Post Holdings Inc (POST) 2013 Q2 法說會逐字稿

Welcome to Post Holdings' second quarter two013 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 8.00 PM Eastern. The download number for the replay is 800-585-8367 and enter PIN number 5008-7042.

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, Post's Director of Investor Relations for introductions. You may begin.

Thank you and good afternoon, everyone. Welcome to Post Holdings conference call to discuss results for the second fiscal quarter ended March 31, 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 for first quarter -- second quarter and discuss fiscal 2013 guidance from the Hearthside acquisition. 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'd 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 and 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.

Evaluating Post's 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 measure, see our press release posted on our website.

With that, I'll now turn the call over to Terry to review our business.

Thank you, Pia. Good afternoon and thank you for joining us today on our earnings call. We'll review the status of our business, both for the second quarter ended March 31, 2013, and for the first six months of our fiscal year 2013.

As stated, we've put in place strategies to effect the turnaround in Post's multi-year negative share and revenue performance. In so doing, we are laying the foundation for reliability and operating cash flow and growth, both of which are central to forward-thinking optionality for our Company. The outcomes of several of these strategies are beginning to materialize.

Second quarter net sales were $248.2 million, down 0.9% versus the same period last year. The shipment performance was against a challenged ready-to-eat cereal category as measured by Nielsen that was down in dollars 2.4% for the same period. For the first six months, net sales grew 3.3%, reaching $485.1 million during the October through March period. This was against the category backdrop that declined 1.6% during the same six-month period.

It's important to view our sales narrative over the first six months as strong new item shipments at the end of the first quarter led to higher retailer inventories which slowed shipments early in the second quarter. This inventory was partially sold through to consumption during the second quarter as new item marketing and merchandising tactics unfolded in the back half of quarter two, following the achievement of retail distribution goals. Post's dollar market share, as measured by Nielsen, were 10.5% for the 13 weeks ended March 31, 2013, down 0.1% versus the same period a year ago. Compared with first quarter, Post's dollars share grew 0.1 of a point driven by new items and increased in-store promotional activity.

Encouragingly, Post's share improved throughout quarter two as marketing and sales efforts continued to increase, leading to Post's highest four-week share in over a year at 10.7% and the highest package share in two years at 11% for the period ended March 30, 2013. According to Nielsen Data, Grape Nuts and Great Grains increased dollar volume during the second quarter. Most notably, Great Grains increased 8.2% over the same quarter last year while Grape Nuts volume increased 2.4%.

HBO and Pebbles declined 7% and 7.1%, respectively. The increases in Grape Nuts and Great Grains were driven by new item distribution and new marketing programs. HBO and Pebbles were challenged with increased competitive promotional activity and distribution losses on weak line extensions, HBO flavors, Pebbles Boulders and Pebbles Marshmallows.

Similar to other Post brands, HBO shipments increased improved in the latter half of quarter two as high new item shipments began selling through to consumption and as a new advertising campaign kicked in, beginning in mid-February. We're particularly pleased with our HBO Hispanic efforts that have contributed to the brand indexing stronger than any other brand among this growing demographic segment.

Great Grains accelerated growth throughout quarter two behind new distribution achievement on Great Grains protein blends and new advertising as the Great Grains' consumer responds well to advertising. Both factors helped contribute to Great Grains becoming one of the fastest-growing better for you positioned cereal brands. Increased promotional support, new distribution on Grape Nuts Fit, and the first advertising on Grape Nuts in 10 years helped propel growth on the Grape Nuts brand for the quarter, helping Grape Nuts reach a full-year share high.

Attune Foods, our organic, non-GMO cereal acquisition that we closed at 2012 year-end, while very small, achieved plan in quarter two. Importantly, the business is gaining distribution and experiencing early success on several new items while also gaining increased non-paid website activity. Net, we're beginning to see promise behind the execution of our strategies of strengthening the breadth of our portfolio's consumer appeal. And the acceleration of our brand innovation and renovation efforts, while mindful that we need to achieve sustainable growth for HBO and Pebbles.

HBO Greek, which incorporates authentic Greek yogurt in and on the granola clusters, combined with Multi-Grain Flakes, is off to a good start, capturing consumption dollars totaling approximately $7.2 million for quarter two. We are adding to the HBO Greek line-up in June with the addition of an extremely tasty Mixed Berry Greek line extension. Additionally in June, HBO is introducing a line of Three Granolas, replacing the Just Bunches line extension, seeking to improve HBO's performance in this faster-growing subsegment of the cereal category.

We've stated that we're actively executing against our strategy to better address the economically stressed consumers with quality Post cereal alternatives. The ongoing Post Good Morning's test has provided learnings with regard to product, size, mix and marketing. We'll be deploying some of this learning into new items for introduction later this calendar year. Our previously announced selective private label program is in its infancy but demonstrating progress in terms of account presentations and active account considerations. However, shipments were negligible for the quarter.

Our product supply strategy is to optimize the product supply network and advantage scale. During the second quarter, we took action against this strategy. It's clear that Post had excess capacity resulting from a decade-long decline in unit volume that accelerated with the 2008 to 2009 recession that was resulting in an inefficient utilization of our product supply infrastructure that, realistically, only plant rationalization would solve.

As previously announced, we have chosen to close our Modesto, California manufacturing facility. This action will unfold in two phases and when completed, will significantly improve our asset utilization. Phase I will be completed by November 2013 and Phase II will be completed by September 2014.

We anticipate a savings of approximately $14 million annually upon completion of both phases with about 20% of the savings occurring in fiscal 2014 and the full $14 million realized in fiscal year 2015. This action is being taken to begin to optimize our network and take advantage of what scale we do have. Obviously, the savings will enhance the reliability of our operating cash flow that is central to our go-forward options for growth, be that organic or through acquisitions.

Finally, strategically, Post has identified proactive acquisition as a key strategy and we've been building cash to activate this strategy when appropriate. We made a very small acquisition of Attune Foods in December 2012. This acquisition provided Post a branded platform of non-GMO and organic cereals and snacks. The just announced acquisition of the organic and natural cereal granola and snacks business of Hearthside Food Solutions greatly enhances that platform. This business has a 40-year legacy and a leadership position in the all-natural and organic cereal and granola segment.

They're a provider of cereals, granolas and snacks to a diverse customer base in the natural, specialty and conventional channels, consisting of proprietary brands and significant private label brands serving the portfolio of preeminent, specialty and conventional retailers. The Attune brands, Erewhon and Uncle Sam's, together with the Golden Temple brand, Peace Cereal brand, Sweet Home Farm granola brand, and Willamette Valley brand snacks, affords Post an improved footprint and the opportunity to participate in the higher-growth, organic, all-natural, non-GMO verified cereal and adjacent categories.

Additionally, Management will continue to aggressively acquire new private label customers, further solidifying their vendor leadership position in the category while potentially adding the ability to represent the Post RTE private label capabilities to their arsenol and client list. We will be combining this business with the Attune brands, under the Attune Foods' operating banner. It's anticipated that the expanded Attune Foods business will add approximately $4 million to $5 million, and $17 million to $19 million, respectively, to EBITDA in fiscal years 2013 and 2014. We fully intend to operate this specialty business independent from our Post RTE cereal business located in New Jersey, striving for focus, growth and effectiveness.

I'll now turn to Rob Vitale, our CFO, to discuss our financial results and guidance.

Thanks, Terry. As Terry mentioned, Post net sales decreased slightly for the quarter, dipping 0.9% from the prior year. This decline resulted from a 4% decline in average net selling prices, partially offset by a 3% higher volumes. Drivers of the net pricing decline were higher trade spending, which contributed about 60% of the decline and products mix representing the balance. Trade spending for the quarter included higher signing fees for the new product introductions.

For the six months ended March 31, 2013, net sales increased $15.3 million, or 3.3% over the prior year, driven by 5% higher volumes and a slight decrease in average net selling prices. Fiscal 2013 volume improvements have been driven by our growth in Great Grains, Grape Nuts and Good Morening brands and growth in revenue from co-manufacturing agreements. Honey Bunches of Oats had a second quarter decline of 9% compared from the prior year, largely resulting from the timing of shipments that were pulled forward into Q1. On a year-to-date basis, Honey Bunches of Oats' volumes were down 3%.

Q2 gross margin of 41.3% is down approximately 300 basis points from the prior year. Virtually the entire decline in margin is the result of the lower overall net pricing. As expected, raw material commodity costs for grains and fruits were up year-over-year. However, those cost increases were mostly offset by lower sugar costs and favorable fixed costs absorption. On a year-to-date basis, gross margin declined 160 basis points to 42.9% compared to the prior year.

In order of magnitude, the lower margins are a function of mix-driven declines in net selling prices, higher trade spending and higher cost of goods sold. Consistent with the quarter commentary, the higher commodity costs were in line with our expectations and favorable cost absorption on higher volumes partially mitigated the impact of the increase in raw material costs. Excluding costs related to the separation from Ralcorp and the development of stand-alone systems, SG&A as a percentage of sales decreased slightly from 27.5% in the second quarter of fiscal 2012 to 27.3% this quarter. This decrease was primarily driven by reduced advertising and promotion costs, some of which we shifted to cover increased signing fees. The reduced A&P was partially offset by incremental holding Company costs.

For the six months ended March 31, 2013, SG&A as a percentage of net sales increased from 27.6% last year to 28.2%. The increase is due to holding Company and related corporate costs required to support the business after the spin-off, largely offset by lower advertising and promotion expenses in the current year. The details of the separation and development costs are included in today's press release.

Adjusted EBITDA for the quarter was $51 million, a decrease of 5.7% from $54.1 million a year ago. Adjusted EBITDA for the six months ended March 31, 2013, was $103.5 million, a 3.8% increase from the same period a year ago.

Interest expense was $21.6 million for the quarter compared to $15.1 million for the prior-year quarter. Interest expense for the current quarter includes the write-off of approximately $1.6 million, or $0.03 per diluted share, of deferred financing costs associated with the Company's term loan, the balance of which was paid in full on February 28, 2013.

Income tax expense was $2.2 million for the second quarter and effective income tax rate of 30.1%. This compares to an effective income tax rate of 45% for the same period a year ago. For the six months ended March 31, 2013, income tax expense was $5.7 million and effective income tax rate of 31% compared to an expense of $14.7 million and an effective income tax rate of 38.7% for the six months ended March 31, 2012. Last year's effective income tax rates were high, primarily as the result of certain non-deductible transaction costs, incurred in connection with the spend.

Additionally, the effective tax rate for the second fiscal quarter of 2013 benefited from a fiscal year 2012 research and development credit that was retroactively reinstated by legislation enacted in January of 2013. Excluding this retroactive credit, the effective tax rate for the second quarter would have been approximately 32.9%. Management anticipates that the effective income tax rate will be in the range of 32% to 34% for the remainder of fiscal 2013.

On February 26, 2013, Post issued approximately 2.4 million shares of 3.75% cumulative perpetual convertible preferred stock. Post received net proceeds of approximately $234.1 million from the offering. We used $168.4 million of net proceeds to pay the remaining principal balance on the Company's term loan. We intend to use the remaining proceeds for general corporate purposes which could include, among other things, financing acquisitions. For both the three and six months ended March 31, 2013, the accumulated preferred stock dividend was $800,000, and represents a reduction of net earnings available to common shareholders.

Adjusted net earnings available to common stockholders and adjusted diluted earnings per common share for the quarter were $6.3 million and $0.19, respectively. Adjusted net earnings available to common stockholders and adjusted diluted earnings per common share for the six months ended March 31, 2013 were $16.3 million and $0.50, respectively. The reconciliation between adjusted and GAAP calculations are included in today's press release.

Working capital increased by $24.4 million and $41 million during the quarter and on a year-to-date basis, primarily from increases in receivables and inventory. The increase in receivables is a result of the timing of certain shipments and payments during the quarter and a non-trade receivable from Ralcorp. There's no structural change to the required investment in AR.

Inventory has remained high throughout the year for two central reasons. First, there have been a series of external events that necessitated Post's carrying safety stock. As we commented on previously, there was a build-up for a possible but ultimately various work stoppage in the first quarter. We also had a slight inventory build in the second quarter related to a conversion in Ralcorp's IT platform as Post continues to receive some IT services from Ralcorp pursuant to a transition services agreement.

The final foreseeable external event is Post's own pending IT conversion. This conversion, which will take us off the remaining elements of the ITPSA, is scheduled for mid-summer. Again, we expect a smooth transition but prudence suggests we carry safety stock.

Second, a byproduct of our aggressive innovation/renovation activities is a significant amount of new SKUs, requiring inventory build-up. We believe we have made the needed investment in additional inventories to reflect the greater complexity of our new portfolio. Roughly half of the inventory increase is attributable to the external events while half is a new level of investment that has been made.

With respect to strategic activities, you all know that M&A remains central to Post's effort at building long-term value. Last week, we announced the acquisition of the private label and branded cereal, granola and snack business of Hearthside Food Solutions. This transaction is expected to close by June 2013, subject to the receipt of HSR approval and other closing conditions. As Terry mentioned, this acquisition expands our footprint in the more rapidly growing areas of the overall food segment, namely, the natural and organic channels.

The purchase price is $158 billion, which we plan to pay from cash on hand. As a result, there are no incremental financing costs to support this purchase. Upon realization of certain synergies resulting from its combination with Attune Foods, we expect this acquisition to generate annualized EBITDA of $17 million to $19 million.

The acquisition is structured tax efficiently as an asset purchase. As a result, we will be able to record for tax purposes as stepped-up value of all acquired assets, including intangibles and take a corresponding tax deduction for the amortization of the step up. The amortization period is dependent on the ultimate allocation of purchase price, but management estimates the present value of the tax benefit of the asset step-up to be approximately $25 million to $30 million. This acquisition is illustrative of our approach to financing and investing.

Our goal remains to generate long-term cash returns in excess of our cost of capital. In pursuing this goal, we may opportunistically raise capital and temporarily accept carrying costs. We've may also pursue transactions that tend to favor cash and tax efficiency over maximizing GAAP EPS.

To be clear, these are guidelines not absolutes. We ultimately manage to enable the Company to adapt to its competitive environment and the opportunities before it. And we believe this transaction does both and contributes to achieving that goal. Also we retain the financial capacity to pursue additional M&A.

Lastly, let me comment on our EBITDA estimates for the balance of 2013. With respect to our outlook for fiscal 2013 and giving effect to the partial-year impact of the acquisitions, we are narrowing the range of guidance to $216 million to $225 million of adjusted EBITDA.

As always, thank you for listening to our call today and we look forward to providing more updates next quarter.

Thank you. Again, today's call was recorded and will be available for replay beginning at 8.00 PM Eastern time. The download number for the replay is 800-585-8367 and enter PIN number 5008-7042.

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