Post Holdings Inc (POST) 2012 Q2 法說會逐字稿

Welcome to Post Holdings' second-quarter earnings conference call and webcast. Hosting the call today 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 9.00 AM. The dial-in number is 888-286-8010. All participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Pia Koster, Director of Investor Relations, for introductions. You may begin.

Thank you and good morning everyone. Welcome to Post Holdings' conference call to discuss results of the second fiscal quarter ended March 31, 2012. With me today are Terry Block, our President and COO, and Rob Vitale our CFO. During this call we will review our financial results, initiatives and provide guidance for second half of fiscal 2012. We will not be taking questions after the prepared remarks. 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 uncertainty that could cause actual results to differ materially. For more information regarding the risks and uncertainties in today's press release please visit SEC filings 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 the statements. All forward-looking statements are expressly qualified in their entirety by this cautionary statement. While evaluating Post business and securities investors should give careful consideration to these risks and uncertainties. As a reminder, this call is being recorded for audio replay.

Finally, this call will discuss certain non-GAAP measures. For a reconciliation of non-GAAP measures to the nearest GAAP measures, see our press release posted on our website. With that, I will now turn the call over to Terry to review our initiative.

Good morning and thank you for joining us today on our earnings call to review our 2012 second fiscal quarter. With eight weeks of results as a standalone company and while cycling over the toughest comp quarter of the year, our focus has been on executing our plan to transition away from Ralcorp, stabilize our base business, and reposition Post for future success. While we expect bumps along the way, we are making progress against the plan. As we have stated, our strategy is to rebuild the strength of our brands through ongoing and impactful marketing support in order to, first, stabilize, and then, grow Post revenue and market share.

Just recently, we launched new programming to support our Great Grains brand and our Honey Bunches of Oats fruit blends. Both television commercials and digital media have started to roll out nationally and will provide higher visibility to these brands. Let's take a closer look at our brands. First and foremost, Honey Bunches of Oats. It's too early to judge the results of our HBO efforts, especially in context of the heavy promotional support that occurred last year in advance of an announced mid-year price increase.

Our specific programming for the HBO line enhancement is just getting started. New television ads began airing in late February and improved product enhancements have been undertaken to increase the amount of granola in the box. Packaging changes calling out, "now with more granola bunches," and television support for the increase in HBO granola began in late March. If you dig deeper into HBO you'll see that retail consumption as measured by Nielsen for flavors representing 78% of the business is positive for the first six months of fiscal 2012. The issue is the other 22%. Our HBO team is working to enhance what's growing and either fix or replace what's not with more productive items. We have identified plans to phase in product improvements and line extensions for Honey Bunches of Oats throughout the next 12 to 24 months.

We are pleased with the 3.5% in retail consumption growth in Q2 we are witnessing in Grape Nuts brand as reported by Nielsen, which we attribute to the modest increase in consumer support. While we lost some distribution on the weaker line extensions of Shredded Wheat, Shredded Wheat's main line business is stabilizing, growing just under 1% in retail consumption in Q2. Our Raisin Bran programming remains a work in process. The Great Grains brand which has a less processed positioning is performing well. This positioning is meaningful and resonates with consumers, especially when supported with great advertising and a patience and willingness to invest in a major product relaunch. This product is on trend for consumers seeking more healthy cereal alternatives.

We continue to review innovation or renovation ideas that will enhance the market position of our iconic brands and we will pursue acquisition opportunities that would strengthen our current offerings or enable us to expand into complementary packaged goods businesses. For the quarter ended March 31, 2012, our US market share based on revenue was 11.1% within measured Nielsen channels, which is flat compared with quarter ended December 31, 2011. Generally, we are seeing different sales trends favoring the non-measured channels. For Post specifically, customers in the non-measured channels are becoming a larger percentage of our business. Our new sales structure is equipped to address both the measured and non-measured channels and make capital adjustments to programs to better accommodate differences in channels and retail outlets.

Let's briefly review the key strategies that we've been focusing on. First, we have increased our sales network so that approximately 85% of our business will be serviced by our own dedicated direct sales force at our customers' headquarters. This expansion is being done to improve the customer focus of our selling effort. We believe the benefit of this commitment will begin to be realized in fiscal 2013 as many key customers' planning horizons are out six months or more. We intend to have filled all open sales force positions by the end of this month, May.

The second component of our strategy is to improve trade spending effectiveness through improved analytics and the focus that will come from our direct sales force's management of customer funding. We are managing trade spend more consistently, getting away from wide quarter-to-quarter variations. For example, last year there was a swing of 30% between the highest funded quarter and the lowest. This year, the variance is 10%. Early indications suggest that this consistency will promote better customer planning and have a positive impact on our business.

Third, we are working to improve our overall value proposition, to correct what we view as a pricing strategy that had become inconsistent with Post's market position. Next, we are focusing more broadly on the brand portfolio by putting business leaders in charge of all the brands, retooling our agency roster, and optimizing and expanding our use of social and digital media. We have increased our consumer support for the portfolio brand, enabling us to compete more effectively in the category. And finally, there is innovation and renovation. We need to improve the output and effectiveness of the Post R&D efforts, investing in R&D to fill gaps in consumer tastes and demand. We're making real progress in this area and I look forward to upcoming announcements towards the end of this year.

As far as the cereal category goes, we are concerned over the declines in volume. A similar demand is showing a higher price elasticity and additional breakfast substitutes have refined our competitive landscape. These challenges require us, as always, to be responsive to consumer behaviors, to continue to seek growth organically and through appropriate acquisitions, and to re-examine our cost infrastructure. However, let's keep in mind the RTE cereal category continues to have many positive aspects with approximately $9 billion of total annual revenue, 92% household penetration, consumption by all age groups from toddlers to seniors and a margin structure that enables brand building. I'll now turn to Rob Vitale, our CFO, to discuss our financial results. Rob?

Thanks, Terry. Good morning everyone. As we have already announced, like Ralcorp, Post is restating its historical financials for the year ended September 30, 2011 and the quarter ended Decembers 31, 2011. Once Ralcorp completes its announced review process and makes its required filings Post will follow suit and make its own required filings as soon as practical. Ralcorp has indicated they expect to complete their filings by May 31. While we are not involved in the review process, we are not aware of any changes to the Post standalone financial statements beyond the previously announced increase to goodwill impairment recorded in September 2011.

So now, let's turn to our business. As you all know, the RTE category has been soft. Revenue for the RTE category as a whole decreased approximately 1.5% for the quarter ended March 31, 2012, compared to the same period a year ago. Category volume declined almost 7.8% measured in pounds but was partially offset by a 3.9% increase in average unit selling price. As Terry has indicated, we attribute this decline in volume to higher than expected price elasticities, expanded breakfast offerings, and a continued shift to non-measured channels.

During Post's second quarter, net sales were $250.5 million, down 3.3% from the previous year quarter, comprised of a 7.8% decrease in overall volume partially offset by higher average selling prices. On a net sales basis, Honey Bunches of Oats and Pebbles, our two largest brands, were down 2% and 7% respectively versus the same time period a year ago, again, however, cycling over a period of intense promotional activity. In contrast, Great Grains, responding to a new national advertising campaign, was up 25% over the prior year. Significantly, as Post has renewed its focus on some of our legacy brands such as Grape Nuts and Shredded Wheat, the brands have responded positively.

Adjusted EBITDA for the quarter was $54.1 million, a 19.7% decrease from the prior year but a sequential increase of approximately 18.6% from the first quarter of fiscal 2012. A reconciliation of adjusted EBITDA to GAAP net earnings is included in yesterday's press release. We have previously made clear that Post required an EBITDA margin reset to first, stabilize its share, and ultimately position it for growth. The margin reset was estimated to be approximately 400 basis points. We want to walk you through this margin reset as it played out in the second quarter, starting with the actual decline in operating income margin of 930 basis points year-over-year, reconciling to a 440 basis point decline in adjusted EBITDA margin. This reconciliation is provided in yesterday's press release.

First, gross profit margin was down versus prior-year. During the quarter, we benefited from carry-over pricing taken in 2011. However, like the category, Post experienced higher volume declines than expected as a result of higher average selling prices. Thus, while pricing offset higher commodity costs, the resulting volume loss and negative fixed cost absorption variance reduced gross profit margin by 400 basis points. SG&A as a percentage of net sales increased from 24.4% to 29.6%. The key drivers of this increase were higher advertising and consumer promotion as well as separation costs incurred in connection with the spin-off.

Advertising and consumer promotion rose from $30.1 million to $35.9 million. This spending is aimed to stabilizing the brand's base and positioning them for growth. Also included in SG&A are approximately $5.3 million or 2.1% of net sales in costs related to the separation from Ralcorp. So to come full circle and reconcile the operating profit margin to adjusted EBITDA margin, first, the separation cost I just mentioned represent 2.1%; second, depreciation and amortization as a percentage of sales rose from 5.6% to 6.4%. Obviously, as a result of the sales decline, that increased but also depreciation in real terms also increased.

All other items including stock-based compensation, public Company costs and mark-to-market adjustments comprised a negative 0.2% and a negative 2.2% of net sales for the second quarter of 2012 and 2011 respectively. These adjustments in 2011 totaled 4.9%, resulting in a reconciled adjusted EBITDA margin of 26% in Q2 2011. When compared to the 21.6% in Q2 2012, it supports our ongoing estimate that an approximate 400 basis point reset was and remains needed to stabilize and reposition the brand portfolio. I realize that simply hearing this reconciliation may be confusing and again want to stress that we have included this reconciliation in the press release and it details the numbers that I just reviewed.

Moving down the P&L. Income tax expense for the second quarter of fiscal 2012 was $8.6 million which represents an effective income tax rate of 45% for the quarter, up from 32.2% in 2Q 2011. This exceptionally high effective tax rate is an anomaly. Because the spin transaction was tax free, certain costs to complete it were not deductible. Post incurred approximately $4.6 million of nondeductible outside service expenses which resulted in approximately $1.8 million in incremental tax expense. We expect an effective tax rate of approximately 37% for the balance of the year and then an effective tax rate between 32% and 35% for fiscal 2013.

On an adjusted basis net earnings for the second quarter 2012 were $13.6 million, or $0.39 per diluted share. We define adjusted net earnings to exclude certain non-cash and one-time costs but to include an estimate of the costs Post would have incurred had it been a standalone company during the entire period and an estimate of the incremental interest expense as if Post's current debt had been outstanding for the full quarter. A reconciliation of the adjusted net earnings to GAAP net earnings is included in the press release. In January 2012, Post management provided adjusted EBITDA guidance of $205 million to $225 million for the 12 months following the separation from Ralcorp, admittedly an unusual time period. To expand on the prior guidance, we are now providing adjusted EBITDA guidance specific to fiscal 2012 of $200 million to $210 million.

Further, Post management now expects adjusted EBITDA for the 12 months following the separation from Ralcorp tying back to the timeframe of the initial guidance to be in the range of $210 million to $220 million. We expect total capital expenditures in 2012 to be in the range of $24 million to $26 million, exclusive of $8 million spent to establish Post as a standalone company prior to the spinoff from Ralcorp. Additionally on an annualized basis, net interest expense should be approximately $63 million to $66 million. In closing, I want to thank you all for your patience. We recognize holding this call the Friday prior to a long weekend was not ideal but the logistics were such that we had to make certain concessions to the calendar. Want to wish you all a great Memorial Day weekend and we will talk to you next quarter.

Ladies and gentlemen, that concludes this presentation. Thank you for your participation. You may now disconnect. Have a great day.