Post Holdings Inc (POST) 2012 Q4 法說會逐字稿

Welcome to Post Holdings fourth-quarter and full-year 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 6.00 PM Eastern. The dial-in number is 800-585-8367, and enter pin number 65051774. At this time, 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 afternoon, everyone. Welcome Post Holdings conference call to discuss results for the fourth fiscal quarter and year ended September 30, 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 and initiatives for fourth quarter and fiscal year end and provide guidance for fiscal 2013. 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 uncertainties that could cause actual results to differ materially. For more information regarding these risks and uncertainties 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 obligations to update or revise these 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 initiatives.

Good afternoon, and thank you for joining us today on our earnings call. We will review the status of our Business for the fourth quarter and the fiscal year ending September 30, 2012. As you all know, 2012 was a transition year for Post. We became a public company and less than seven months from the spin-out announcement, hired a talented high-capacity holding company staff, only one of whom was on the Post payroll in September 2011; filled out our direct-selling organization, adding calendar sales professionals and sales support analysts; raised $950 million in debt offerings to help satisfy our dividend obligation to Ralcorp as a price of going public; and importantly, put in place strategies to affect a turnaround and a multi-year negative revenue and share performance of Post.

In so doing, we were laying foundation for growth and reliability of cash, both of which are crucial to forward-thinking optionality for the Business. We have chosen to optimally operate the Business for the long term, while addressing short-term disparities when appropriate. We are avoiding chasing a number that would hamper execution of our strategies. The outcome from the efforts to stabilize revenue and share continue to offer encouragement, as the investments in product, brand building, and customer management begin to take hold.

I am pleased to announce that our fourth quarter recorded 4% growth, with net sales hitting $247.2 million. This marks only the second time in the past three years where Post has achieved year-over-year quarterly sales growth. The category experienced dollar-consumption declines of 0.7% for the same quarter. Against that category of performance backdrop, Post's market share was 10.2% for the 13-week period ending September 29, 2012, flat versus same period one year ago. Please keep in mind that market share reflects the restatement of Nielsen data with the expanded reporting universe, including Dollar Channel and Walmart. Channels where Post was and is underrepresented, but where we have placed increased emphasis to better compete.

For the fiscal year, sales were $958.9 million, down less than 1% versus one year ago. Market share is 10.4%, off 0.4 points versus last year, and in line with our transition fiscal year-end goal at 10.5%, after adjusting for the expanded Nielsen reporting data universe. We obviously have more work to do to become a long-term share gainer, and that will be a focal point for 2013. Adjusted EBITDA for fiscal year 2012 was $214.6 million, which exceeded the top side of our guidance by $4.6 million. Rob Vitale will comment further about the financials, following my comments.

Now, let's talk about product, brand building, and customer management, as they are the means by which Post will first stabilize and then grow revenue and market share. We have stated that we are implementing a meets, beats, and best approach to expand the breadth of the portfolio's appeal and to improve the level of engagement Post has with our retail customers.

Meets is about better fulfilling the cereal needs of the economically stressed households, offering Post-level quality alternatives to the competitive set at attractive price points. Good Mornings, our first meets initiative, was introduced into a test market with limited exposure in June. The product lineup is priced to sell at $0.14 per ounce for most SKUs at retail, in line with the major value competitor and only slightly higher than private label. We are learning from our test market what adjustments need to be made around product mix and levels of marketing support, as we prepare to expand this effort more broadly in January 2013.

In addition to Good Mornings, Post has launched a private-label program to engage and align with our retail customers to better address their quality needs with our desire for improved partnership and plant productivity. We anticipate shipping to our first customer in the second quarter of fiscal 2013. Product is at the very heart of improving our core brands, so they consistently beat consumer expectations. It's through our delivering against the brand promise that we will build our brands. Now, let's dive deeper into these efforts.

First, Honey Bunches of Oats. We are gaining encouragement that the consumer is beginning to respond positively to our Honey Bunches re-stage efforts. For the quarter, Nielsen reported dollar volume grew 1%, led by nearly 3% growth for the Honey Roasted and Almond varieties that comprise approximately 75% of the brand's market share, which increased a modest 0.1% during this time period. Recall, the restake started with product, more precisely, more granola bunches in every box. And, it's product that is a key priority for fiscal 2013.

We are not only launching the on-trend flavor edition, Mango Coconut, in January, but we've added a second-line extension to the January lineup, Honey Bunches of Oats Greek yogurt. This product beats expectations, resulting from a technology breakthrough enabling both inclusions and enrobing of authentic Greek yogurt in the granola clusters that comprise 30% of the product. These products efforts will be accompanied by refreshed packaging across the entire Honey Bunches product lineup and a new advertising campaign that promises to bring a smile to Honey Bunches users and non-users alike.

Pebbles, while keeping all formulations gluten free, is beginning to respond to our revamp programming, emphasizing a more chocolaty flavor of Cocoa Pebbles and more directed consumer support accompanied by better execution at retail. For the quarter, compared to the annual rates, dollar volume was considerably less negative for Cocoa, positive for Fruity Pebbles, which combined to deliver a stable market share of 1.8% for the quarter versus a 0.2% decline for the year.

Grape-Nuts is our turnaround story of the year. For the year, as measured by Nielsen, the brand grew dollar volume 3.8% with a strong base business. The year-over-year quarterly growth is even more encouraging at 7.2%. This has been accomplished with a focus on consumer support, evidencing the latent potential in this iconic 110-year-old-plus brand.

Going forward, we are managing the brand to capitalize on these positive trends with a stronger, proven product positioning; an improved mainline product, boosting protein levels to among the highest in the cereal category, offering more energy to fuel the start of the day; and launching the previously referenced new product, Grape-Nuts Fit, in January. Grape-Nuts Fit combines the heritage of traditional Grape-Nuts with a texture and flavor that needs to be tasted to be appreciated. Contemporising the Grape-Nuts brand and getting Grape-Nuts Fit into the hands of the target audience are the top priorities for the overall brand this year. The Grape-Nuts product deliver, again, some of the health needs of society, and the products speak for themselves after use.

Post Shredded Wheat reported 0% share loss for the year and for the most recent quarter, despite losses in the weaker-line extensions. At its core, Post Shredded Wheat is a very simple product consisting of one ingredient, wheat. It has top notch nutritional credentials, including being heart healthy. We will be introducing a strong health and nutrition campaign in 2013, starting with a doctor-recommended message, communicating Shredded Wheat's great health and nutrition benefits is job one for the brand.

I mentioned at our last call that Post Raisin Bran was at a crossroads and that we were addressing this problem by adding more of the ingredient that is the reason for buying the product, raisins. Product and packaging calling out hundreds more raisins in every box began shipping last month.

For our best product offering, Great Grains is a prime example. It has a less-processed consumer benefit and continues to outperform the category, growing dollar volume 7.9% for the year, as measured by Nielsen. The less-processed positioning resonates with consumers, especially when supported with great advertising and a product lineup that delivers against the consumer's expectations. Adding to the product lineup are Great Grains Protein Blends in two flavors, Cinnamon Hazel Nut as well as Honey Oats and Seeds, that began shipping to customers this summer and that will begin shipping nationally in January 2013. Early feedback is positive in terms of initial consumer takeaway. Great Grains is on trend for consumers seeking more healthy cereal alternatives.

Improved customer management is a core strategy for Post. During fiscal year 2012, we dramatically upgraded our selling effort, completing our transition to a direct-selling organization, managing headquarter accounts at customers representing about 80% of our business. The selling organization expansion was augmented by a newly formed market development organization to assist the alignment with marketing and customers and assist in better management of the trade investment spend. We have seen early evidence of improved trade-spend effectiveness, better fact-based engagement at the buyer/seller interface, achievement of higher levels of net distribution for our innovation and renovation initiatives, and overall better partnering with our customers for mutual gain.

Given the transition wasn't completed until May, we are encouraged by what the selling team has been able to get done with little lead time, increasing our participation in the trades after-school promotions and look forward to the contributions more forward planning can produce. Product, brand building, and customer management are at the core of our turnaround efforts, but without improving the output and effectiveness of the Post R&D efforts, we could not succeed. The preceding brand comments provide concrete examples into the execution against this strategy. In summary, for the year, the R&D team executed product improvements and new news on HBO; Pebbles; Great Grains; Grape-Nuts; Raisin Bran; and Shreddies, our largest brand in Canada, plus developed a toddler-oriented cereal to be launched in January under the Sesame Street banner.

We will continue to increase the intensity placed behind innovation and renovation that will enhance the market position of our iconic brands and extend where the consumer judges our brands can meaningfully transfer positioning and brand promise. Our productivity is top of mind, as we witnessed the effects of the drought this summer and the rising commodity costs. We are hitting our internal cost-savings targets, and the savings are contributing to the investments that we are making in the Company and partially offsetting cost increases.

Finally, in 2013, we will be operating against the following core strategies as we continue to execute our objective of being able to operate as an independent company, achieving sustainable growth through product leadership, and unleashing the latent potential in the Post iconic brands, growing organically and through acquisition. Specifically, the core strategies are to strengthen the breadth of the portfolio's consumer appeal; to improve the interactions at the customer interface; to accelerate innovation and renovation; to optimize our product-supply network advantage and scale; and to build a lean, resourceful organization.

Before turning over to Rob, I would like to mention that I'm proud of our New Jersey-based teams' reactions in the wake that Hurricane Sandy left. Everyone pitched in to help so that operations were not interrupted, despite dealing with their own safety, family, and home disruptions. With that, I will turn to Rob Vitale, our CFO, to discuss our financial results and guidance.

Thank you, Terry.

In commenting on our financial results and status for comparative purposes, I am going to initially comment on Q4 and then circle back for the full-year comparisons. As Pia mentioned, for both the quarter and the year, we are providing certain non-GAAP measures because we believe they are representative of Post as a stand-alone public company and not an operating segment of Ralcorp. Where I mention adjusted EBITDA or adjusted EPS, you will find reconciliations to the appropriate GAAP metric in today's press release.

With respect to Q4, as Terry mentioned, Post net sales increased 4% compared to the prior year, primarily driven by a 4.9% increase in volume. Honey Bunches of Oats, Great Grains, Pebbles and Grape-Nuts all increased volumes in Q4. Additionally, the Good Mornings value brand had distribution gains. Volume increases were partially offset by lower overall net pricing from greater consumer promotion and by mix, as Post gained value distribution. Honey Bunches of Oats and Pebbles volume increased 9.9% and 9.5%, respectively, while Great Grains and Grape-Nuts volume grew 13.5% and 2.8%, respectively.

Gross profit margin of 44.5% is an increase of approximately 130 basis points from the prior year, largely driven by favorable fixed-cost absorption from higher volumes and cost efficiencies. The gains are partially offset by unfavorable commodity costs, primarily grains, and lower net pricing. On a sequential basis from the third quarter, gross margin declined approximately 90 basis points, due to increased promotional activities resulting in lower average selling prices.

Excluding costs related to the ongoing separation from Ralcorp Systems, selling, general, and administrative expenses, as a percentage of net sales, increased from 23.7% to 28.2%. This increase was primarily driven by establishing holding company costs, compensation costs for the new direct-sales force, bonus costs, and higher advertising and consumer costs. Looking forward, we will not have complete comparability for SG&A until the third quarter of 2013 because of the timing of the spend in 2012. For reference, the separation costs added back were $2.1 million and $2.8 million in the fourth quarters of 2012 and 2011, respectively.

Adjusted EBITDA for the quarter was $53.5 million, versus $56.7 million for the same time period one year ago, and declined sequentially from $61.4 million in Q3. As previously indicated, third-quarter margins had timing benefits, as certain A&C costs fell into the fourth quarter. We do not place of emphasis on quarter-to-quarter margin swings as expense timing can distort results over such a short term.

Interest expense was $16.1 million, in line with expectation. Income tax expense was $6.2 million, which represents an effective income tax rate of 36.5% for the third quarter, compared to a tax benefit of $32.5 million and an effective income tax rate of 6.3% for the same period one year ago.

Net earnings were $10.8 million, or $0.31 per diluted share, for the fourth quarter. Adjusted net earnings and adjusted diluted earnings per share for the quarter were $11.9 million and $0.35, respectively; and again, I would refer you to the reconciliation in today's press release.

Now, I will comment on the full year. Full-year 2012 net sales decreased 1% resulting from a 3.2% lower volumes, partially offset by higher gross and net pricing. Honey Bunches of Oats and Pebbles volumes were down 2.3% and 6.4%, respectively, versus the prior year, while Great Grains experienced a year-over-year volume increase of 10.1%. Gross profit margin decreased by approximately 190 basis points, driven by higher raw material costs, again, primarily grains, and unfavorable fixed-cost absorption resulting from lower production volumes.

Again, excluding the effect of costs related to the transition and separation from Ralcorp, SG&A, as a percentage of net sales, increased from 24.4% in fiscal 2011 to 27.3% in fiscal 2012. The same drivers from the quarter resulted in the increase, these being the establishment of the incremental holding company costs, the higher operating company overhead from the new direct-sales force, and bonus costs that were partially offset, in total, by lower warehousing and broker expense. Again, for reference, the transition costs for 2012 and 2011 were $12.5 million and $2.8 million, respectively.

For the full year, adjusted EBITDA was $214.6 million versus $248.9 million for the same period one year ago. Recall, we had guided $200 million to $210 million, and in October provided an update we expected to meet or slightly exceed the high end of the guided range.

For the full year, income tax expense was $30.5 million, an effective income tax rate of 37.9%, compared to a benefit of $6.3 million and an effective income tax rate of 1.5% for the year ended September 30, 2011. The current year effective tax rate was unfavorably impacted by tax expense related to an uncertain tax position we expect to take on our short period tax return. The year-to-date effective income tax rate was also unfavorably impacted by $4.6 million of nondeductible outside service expenses incurred to effect the separation from Ralcorp, which resulted in incremental income tax expense of approximately $1.8 million. The prior-year annual effective tax rate was significantly impacted by the nondeductible goodwill impairment expense incurred during the fourth quarter of fiscal 2011. Management anticipates that the effective incomes tax rate will return to its historical range of 32% to 35% in fiscal 2013.

For the full year, adjusted net earnings were $52.7 million, or $1.53 per diluted share. Please note the non-cash stock-based compensation is $2.3 million for the fourth quarter and $4.5 million for the full year, pre-tax. We add back non-cash stock-based compensation for our calculation of adjusted EBITDA, but not to our calculation of adjusted net earnings.

On September 28, 2012, Post repurchased from cash on hand 1.75 million shares of its common stock, or approximately 5% of our shares outstanding, at $30.50 per share, for a total use of cash of approximately $53.4 million. Recall that in connection with the spend, Ralcorp had retained nearly 20% of Post's common shares. These shares were put to the market in a debt-for-equity exchange in which we had the opportunity to participate. While we did not anticipate engaging in any stock repurchase at the time of the separation, we decided to purchase a sizable block of shares in such an efficient manner and resulting attractive use of cash.

I would like to comment on one event subsequent to year end. On October 25, Post issued an additional $250 million 7.375% senior notes due 2022, a tack on to our original high-yield issuance. They were issued at 106% for a yield of approximately 6.3%. The decision to pursue this additional offering was not driven by a specific use of proceeds; rather, it was a result of our assessment that the financing market was opportunistically attractive. We recognize the additional interest expense will dilute earnings until we identify an appropriate use for the proceeds. For the time being, we have chosen to decouple our financing decisions from our investment decision. Our inherent assumption is that capital obtained in this low-cost environment can be effectively deployed, even inclusive of the carrying costs incurred prior to investing in an operating asset.

Looking forward, Post management anticipates that fiscal 2013 adjusted EBITDA will be between $210 million and $225 million, after considering the estimated year-over-year unfavorable commodity cost effect of an increased $10 million to $15 million. Post management further expects that capital expenditures will be in the range of $30 million to $35 million, inclusive of between $11 million and $13 million of capital costs associated with establishing stand-alone information systems separate from Ralcorp. The IT conversion and the balance of the TSAs are on track to meet their exit dates.

With that, I will thank you all for listening, and we look forward to providing more updates next quarter.

This concludes today's call. You may now disconnect.