my pleasure to turn the floor over to Brad Harper, Investor Relations for Post Holdings, for introduction. You may begin.

Brad Harper

Thank you, and good afternoon. Welcome to the Post Holdings conference call, where we will discuss results for the fourth quarter and our 2013 fiscal year. With me today are Terry Block, our President and COO; and Rob Vitale, our CFO. We will not be taking questions after our prepared remarks today. The press release that supports these remarks is posted on our website at www.postholdings.com (sic) [www.postfoods.com] .

Before we continue, I would like to remind you that this 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 the SEC Filings page 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, this call will discuss certain non-GAAP measures. For a reconciliation of non-GAAP measures to the nearest GAAP measure, see our press release posted on our website.

With that, I will turn the call over to Terry.

Terence E. Block

Good afternoon, and thank you for joining us today on our earnings call. We'll review the status of our business for the fourth quarter and for the fiscal year ended September 30, 2013.

The past 12 months witnessed the continued transformation of Post from a low-growth, single-category participant to a more diversified consumer products enterprise, with a product portfolio that is allowing us to gain participation in retail channels and categories, exhibiting more dynamic growth. The transformation has had 3 main areas of concentration: center store shelf-stable, active nutrition and private label, with some of the areas also providing access to new customers and channels for Post. There are also areas where Post has broad organizational knowledge and experience and has acquired talented management teams.

The acquisition of both Attune Foods and the Hearthside's Golden Temple granola business provided entry into the natural specialty channels, where natural and organic cereals are experiencing high single-digit growth. The combination gives Post access to an attractive base of brands and retail customers. Attune Foods will be cash-accretive in fiscal 2014.

The Premier Nutrition acquisition represents a threefold opportunity, granting Post first access to the double-digit growth of the sports nutrition and weight-loss category. Second, its first out-of-the-bowl eating experience was the premier line of shakes and bars, serving as meal replacement substitutes that can be easily consumed on-the-go.

And third, a platform from which to initiate roll-up opportunity, as the industry seeks to consolidate. Additionally, Premier increases Post's knowledge of the science of protein, which is gaining broader acceptance in food and can play a leadership role in helping to address the obesity problems confronting consumers, as they seek healthier habits and lifestyles. Through Premier, and more broadly, Post is already building upon that protein opportunity. Premier Nutrition will also be cash-accretive in fiscal 2014.

The Dakota Growers acquisition, which is scheduled to close in January 2014, expands upon Post's limited portfolio of private-label business and creates an attractive strategic growth platform, providing leadership positions, servicing manufacturers, food service and retail customers. This, too, will be cash-accretive in fiscal 2014.

The ongoing transformation of Post can be characterized by the convergence of ample deal-full opportunities, as private equity and public companies seek to sell assets, a historic low interest rate environment and most importantly, the stabilization of the Post RTE cereal business, thereby strengthening the reliability of the free cash flow provided by the Post cereal business.

The outcomes from the efforts in RTE cereal to stabilize revenue and share continues to offer encouragement as the investments in product, brand building and customer management continue to take hold. This fact, when coupled with acquisitions, is fueling Post's growth. I'm pleased to announce that our fourth quarter recorded 18% growth, with consolidated net sales hitting $291.7 million. The Post RFCE -- RTE cereal business alone recorded net sales of $253.9 million for a growth rate of 2.7%. This net sales figure marks the best Post RTE cereal fourth quarter in the past 4 years. The category, as measured by Nielsen, experienced dollar consumption declines of 3.5% for that same quarter.

For the fiscal year, consolidated net sales grew 7.8%, reaching $1,034,000,000 during the 12-month period ended September 30, 2013. Breaking net sales out, Post Foods grew 2.5%, achieving $982.8 million in sales during the same 12-month period. This RTE cereal shipment performance was against the category backdrop that declined 2.2% for the same 52-week period ended September 28, 2013.

Acquisitions made throughout fiscal year '13 accounted for the remaining $51.3 million in net sales with the bulk of that coming from Attune Foods and only 1 month, September, attributed to Premier Nutrition.

Post Foods dollar market share, as measured by Nielsen, which for clarity excludes the Attune and Premier brands, up 10.2% for the 13 weeks ended September 28, 2013, flat versus the same period last year. Both package and pound shares were 10.4%, up 0.1 point for the same 13-week period. In this 13-week period versus the prior year, we saw share trend improvements, that is, share stabilization or growth on almost every brand in the Post Foods portfolio. The number of brands that have grown or shown stable dollar share is greater than at any time in at least the past 2 years. This includes Honey Bunches of Oats, Pebbles, Great Grains, Grape Nuts, Honeycomb, Raisin Bran and Golden Crisp. Drivers of share continue -- drivers of share performance were increases in day sales by consumers continuing to switch to a larger Post sizes, which is offset somewhat by selling fewer packages on promotion due to higher competitive activity.

For the 52 weeks ended September 28, 2013, Post dollar share was 10.4%, down 0.1 point versus the same period last year. New product efforts aided share as additional items were carried by retailers. However, despite some improvement this past year, display, a key metric, remains significantly below fair share and continues to represent a growth opportunity for Post.

Taking a look at some of the individual consumption, dollar brand performance as measured by Nielsen, Great Grains continues to perform well with the last 13-week dollar increases up 10.3%. For the 52-week period, Great Grains grew dollars 8.6%, driven by strong advertising and distribution gains behind 2 new items that deliver on consumers' desire for more protein in their diet. 2014 will see continued investment in product improvements to appeal to the ingredient-conscious consumer with non-GMO offerings in the line, as well as the introduction of 2 new Great Grains digestive blends items.

Grape Nuts grew dollars 2.6% in the last 13 weeks and 2.3% for the year, driven by distribution gains on the new items, Grape Nuts Fit and on brand revitalization efforts behind the "What's Your Mountain?" campaign that leverages Grape Nuts' role in the first summit of Mount Everest by Sir Edmund Hillary. Grape Nuts dollar share over the last 52 weeks is the highest it has been in the last 3 years.

Honey Bunches of Oats continues to be a work in process, but showed sequential improvement in the last 13-week period, with dollar decline being less negative compared to the last 52 weeks. The brand is becoming more competitive. We remain focused on executing the fundamentals of pricing pack-size architecture, shelving and merchandising on HBO. The brand will also have a new marketing campaign in 2014 and will introduce HBO Morning Energy [ph] in 2 flavors that leverage protein and high levels of whole-grain, designed to tap into consumers' increasing desires for healthy energy. We are also encouraged by the early results of Honey Bunch of Oats Granola, and we'll be expanding distribution on those items throughout 2014.

The Pebbles business responded well in 2014 through a focus on the core flavors, Fruity and Cocoa, through improved merchandising, stronger advertising and a steady stream of product renovation, bringing relevancy to kids and moms. Dollar growth for the 2 core flavors was plus 0.4% in the last 13- and 52-week periods. The total franchise was down 3.2% for the last 52 weeks, driven by delistments of weak flankers, Marshmallow Pebbles and Boulders.

In 2014, Pebbles will launch a first of its kind product innovation called Popping Pebbles [ph] , in which kids experience of fizzy popping sensation with each bite. We are encouraged by consumer research and customer feedback to-date for this truly unique Pebbles item.

Honeycomb, Post Raisin Bran and Golden Crisp all showed dollar growth in the last 13 weeks, driven by improved tactical support, including product and graphic improvements, as well as enhanced merchandising. We'll look to leverage learning from these efforts that have yielded share trend improvements for each of us, as we focus on trying to stabilize Post Shredded Wheat, which was a drain on the overall Post share performance, with brand declines of 0.1 point in both the last 13- and 52-week periods.

Lastly, as you recall, we launched a value offering called Good Morenings. While this introduction did not that achieve our expectations, it has provided meaningful learning with regard to product mix, product placement, size mix and marketing. Capitalizing on those learnings, this September, we began expanding our efforts to address the value-seeking consumer with a limited introduction of large, bagged items of Fruity and Cocoa Pebbles, Honeycomb and Golden Crisp.

While we have made progress in reversing negative net sales and share trends and stabilizing the Post Foods business, important work remains as we look to pivot now to growth. Our efforts are focused on demand generation through stronger marketing and product enhancements, building a pipeline of more incremental new item introductions and executing the fundamentals of shelving, assortment, pricing and merchandising.

Attune Foods, formed from 2 recent acquisitions, is our on-trend, organic, non-GMO cereal and snack business and is comprised of the Erewhon, Uncle Sam, Peace, Sweet Home Farm and Willamette Valley brands plus a fantastic private-label granola business, servicing a number of preeminent retailers. As a reminder, annualized, Attune Foods would equal approximately 8.5% of fiscal year '13 Post Holdings sales.

Attune Foods for the fourth quarter exceeded plans and was significantly ahead of 1 year ago, turning in a record quarter. Strong results were driven by strength in organic, non-GMO gluten-free cereals, especially the recently introduced Erewhon SuperGrain, Peace Cereal and bulk granola. Additionally, the private-label portfolio gained both new customers and increased business with current long-standing customers.

The integration of the operations in San Francisco and Eugene, Oregon, was completed in September. And Attune Foods now addresses customers with 1 sales broker network and a unified systems platform, creating One Attune both internally and externally. Momentum on the business remains positive, with opportunities for operational improvements, capitalizing on Posts' scale and knowledge, while remaining an independent operating unit.

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. Premier Proteins marketing message of "Energy for every day" embodies the brand's mission. And importantly, differentiated from other brands which have deep roots in either muscle-building or weight-loss and as such, it competes outside the specialty nutrition channel.

Premier management began the expansion of the brand into food/drug/mass channels by developing and launching 12 new channel-appropriate items and gaining distribution of multiple SKUs in over 14,000 outlets. Existing account business maintains significant growth by focusing on increased item assortment, account-specific programming and improved promotional execution, leading to SKU leadership positions at critical customers during this period of distribution expansion.

Premier Nutrition has an outstanding entrepreneurial team that's excited about establishing Premier Protein as the protein brand of choice for a healthy active lifestyle by executing highly effective branding and fielding innovation to expand usage and shelf presence. Annualized Premier Nutrition would equal approximately 13% of fiscal '13 Post Holdings sales, a ratio that is expected to grow given the category and Premier-specific growth trends. As with Attune Foods, Premier Nutrition is operated independently from Post Foods with active collaboration where appropriate.

Finally, adjusted EBITDA of fiscal 2013 was $216.7 million, which is within our previously guided range.

Rob Vitale will now comment more about the details of our financials.

Robert V. Vitale

Thanks, Terry. I'd like to first expand on our consolidated net sales figures that Terry highlighted.

Starting with the fourth quarter, consolidated net sales were $291.7 million, an increase of $44.5 million for the quarter. This includes $37.8 million from acquisitions. Post Foods segment net sales were $253.9 million, up 2.7% or $6.7 million over last year. The improvement resulted from a 3.4% increase in pound volume, slightly offset by a 0.7% decline in average net selling prices. Pound volume increases were driven by Post Raisin Bran, private label and co-manufacturing agreements.

Q4 was the first full quarter for the expanded Attune Foods segment. Net sales, including intersegment sales for the quarter, were $24.2 million. For reference, net sales were up 17.5% compared to the year-ago pre-acquisition quarter.

Lastly, our Premier Nutrition acquisition closed on September 1. As Terry mentioned, it currently comprises our active nutrition segment. This segment contributed net sales of $13.9 million to the quarter.

Fourth quarter gross profit was $112.5 million, up $2.4 million from the prior year. This includes $11.1 million in gross profit from acquisitions, which is partially offset by $4.8 million of accelerated depreciation related to the Modesto plant closure.

Excluding the impacts of Modesto and acquisitions, fourth quarter gross profit was $106.2 million, a gross margin of 41.8% on net sales, excluding acquisitions. Gross margin is down approximately 270 basis points compared to the prior year, largely resulting from the impact of product mix on both manufacturing costs and average net selling prices.

As expected, we continued to see higher commodity costs for grains compared to the prior year. However, for the fourth quarter, these increases were offset by lower costs for sugar and nuts. Manufacturing fixed cost absorption is consistent with prior year.

SG&A increased $7.5 million to $79.2 million for the fourth quarter versus prior year. Excluding $5.7 million in SG&A related to acquired businesses, SG&A was 28.9% of net sales, sales excluding acquisitions, flat compared to the prior year. The $1.8 million increase in SG&A costs was the result of incremental holding company costs, partially offset by lower advertising and promotion expenses for the Post Foods business compared to the prior year.

Consolidated adjusted EBITDA for the fourth quarter was $57.2 million, up $3.7 million compared to the prior year. Acquisitions contributed $6.3 million to the fourth quarter adjusted EBITDA. Interest expense was $25.5 million for the quarter compared to $16.1 million for the prior year quarter. This increase is driven by the issuance of an aggregate of $600 million of senior notes issued in October 2012 and July 2013. The notes were issued as stack-on financings to our existing 2022 senior notes.

Fourth quarter income tax benefit was $200,000, primarily resulting from a loss before income tax of $1.1 million, which does include $5.6 million of expenses related to the Modesto plant closure. We also incurred certain nondeductible transaction expenses in the quarter related to the PNC acquisition.

Net loss attributable to common stockholders for the fourth quarter was $3.2 million or $0.10 per diluted common share. Adjusted net earnings available to common stockholders and adjusted diluted earnings per common share for the quarter were $5.3 million and $0.16, respectively. And as Brad mentioned, the reconciliations between these figures and the GAAP-related figure are in the press release.

Moving on to our fiscal year results. Consolidated net sales were $1,034,100,000. This is up $75.2 million compared to the prior year and includes $51.3 million from acquisitions. The Post Foods segment net sales were $982.8 million, an increase of $23.9 million or 2.5%. This is the first time in several years that the Post Foods business has shown annual net sales growth and it occurs against the backdrop of a 2.2% decline in RTE cereal category recorded in Nielsen. This result was driven by 4.7% higher volumes, offset by a 2.1% decrease in average net selling prices. Volume improvements were driven by growth in the Great Grains, Post Raisin Bran and Grape Nuts brands and growth in revenue from private label and co-manufacturing agreements. Including intersegment sales, the Attune Foods segment contributed $37.8 million in net sales for the fiscal year and PNC contributed $13.9 million.

Gross profit for the fiscal year was $424.9 million, which includes $14.1 million from acquisitions and a deduct of $9.6 million in accelerated depreciation related to the Modesto plant closure. Excluding these 2 items, gross profit was $420.4 million, a decline of $8.5 million with gross margin of 42.8% on net sales exclusive of acquisitions. This figure declined approximately 190 basis points from the prior year on product mix, higher trade spending, including higher sodding fees for new product introductions and higher total commodity costs in the current year. Again the higher commodity costs were expected that negatively impacted the fiscal year results. Manufacturing fixed cost absorption is consistent with prior year.

SG&A increased $19.9 million to $294.4 million for the fiscal year. This was driven primarily by $8.6 million from acquired businesses and incremental holding company costs. The increased holding company costs include $5.7 million of spending related to due diligence on completed and potential acquisitions. These increases were partially offset by lower overall advertising and promotional spending for Post Foods.

Consolidated adjusted EBITDA was $216.7 million for the year, an increase of $2.1 million. Acquisitions contributed $8 million in adjusted EBITDA. Interest expense was $85.5 million for the fiscal year compared to $60.3 million from the prior year due to additional debt issuances, as discussed in the quarter comments.

For the fiscal year, income tax expense was $7.1 million, an effective income tax rate of 31.8%. This compares to an expense of $30.5 million, an effective rate of 37.9% for the fiscal year ended September 30, 2012. The decrease in the effective rate is primarily the result of an uncertain tax position taken on the company's 2012 short period tax return and higher nondeductible transaction expenses in the prior year.

For the fiscal year ended September 30, 2013, net earnings available to common stockholders were $9.8 million or $0.30 per diluted common share. Adjusted net earnings available to common stockholders and adjusted diluted earnings per common share for the fiscal year were $31.1 million and $0.94, respectively.

With respect to strategic activities during the fourth quarter, we completed the acquisition of Premier Nutrition Corporation. As Terry mentioned, this acquisition provides us with a platform in the growing active nutrition and supplements business. This is a segment of the market that exhibits both strong organic growth and lends itself to potential consolidation opportunities. We expect to continue to invest in this segment.

On September 16, we announced our planned acquisition of Dakota Growers Pasta Company, a private-label manufacturer of pasta products, for $370 million. Dakota provides Post a platform in private label, which again as a category, lends itself to both organic growth and consolidation opportunities.

On a full-year basis, Dakota is expected to contribute approximately $300 million of net sales and approximately $42 million to $46 million in adjusted EBITDA. The transaction was granted early termination under the Hart-Scott-Rodino Act in October and we expect to close the transaction in January 2014. The acquisition will be financed from cash on hand.

Finally, with respect to fiscal 2014, we expect adjusted EBITDA, including the results of acquisitions completed in fiscal 2013, to be between $245 million and $260 million. This range reflects modest growth of the Post Foods business and contributions from acquisitions in line of management's previously announced expectations. As a reminder, on a full-year basis, Dakota is expected to contribute, as I mentioned, between $42 million and $46 million in adjusted EBITDA.

Lastly, we expect capital expenditures to be in the range of $65 million to $75 million, inclusive of acquisitions completed through fiscal 2013. Our capital expenditure outlook reflects our maintenance requirements plus requirements to complete the start-up and transfer of production to other facilities related to the Modesto facility closure, along with other corporate initiatives.

Thank you for listening to our call today and we look forward to updating you again next quarter.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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