Post Holdings, Inc. (NYSE:POST)
Q2 2014 Results Earnings Conference Call
May 9, 2014 9:00 AM ET
Terry Block - President and COO
Rob Vitale - Chief Financial Officer
Brad Harper - Investor Relations
Welcome to Post Holdings' Second Quarter 2014 Earnings Conference Call and Webcast. Hosting the call today from Post are Terry Block, President and Chief Operating Officer; and Rob Vitale, Chief Financial Officer. Today's call is being recorded and will be available for a replay beginning at 12 p.m. Eastern Daylight Time. The dial-in number is (800) 585-8367 and the passcode is 35900562. At this time, all participants have been placed in a listen-only mode.
It is now my pleasure to turn the floor over to Brad Harper, Investor Relations for Post Holdings for introductions. Sir, you may begin.
Thank you and good morning. Welcome to the Post Holdings conference call where we will discuss results for the second quarter of fiscal 2014. 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.
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, 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 issued yesterday and the last 8-K we filed on March 10, 2014, each posted on our website.
With that, I will turn the call over to Terry.
Thanks, Brad. Good morning and thank you for joining us on our earnings call. We'll review the status of the business for the second quarter and for the first six months ended March 31, 2014.
In the last 12 months, Post Holdings has been transformed into a more diverse consumer packaged goods holding company competing in categories with more dynamic growth prospects driven by large secular themes, portability and convenience, changes in diet toward protein and more organic and natural products, and the shift in breakfast eating locations away from home. Post investments in Active Nutrition, nut butters, organic and natural foods, and the announced Michael Foods acquisition positions Post to benefit from these things.
Our second quarter recorded consolidated net sales of $438 million, an increase of $189.8 million versus Q2 last year. Post Foods RTE cereal business recorded net sales of $239.5 million for the quarter, a decline of $5.9 million or 2.4%.
The quality shipment performance was against a challenged RTE cereal category as measured by Nielsen that experience dollar consumption decline of 4.8% for the same quarter. It’s worth noting that the contributing factor to both the categories and Post performance is reduction in category promotional efficiency, resulting a lower volumetric lift for promotional dollars.
Net sales from acquisitions was split $22.2 million, $70.6 million and $105.7 million between Attune Foods, Active Nutrition and Post Private Brands, respectively. I will touch on each group’s performance later.
For the first six months, consolidated net sales were $730 -- was $735 million, an increase of $249.9 million versus the same period last year. Post RTE cereal sales of $476.4 million declined 1.2% or $5.9 million. This performance was against the category backdrop that declined 4.4% as measured by Nielsen for the same period.
Contributing to overall growth was sales contributions of $45.4 million, $107.8 million and $105.7 million, split between Attune Foods, Active Nutrition and Post Private Brands, respectively.
The Post Foods business showed continued consumption progress in Q2, outpacing the category and delivering strong year-over-year share increases. Dollar share increased 0.9% to 11.3% in Q2, due to improved demand generation efforts, increased distribution of new item and higher promotional frequency versus year ago.
Pounds and package shares also increased 1.0 and 0.7 points, respectively, as we saw a continued reversal of the multiyear share declines. In total, Post is growing share in nearly all of our brands, a short signal that the turnaround efforts are having an impact.
Now let’s take a look at the performance of several of our key brands. HBO, our largest brand showed continued encouraging share progress. HBO grew dollars share driven by improved execution of fundamental, including pricing, shelving and merchandising. Core flavors were up 1.3% as efforts to drive distribution gains on larger sizes delivered share gain. Year-over-year, based dollar share growth continues to strengthen.
Pebbles continued it share and revenue growth in Q2, increasing $0.6 share points. These gains were driven in significant parts for the launch of Pebbles in large bags. What is notable that the core box business also grew.
The Popping Pebbles launch has been encouraging, with velocity higher than anticipated and with upsize potential for broader distribution. Pebbles has demonstrated strong growth fiscal year-to-date across both dollars and units, increasing 11.3% in dollars and 4.9% in units.
While the category remains challenged, we remain encouraged by the progress at Post Foods. We have successfully transition from share declines to share stabilizations and now the share growth.
We continue to focus on demand generation efforts, improving critically important fundamental and working to bring more incremental innovation to the category, starting with the limited introduction of three flavors a Post Goodness To Go 15-gram protein shakes in May 2014.
These products based on our studies have paste tasted better than others available in the breakfast style. Their development borrowed from the taste profile knowledge that exists within our Active Nutrition business.
Improvement in both Post Foods short and long-term cost structure have also been a focus area over the past two years. The previously announced Modesto plant closure is on schedule and is expected to be completed in August 2014. This closure is expected to deliver $14 million in annualized cost savings with approximately 20% accruing in the back half of FY ‘14.
Additional projects are in various stages of the assessment and development that when implemented beginning in fiscal year ‘15 are expected to generate an additional $10 million in cost savings across the product supply network. We expect the back six months of FY ‘14 to experience modest net deflation in commodities in the Post Foods segment.
Net, we expect earnings to experience improved gross margin in the Post Foods segment as we move through the back half of FY ‘14. Attune Foods for the second quarter achieved net sales of $22.2 million, 7.8% ahead of the prior year pre-acquisition quarter. The results were driven by strength in organic non-GMO gluten-free cereals, especially Peace, Sweet Home Farm and Erewhon.
Additionally, the private label portfolio gains new customers and experienced double-digit growth at several of its largest customers. Volume growth more than offset the sales decline related to a price reduction included as part of the successful customer rebid.
For the six months October through March 2014, net sales were $45.4 million, up 12.4% versus the prior year pre-acquisition first half. We believe momentum remains positive with both identified operational and new business opportunities to pursue.
Post’s Active Nutrition group includes Premier Nutrition, marketers of the Premier Protein and Joint Juice brands and beginning February 1, 2014, Dymatize Enterprises markers of the Dymatize and Supreme brands.
For the second quarter and the first half, the Active Nutrition business recorded net sales of $70.6 million and $107.8 million, respectively. The growth rates for the trailing three-months and six months ending March 31, 2014 compared to same three and six-month period last year reflects 8% and plus 13% respectively.
The Premier brand exhibit solid based business growth that was enhanced by the introduction of new Premier strawberry shake products that received great support from top customers. This report was coupled with distribution expansion on channel appropriate items in the food/drug/mass channels.
With respect to Dymatize, despite demand that outpaced the category that key specialty U.S. customers, severe winter weather in numerous key markets limited consumer traffic at key Dymatize retailers depressing sales. Additionally product supply issues are resulting in missed shipments.
The causes have been identified and are being addressed with assistance from Post Holdings’ Center of Excellence experts. The demand planning process is being improved to better mass supply in inventory with demand to enhance customer service in overall business performance.
Manufacturing practices are being reconfigured to enhance product flow, reduce shrink and improve overall productivity and product quality. Active Nutrition is a key component in the transformation and growth story of Post and is being managed at the singular group within Post with expected annualized sales to exceed $500 million, following the closing of the PowerBar transaction.
This business have attracted growth dynamic as the global Active Nutrition category is projected to grow at high-single digit in the upcoming years. Dave Ritterbush have been named to lead the Active Nutrition group. Dave was formerly CEO and President of Premier Nutrition. Dave will oversee a broad portfolio of brands, addressing key consumer segment of the category with access to all channels of sales and distribution, as well as all leading product forms, bars, shakes and powders.
This is an exciting business operating at the intersection of healthier lifestyles, activities and diets aided by the ability to deliver protein and other nutrients to consumers and convenient portable forms that taste good while addressing their various needs that the consumer seeks, be that body building, endurance, sports nutrition, or simply meal replacement.
Post private brands group in our second quarter includes Dakota Growers for the three-month and Golden Boy for two months. The combined private brands group for second quarter recorded net sales of $105.7 million. As previously guided, Dakota Growers experienced a sales decline versus the prior year pre-acquisition quarter that actualized at 12.6% at several key ingredient clients internalized pasta purchases.
Golden Boy more than offset the Dakota declines in the private brands group overall exhibited growth of 1% versus the prior year pre-acquisition period. The innovation of the Dakota Growers and Golden Boy into one group is progressing smoothly.
Combining these businesses will better manage the scaling of enterprises that possess similar go-to-market dynamics, management and operating opportunities and customers, while maintaining accountability at the operating unit level.
Early synergies have been identified, key future contracts are being extended and new ones signed up, pass the cost reduction programs have been announced, capacity enhancing and productivity oriented capital projects are about to come on stream and the other plant network is being reconsidered to provide better geographic coverage and manufacturing capabilities.
These initiatives, when combined with the ongoing business are expected to provide a better-than-average growth outlook with margin improvement, as the Private Brands group looks to reverse and offset the guided Dakota decline, setting up an improving business outlook for FY ‘15.
The Michael Foods acquisition will be our largest transaction to date. The continuous post-strategy of investing in a large sector themes in the food industry. Post remains focused on the expanding its business to capitalize on shifts and consumer behavior towards increase consumption of proteins and away-from-home eating locations.
We’ve had the exposure to segments in consumer packaged goods, all with expected higher growth rates in RTE cereal and in segments that remain fragmented and present consolidation opportunities.
Finally, the transformation from $1 billion to a projected $4 billion in net sales has encouraged some operational challenges that naturally arise with this level of activity. A summary of acquisition scorecard today would be as follows. Attune Foods, Premier Nutrition and Golden Boy, all meeting expectations and the promise inherent in the deals.
Dakota Growers required a reset and has highlighted is taking the steps necessary for an improved outlook that will meet the expectation and Dymatize is addressing the highlighted internal business process issues that have caused near-term business results to fall short of expectations. This action should enable the Dymatize brand to fulfill consumer demand and deliver on the foundational outlook intended for this deal.
Next, we very much like our acquisitions. The issues we’ve encountered are inherently fixable and are being fixed. We believe the combination of category growth dynamics, the strong management that exists in the portfolio of businesses and the enhanced capabilities and resources that Post provides support our expectations for accelerated growth in excess of respective category growth. And that we expect adjusted EBITDA growth will be in the mid-single-digit range.
I will now turn the meeting over to Rob. Thank you.
Thanks, Terry. Good morning. We recognized all the M&A activity in the last 12 months, makes it a challenged to attract the performance of the business solely from the reported consolidated results. To help, I’m going to provide commentary on the quarterly reported results and I will then follow with aggregate comparisons, including acquisitions closed to date reflected as if we have owned them for the entire prior 12 months.
Further, I will provide additional forward-looking information, which should assist in developing financial models. To begin, I want to make clear what is included in the consolidated financial statements. In short, the financials include acquisitions from the date of acquisitions forward without adjustments to any prior period. The Post Foods segment is the legacy business and of course it's fully included in comparable periods.
The balance of the portfolio includes partial periods in either 2013 or 2014 or both. Acquisition dates are as follows. Attune Foods acquired on May 28, 2013, other than in a material acquisition in December 2012. Active Nutrition, Premier Nutrition acquired on September 1, 2013 and Dymatize Enterprises acquired on February 1, 2014, Private Brands, Dakota Growers Pasta Company acquired on January 1, 2014 and Golden Boy Foods acquired on February 1, 2014.
With the housekeeping out of way, I will go through the segments, provide consolidated results and then turn to our near and longer-term outlook. Starting with Post Foods, Post Foods reported net sales for the second quarter of $239.5 million, a decline of $5.9 million or 2.4%. To bridge second quarter 2014 to its prior year quarter, one, volume increased 1%, two, average pricing declined 4%. The decline in average pricing included an unusually high level of inventory liquidation. Higher trade spending and an unfavorable product mix compared to the year ago quarter, also contributed to the decline in average net selling prices.
COGS per pound decreased 2% and we expect that decrease to accelerate in the second half, resulting from commodity deflation like our purchasing cycle. Better absorption and cost reductions starting to phase in during the second half. As a result, gross profit decreased from $102.3 million to $97.6 million, with gross margin declining 90 basis points to 40.8%.
SG&A declined from $53.3 million to $52.7 million. Post Foods adjusted EBITDA was $54.4 million and $60.2 million for the second quarter 2014 and 2013 respectively. For the six-month period, Post Foods net sales were $476.4 million, a decrease of $5.9 million or 1.2%.
Adjusted EBITDA was $114.1 million and $122.3 million for the six months ended March 31, 2014 and March 31, 2013, respectively. We expect modest commodity release in the second half of fiscal 2014 and improved gross margins in the Post Foods segment, when compared to the first half of fiscal 2014.
Moving to Attune Foods, net sales were $22.2 million for the quarter. Adjusted EBITDA was $3.6 million. For the six months ended March 31, 2014, net sales, including intersegment sales, were $45.4 million. Adjusted EBITDA was $8 million for the six months ended March 31, 2014.
Next, Active Nutrition, net sales were $70.6 million for the quarter. Adjusted EBITDA was $6.7 million. This is the partial quarter for Dymatize and the seasonal low point fridge business. For the six months ended March 31, 2014, net sales were $107.8 million and adjusted EBITDA was $12.5 million.
Finally, turning to Private Brands, sales were $105.7 million. Adjusted EBITDA was $13.4 million. This too is partial period and also represents a seasonal low particularly for the Golden Boy fruit and nut business.
At the consolidated level for the second quarter, net sales increased $189.8 million to $438 million. Gross profit increased $26.9 million to $129.4 million, compared to the prior year and included $34.1 million from acquisitions.
Total SG&A expense increased $34.9 million to $104.8 million and is running at 23.9% of net sales, compared to 28.2% in the prior year. SG&A from acquisitions was $21.5 million in the quarter. Second quarter 2014 SG&A included $10.5 million of acquisition-related transaction expenses for announced transaction, all of which is added back for the adjusted EBITDA calculation. Adjusted EBITDA was $63.5 million, up $12.5 million compared to the prior year but included $23.7 million from acquisitions.
Consolidated interest expense was $37.3 million for the second quarter, up $21.6 million from last year’s second quarter. The increase resulted from the issuance of $350 million and $525 million in aggregate principal amount of senior notes in July 2013 and November 2013, respectively. Additionally, we issued $350 million in aggregate principal amount of senior notes in March 2014.
Starting this quarter, we now report foreign currency gains and losses separately from SG&A. Accordingly, SG&A for prior periods has been adjusted to align with fiscal 2014 presentation. Losses on foreign currency were $11.9 million for the second quarter, compared to $200,000 in the prior year quarter. The foreign currency loss reflects the accumulation of Canadian currency between the announcement and completion of the Golden Boy acquisition. As a result, it’s economically offset by the decrease in the Golden Boy transaction price, that’s reflected in U.S. dollars.
Pre-tax loss for the quarter was $37.6 million and resulted in an income tax benefit of $19.3 million. This compares to an expense of $2.2 million in the second quarter of fiscal 2013. The effective income tax rate was 51.3%, compared to 30.1% last year. The elevated effective income tax rate is a function of our estimated range of earnings or loss before income taxes for fiscal 2014, excluding the impact of pending acquisitions.
Small variations in earnings or loss before income taxes and permanent differences are anticipated to have a magnified impact on the effective income tax rate for fiscal year 2014. The effective tax rate is expected to stabilize and to be approximately 32% to 35% in fiscal year 2015.
The second quarter net loss was $22.6 million or $0.67 per share. On an adjusted basis, the net loss was $7.2 million or $0.21 per share. Weighted average diluted common shares increased from 32.9 million to 33.6 million quarter-over-quarter. The increase resulted from an additional 5.75 million shares of common stock included in the second quarter weighted average from the issue date of March 18, 2014.
Moving to our six months consolidated operating results, for the six months ended March 31, 2014, net sales were $735 million, an increase of $249.9 million. Gross profit increased $35.7 million to $243.9 million. SG&A expense increased $44.1 million to $186.2 million, compared to the prior year and was 25.3% of net sales.
SG&A from acquisitions was $29.6 million. SG&A included $14.9 million of acquisition-related transaction expenses for announced and unsigned transactions, $13.9 million of which was related to announced transactions and is added back for the adjusted EBITDA calculation. Adjusted EBITDA was $119.4 million, up $15.9 million, compared to the prior year included $33.9 million from acquisitions.
For the six months ended March 31, 2014, the net interest expense was $66.3 million, compared to $40.8 million for the six months ended March 31, 2013. For the six months ended March 31, 2014, the income tax benefit was $20.7 million and effective income tax rate of 50%, compared to an expense of $5.7 million and effective income tax rate of 31% for the six months ended March 31, 2013. The net loss was $27.6 million or $0.83 per share. Adjusted net loss was $7.3 million or $0.22 per diluted common share.
Turning to updates on acquisitions and financing. On February 3, 2014, we announced we've agreed to acquire the PowerBar and Musashi brands and related worldwide assets from Nestle. The transaction initially expected to be completed in our fiscal third quarter is now expected to close in our fiscal first quarter of 2015, subject to various closing conditions.
On April 17, 2014, we announced we've agreed to our acquire Michael Foods, a leading producer of value-added food products and service solutions to customers across the foodservice, retail and food ingredient channels. The acquisition is expected to be completed in the second calendar quarter of 2014, our fiscal third quarter, subject to various closing conditions.
Under the terms of the agreement, Post will acquire Michael Foods for $2.45 billion on a cash-free, debt-free basis, subject to working capital and other adjustments, plus a $50 million payment on the first anniversary of the closing day.
Concurrent with the signing of the agreement, we obtained financing commitments under which various lenders have committed to provide up to $1.765 billion in credit facilities, including a committed bridge loan of up to $340 million. Committed facilities, together with cash on hand, are sufficient to fund the purchase price.
We currently expect to replace a portion of the committed financing with approximately $635 million of new term loan borrowings with the remainder of the financing consisting of approximately $500 million of newly-issued common and/or equity-linked securities and approximately $630 million of newly-issued senior unsecured debt securities. The final structure and terms of the acquisition financing will be subject to market and other conditions, and may be materially different than current expectations. We expect the marginal cost of debt on this financing to be less than the average cost of borrowing prior to giving effect to the new debt.
Finally, we have sought and obtained an increase in our revolving line of credit from $300 million to $400 million, subject to the completion of the Michael Foods acquisition and certain other conditions.
Going back to opening comments, I want to provide context to help you model. We believe the best way to look at the aggregate business is to consider it on a trailing 12 month basis giving effect to the acquisitions completed to-date as if they had been owned by Post for the full 12 months. This information is included in our earnings release. For the 12 months period ended March 31, 2014, pro forma adjusted EBITDA would have been $321 million, down $25 million from the 12 months period ended December 31, 2013.
The following items were the key drivers of the adjusted EBITDA decline from the quarter ended March 31, 2013, to the quarter ended March 31, 2014, on a pro forma basis. Dakota Growers adjusted EBITDA declined approximately $5 million. Dakota remains in line with both revised expectation and our timetable for returning to the previously estimated range of annual adjusted EBITDA to be between $42 million and $46 million in 2015.
Corporate expenses increased approximately $7 million to support the larger company footprint, M&A activity and IT projects. Post Foods continued to see softness in the ready-to-eat cereal category in the second quarter and declined approximately $6 million. Results for Dymatize in the second quarter declined from prior year, resulting from the operating issues Terry mentioned. The 12-month run rate was also affected by final audit and working capital adjustments of approximately $3.4 million that related to periods prior to Post ownership.
Last, regarding near and longer-term outlook, recognizing the complexity of trying to translate, so many disparate pieces into a run rate. We further want to provide the following information to assist you in modeling purposes.
Pro forma LTM adjusted EBITDA as of March 31, 2014 for Post, giving effect to the full 12 month of each completed acquisitions to date, would have been $321.2 million. We expect the same measure of adjusted EBITDA for the 12-months ended September 30, 2014 to be between $320 million and $340 million.
Michael Foods has LTM adjusted EBITDA as of March 29, 2014 of $238.8 million, which does not give effect to Michael Foods’ acquisition of Primera Foods Corporation for periods prior to the date the Primera acquisition was completed, which was June 2013.
We expect Michael Foods to end calendar 2014 with adjusted EBITDA of between $255 million and $270 million, prior to giving effect to synergies. We estimate there will be $10 million in scale related synergies from the combination of Post and Michael Foods in fiscal year 2015. The synergies results from improved commodity purchasing as well as indirect purchasing and professional services.
The second phase of Post’s previously announced Modesto, California facility closure is expected to be completed by September 2014, with the total net pretax annual cash savings of approximately $14 million expected to be fully phased in by fiscal year 2015.
Ongoing annual capital spending beyond 2014 for the combined Post and Michael Foods is expected to be approximately $80 million to $90 million. However, for Post, in fiscal 2014, excluding the pending PowerBar and Michael Foods acquisitions, we have raised our capital expenditure guidance to between $90 million and a $100 million from the prior estimates of between $75 million and $85 million. This increase results from the purchase of assets of Sunland, Inc., which was accounted for as the capital expenditure in the period in which the transaction occurred.
We break the capital expenditure guidance down as follows. $26 million related to the Sunland assets, $20 million related to the closure of our Modesto facility and the remaining balance for ongoing capital spending. Last, the effective tax rate is expected to stabilize and be approximately 32% to 35% in fiscal year 2015.
I'm hopeful that this information will assist you in developing your models of free cash flow. As Terry mentioned, we believe we have a portfolio of assets that will grow adjusted EBITDA and will generate attractive free cash flow for debt reduction or to fund growth.
Thank you for listening to our call today and we look forward to updating you again next quarter.
Thank you for participating in the Post Holdings second quarter 2014 earnings conference call. You may now disconnect.
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