Post Holdings Inc (POST) 2015 Q4 法說會逐字稿

Welcome to Post Holdings fourth-quarter and FY15 earnings conference call and webcast. Hosting the call today from Post are Rob Vitale, President and Chief Executive Officer, and Jeff Zadoks, Chief Financial Officer. Today's call is being recorded and will be available for replay beginning at 12:00 PM Eastern time. The dial in number is 800-585-8367 and the pass code is 62412257.

(Operator Instructions)

It is now my pleasure to turn the floor over to Brad Harper, Investor Relations of 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 fourth quarter and fiscal year. With me today are Rob Vitale, our President and CEO, and Jeff Zadoks, our CFO. Rob and Jeff will begin the call with prepared remarks and afterwards will be available for a brief question-and-answer session.

The press release that supports these remarks is posted on our website at www.postholdings.com in the Investor Relations section and in the SEC filing section. In addition, the release is available in our SEC filings on the SEC's website. 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 posted on our website. With that, I will turn the call over to Rob.

Thanks, Brad, and thank you all for joining us. As you have seen from our press release, we finished 2015 with a strong fourth-quarter, and we are encouraged by our prospects for 2016. We expect 2016 to build upon the momentum we have gained and enable us to attractively grow adjusted EBITDA despite incremental investments in brand building and modestly higher net commodity costs.

As for the quarter, each business unit except Dymatize achieved organic growth in adjusted EBITDA. We've recorded sales and adjusted EBITDA of $1.3 billion and $193.1 million, respectively. Jeff will provide more color around the results. We enter 2016 having spent two years building a portfolio that provides a balance of diversification, organic growth, and M&A optionality.

Each of our business units, including ready-to-eat cereal, has the strategy to deliver organic growth, and each business unit has opportunities for more dramatic growth via M&A. Together, the business units complement each other in a manner that enables aggressive balance sheet management to fuel the growth and leverage the return potential.

Our cereal business is in the midst of the integration between legacy Post Foods and legacy MOM Brands. Combined, our share of the RTE cereal market is now 18% and 20.7% in dollars and volume, respectively. Thus far, we have met each milestone towards a successful integration. Our next key milestone is our conversion this spring to a single ERP system.

Operating from a single ERP system becomes the enabling aspect in identifying and executing synergies beyond our initial estimate of $50 million. We are highly confident in delivering the announced synergies by the end of FY17 or earlier.

The cereal category has continued to show improvements in its rate of decline. While we would certainly like to be discussing category growth, the first step in getting there is slower decline. We attribute this improvement to an overall increase in cereal advertising, a modestly improving consumer profile, and simply the lapping of weaker comparisons. While trade effectiveness has improved, it too is against weaker comparisons and remains historically inefficient. We are implementing a new trade tool towards the end of 2016 and we expect that greater analytical sophistication and the new scale of business will have a positive impact.

Michael Foods performed quite well. We continue to navigate the reverberations of avian influenza. That event echoes through our business practices around bio security, our relationships with customers, and our overall approach to risk management. It would be foolish to conclude this risk is contained; rather, we have a better understanding of it and have developed a thorough approach to mitigate the effects of any future outbreaks. I'm very proud of our team's response to this crisis and I believe we are in a better competitive position than we were prior to AI.

Within our Active Nutrition brands, Premier Protein continues to perform exceptionally well. PowerBar is on track with respect to its needed renovation. Our challenge remains Dymatize. Our plan to remedy Dymatize is as follows. One, we have ceased internal manufacturing. The ongoing issues with the facility ultimately led to a conclusion that manufacturing, at least in that facility, would never be a competitive advantage; in fact, it would remain a competitive disadvantage.

Two, exit Dymatize private label business and shrink the branded business to its core products, thus enabling better focus on what matters. Three products comprise approximately 76% of sales, but only 22% of the SKUs.

Three, contemporarize the packaging; it had become stale. And four, continue leading-edge product development around core products. We believe this simplification will result in Dymatize achieving a low-teens adjusted EBITDA margin, with growth opportunities in the specialty channel.

This year, our expectations are quite modest, as we incur costs, both direct and indirect related to the business model conversion. Our Private Brands business continues to perform nicely. We're in attractive categories and we would like to expand more deeply into these categories.

On a more macro basis, we occasionally get questions around our sensitivity to increases in interest rates. We have used derivative transactions to provide Post considerable insulation from such increases. With the benefit of hindsight, we were too early in establishing our hedges, but nevertheless we are well-protected. Jeff will provide more commentary around these tools.

From a strategic perspective, Post is well-positioned. Our capital raised in August and cash generation since then has resulted in us having cash in excess of $800 million. We have deleveraged much faster than anticipated. We do not lack for opportunities to deploy capital. Our opportunities include tactical purchases, like our Willamette Egg transaction, as well as more transformative opportunities. We will continue to pursue both while being discriminating in our selection among these opportunities.

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

Thanks, Rob. Good morning. Starting with Post Consumer Brands, fourth-quarter sales were $442.5 million. On a comparable basis, sales increased approximately 0.2%, driven by increased sales of branded [bags] and private label, plus additional four days at MOM brands. Growth was offset by distribution declines, primarily for Honey Bunches of Oats.

Volumes were up 2.5%, while net pricing decreased 2.2%, mostly from unfavorable mix. Post Consumer Brands adjusted EBITDA was nearly $100 million for the quarter. Adjusted EBITDA benefited from lower advertising and consumer spending and a 2.4% decline in cost of sales per pound in the Post Foods business. This was driven by favorable commodity price trends and from cost management initiatives.

Moving to the Michael Foods Group, net sales were $591.4 million for the fourth quarter, a decline of 0.7% compared to the prior year. Egg volumes were down 25%, in line with our estimate of AI supply losses; however, egg revenues were up 1.1% behind AI-related price increases and favorable product mix.

Potato volumes declined approximately 13%. This was primarily driven by lower food service sales, resulting from exiting low-margin business. We expect to shift capacity to higher-margin customers in FY16. Pasta volumes were up 13.5%, primarily related to increased volumes in the food ingredient channel. Cheese volumes declined 11.3%, resulting from discontinued low-margin product lines and declines in private label. Michael Foods group adjusted EBITDA was $90 million, and benefited from profitability per pound in eggs, potato, and pasta.

Turning to Active Nutrition, sales were $136.2 million. On a comparable basis, sales increased less than 1% as lower sales of Dymatize and PowerBar mostly offset the greater than 50% growth at Premier. Premier sales performance was driven by increased distribution and organic growth in the club channel. Dymatize sales declined significantly as a result of insufficient products supplies related to production issues.

Last, as expected, PowerBar sales declined year-over-year as volume sales growth in Europe was offset by the strong dollar and soft sales in North America. Active Nutrition adjusted EBITDA was negative $3.8 million and benefited from higher volumes and lower milk protein concentrate costs at Premier and from the exit of the unprofitable Musashi business. Adjusted EBITDA was negatively impacted by reduced sales, unfavorable production absorption, and the write-off of approximately $9.2 million of unsalable inventory at Dymatize.

Moving to Private Brands, fourth-quarter net sales were $140.3 million, up 1.8% over the prior year on a comparable basis. The sales increase was driven by higher private label granola sales and increased net pricing for dried fruit and nut products and tree nut butters. Private Brands adjusted EBITDA was $21.3 million.

Before moving to our guidance, I would like to comment on our interest rate swaps and our fourth-quarter capital markets transactions. We continue to believe in the prudence of financing long-term assets with long-term fixed-rate liabilities. To preserve this match, while also benefiting from current low floating rate environment, we have used interest rate swaps.

These swaps have volatile market values, and as we do not elect hedge accounting, changes in marketing value are reflected our GAAP results. As a result of declining long-term interest rates in our fiscal fourth quarter, we recognized a non-cash mark-to-market loss on interest rate swaps of $51 million in the quarter. For the fiscal year we recognized a loss of $92.5 million.

In August, we raised nearly $1.6 billion from debt and equity offerings. We issued $1.2 billion in aggregate principle amount of senior notes, which was used to repay a portion of our outstanding term loans, leaving the remaining principal balance of approximately $374 million. Giving effect to these activities, we expect quarterly net interest expense to be approximately $79 million in FY16.

We also issued 6.7 million shares of common stock at a price of $60 per share resulting in net proceeds of approximately $391 million. We now have approximately 62 million shares of common stock outstanding.

Now turning to our outlook. For FY16, we expect adjusted EBITDA to be between $780 million and $820 million with a modest favorability in the first half of the year. Regarding our capital expenditure outlook for 2016, we expect to invest between $145 million and $155 million, including $20 million related to growth activities and $20 million related to integration activities.

With that, I would like to turn the call back over to the operator for questions. Operator?

(Operator Instructions)

Bill Chappell, SunTrust.

Good morning. Thanks. Two questions. First on Dymatize, I'm not sure how much you will give me, but when you bought it had mid-$30 millions EBITDA. With the changes you are making to the manufacturing, can you get back to that number or is it permanently a lower number as you choose to outsource it going forward?

When we bought Dymatize, it had a historical $28 million and then anticipated going into the mid-$30 millions in the next year. We do not expect to get back to $28 million anytime soon as we migrate to this model. We expect it to be in the low-teens off a base of closer $120 million to $150 million, positioned for growth, but certainly it will be a while before we get back to the acquisition case.

Okay. And you mentioned that you deleveraged faster than you expected. Can you help us understand what happened versus your expectations that helped -- in terms of the cash flow coming in and the leverage ratio where we are?

The increase in EBITDA certainly contributed to it. So as a multiple, that had a significant effect on the ratio deleveraging, but we also generated a considerable amount of free cash flow in part because of working capital monetization.

Okay. Working capital -- can you tell us what source it was for the full year?

It was approximately $100 million source for the year.

Great. Thanks so much.

Tim Ramey, Pivotal Research Group.

Good morning. Thanks a lot. If I missed it I'm sorry, but did you say what cash taxes were in the fourth quarter?

We didn't say what cash taxes were in the fourth quarter, but for the year, it's in the same neighborhood we've commented before of about $90 million. Then going forward for 2016, at the midpoint of our range, we'd estimated it at about $105 million and then any increment or decrement from that midpoint you'd model at about 35%.

Great. It is difficult as you might imagine to think about Active Nutrition with Premier growing so rapidly and Dymatize retrenching. Can you say anything about the sequencing of how that flows through in terms of just the top line for 2016?

We would expect the Premier growth rate to continue through 2016 and that the Dymatize sales will be negative on a quarter-to-quarter comp because of the shrink out of the Private Brands and the elimination of many of the non-core SKUs. Through 2016, it will be a negative comp.

Okay. But bottom line, any way to net those together to give us some sense on the model?

Low single-digits growth.

Okay. And then just also sequencing on the Consumer Brands side, typically the first fiscal quarter for the calendar is your peak sales period. I assume that continues and maybe even accelerates a bit with MOM Brands in the mix?

That's correct on the Consumer Brands side.

Okay. Terrific. That's it for me. Thanks.

John Baumgartner, Wells Fargo.

Thank you. Good morning. Rob, I would like to ask, in terms of the guidance for FY16, how much of EBITDA benefit are you assuming from MOM Brand synergies coming through?

We are not going to respond to the guidance on that granular a level. What we have articulated is that we have meaningful synergies in the year. We have $50 million over two years, we have some incremental costs around brand building, and some higher net commodity costs from sugar and nuts, but we are not going to break down the numbers into that degree of specificity, because of all the various ebbs and flows that occur throughout a year.

Okay. Then I heard some upside to that $50 million target, as well. Is that correct?

What we commented on is that with the conversion to a single ERP, we are thus in a better position to start expanding that target into areas around logistics. Namely some joint shipping, joint warehousing, which we expect to be a promising source of synergies. We have been, as I think we've made clear, cautious in our synergy estimate thus far and we expect it to expand.

And the incremental synergies, would you [spread] out the fall in the FY16, FY17 timeframe as well as from 2018, 2019 type of horizon?

We certainly wouldn't expect much to occur in the FY16 P&L. The actions would be taken toward the end of FY16 and occur in the 2017 P&L and beyond.

Okay. An just a follow-up on, in terms of Active Nutrition. Looking at Premier, the sales velocity there, maybe its [argumently] the best in the category. Why not move that brand more aggressively, more broadly in terms of distribution across FDM, as opposed to just really in the Club channel?

We agree and we have plans to do just that in tandem with our PowerBar expansion.

Okay. Great. Thank you.

Cornell Burnette, Citi.

Good morning, guys. This is Cornell with just a few questions. First, I wanted t know, when you look back at Michael Foods and where your internal expectations were for that business at the beginning of the year, is it fair to say that, despite AI, that Michaels Foods, it basically exceeded maybe where you are at the beginning of the year in terms of EBITDA?

Modestly. Yes. If you go back to our acquisition case, it almost lands exactly on our acquisition case for 2015.

Can you talk what were the drivers of this? I felt like in the quarter, it looks like your egg prices were up about 26%, which is really strong. Is it just the pricing that you were able to get, which were really able to mitigate all of the impacts of AI?

That's exactly the answer. If you looked at the plan for 2015, while the end result was exactly in line with our acquisition case, the number of levers that resulted in that outcome were substantially different than we expected in that volumes shrunk dramatically because of AI and price increased dramatically.

And when we think about modeling the business going forward next year, is it the thought that at least for most of the year, you are still looking at steep volume declines related to the loss of flock, but very strong pricing maybe perhaps until we get in the back half of the calendar year and egg supply starts to replenish. Is that the way that we should think about this?

That's correct. We will continue to be in a unusual post-AI scenario through part of the year. Jeff, do you want to comment on repopulation?

It's still consistent with what we've commented before. We expect the repopulation to take until the end of calendar 2016 to be completely back online and we would expect to get progressive repopulation between now and then. For our internal farms, we've started that repopulation. Our external suppliers are trailing a little bit behind us.

One more just on actually cereal. Now that you have had MOM for more than a quarter and you look at the manufacturing footprint of the legacy Post and MOM businesses, just was wondering how you're thinking about potential capacity rationalizations and are there any opportunities that you see there?

There are opportunities to optimize capacity and the difference between optimize and rationalize is, we tend to think of rationalize as shutting a plant and optimize as maximizing utility of a particular line. So when you look at the capacity utilization line by line, the opportunities really become more significant by optimizing production along common lines rather than by the elimination of bricks-and-mortar in any one facility. So yes, we will see cost reduction, but it may not be the result of plant closures, more the result of line optimization.

Okay. But it sounds like you haven't really done anything in this regard to date and so going forward, is that something that is embedded in that $50 million cost savings figure, or are these potential opportunities something that could be incremental to that?

It is embedded in the $50 million and we expect there to be opportunities to expand it, so a little bit of both

Okay. Sound great. Thanks a lot, guys.

Bryan Hunt, Wells Fargo.

Good morning and thank you for taking my questions. First, if I look at your Nielsen data and the cereal volume, it looks like it's tracking nicely higher than what you reported for the quarter. Can you talk about what's going on with inventories in the space, are you seeing the same difference in the data, as well as do you see any changes for planned promotions for calendar 2016

We certainly see the same data and there is obviously ebbs and flows with retail inventory that creates some disconnection between the Nielsen consumption and the shipments that will flow through the quarter and we have got that baked into our planning. With respect to trade promotions going forward, the likely scenario is that we will continue what we has been working around fewer deeper events.

Great. My next question is around the Michaels business, there's been increased announcement and it seems like it's gaining momentum around cage-free and the movement into that direction. I was wondering if you could describe the difference in cost and maybe what capital requirements may be needed to migrate production in that direction?

First of all, it's important to understand that Michael is the largest cage-free producer in the country, so we have a significant commitment to cage-free. The capital costs are about double. The cost of various other forms of housing. The ongoing costs vary with a number of different scenarios, but the capital costs are considerably higher and we look to make this migration to cage-free in tandem with our customers over time.

Right. Then my last question is, you made a comment about growth in all the businesses supplemented with acquisitions, which could be significant. It sounds a little different from maybe the comments you made regarding acquisitions in the last couple of conference calls. My interpretation is you are maybe looking at smaller acquisitions across all businesses instead of a single blockbuster acquisition. Is that a fair interpretation or maybe how would you describe how you are analyzing opportunities going forward?

I don't think that's an entirely fair interpretation. We have a decision tree that now includes a much more substantial business than it included two years ago. So where two years ago to really move the meter, we needed to make more of the blockbuster acquisition, now we have the luxury of having opportunities to build within the portfolio on a tactical basis.

It has a very high marginal return to that investment. That being said, we continue to look for transformational opportunities and would pursue them if the right one came along. We are not shying off of either.

And you are still limiting yourself to 6 times leverage including highly visible synergies?

Yes, we have actually suggested closer to 5.5.

All right. That's all my questions. Thanks for your time and happy Thanksgiving.

Bill Chappell, SunTrust.

Thanks. Just to follow-on the Private Brands business, anything you're seeing -- you talked about there was some positive pricing on the nut butter side, but I'm just trying to understand what you're seeing as we go into next year. Are you seeing prices come down, are the gaps improving and you are taking some share, just trying to get a better sense there?

It's a different story between peanut butter and the other nut butters. The cost environment is relatively flat in the peanut butter market and we are continuing to gain share in that segment as we have wins at retail. On a tree nut butter, mostly almonds, it's a very significant cost increases, mostly as a result of the drought in California, so we are taking price there and starting to see some elasticity as the prices get pretty high for almond butter.

So you are taking the pricing, but it's in line with the category?

Correct.

Okay. And then just last thing, on -- I know we keep going back to the egg business -- but are you seeing any change in demand as the overall pricing has gone that much higher? Are you forecasting volumes to decline from an organic basis as we move into next year?

We have seen some modest demand disruption in the ingredient business, where companies have the ability to take eggs out of their ingredients or out of their recipes. So we have seen very modest if any at retail or in food service, but some in ingredient. And then, I'm sorry Bill, what was the second part of your question?

I was just trying to understand if that was anything in your forecast going for the next year, if you're expecting--?

Yes. Certainly we factored in all available information into that forecast.

Got it. Happy Thanksgiving, as well

John Baumgartner, Wells Fargo.

Thanks for the follow-up. I just wanted to come back to Michael for a second. In terms of McDonald's expanding breakfast, the daypart, and some of the other moves across the food service industry favoring eggs, how do you see producers meeting this demand, and how do you see new business wins potentially accruing to Michael going forward?

We have always viewed Michael as an opportunity to deploy internal capital. We tend to talk about M&A as our main deployment of capital, but within Michael, we have internal growth opportunities that capital could be used to fund, as we put more flocks on the ground, both internally and externally.

So certainly there will be a need to increase supply, and I'm speaking separately from AI. AI self-evidently creates a need to populate. But beyond that, as we see additional demand and the migration to cage-free, there will be opportunities with attractive returns to invest in Michael internally.

Is a fair to say the growth investment in your CapEx guidance for this year, that flows substantially towards Michael?

It depends if you -- yes, unless you include -- there are some capital investments required to handle the integration between Post and MOM that we've characterized as growth.

Okay. Then as your egg supply normalizes through the end of calendar 2016, how likely is it that you can continue to tilt your business toward higher-margin customers with that incremental supply, or should we expect the incremental supply flows back towards lower margin food service customers. How do you think about customer mix going forward?

We seek to invest in the highest marginal returns, so we will invest capacity first in the highest marginal opportunity, so we would skew it to the more value-added products.

Great. So there's nothing contractually in terms of with the--?

No.

Okay. Great. Thank you.

(Operator Instructions)

Chris Growe, Stifel.

Hi. Good morning. I just had two quick ones and really follow-ons to earlier questions. I wanted to ask with, in relation to the egg business, how much are we seeing of the volume change, is elasticity versus maybe planned rationalization. I'm just trying to get a sense of what you can build back potentially going forward, and then are you prioritizing our sales and your volumes by margin or more by customer, as you look at the egg business?

The volume decline is almost exactly linear with the loss of supply. So the elasticity, with some very limited exceptions in ingredients, has been modest and we prioritize mostly by customer.

Okay. And then can I ask a question in relation to the Active Nutrition division? How do you foresee the rebuilding of profitability in that division as you move to a co-manufacturing model? Should we expected it to be pretty linear by quarter, or does it get better in the second half versus the first half? Just curious how that will play out throughout the year?

No it will be non-linear. It will increase out throughout the year.

Okay. Would there be operating losses early in the year?

We don't anticipate operating losses, but we don't anticipate meaningful income either and I'm speaking specifically with respect to Dymatize.

Okay. Got you. Thanks very much.

Tim Ramey, Pivotal Research Group.

Just a couple more on Michael. It's interesting to even talk about demand destruction, because it seems like there is an awful lot of pressure on incremental demand for breakfast all day. McDonald's is not your customer, but presumably that ripples through to other QSRs, and we haven't seen, other than the Willamette acquisition, we haven't seen a lot of new capital deployed there. Do you think of that as greenfield capital or are there other businesses like Willamette that are potential acquisition targets?

There is plenty of acquisition targets in the segment before going to a greenfield approach, but we're also not shying away from looking at greenfield opportunities.

Is it fair to say we are going to see one or the other this year?

I wouldn't want to take a position on anything that near in, but it's fair to say longer-term we will see one or both.

Okay. Thank you.

Kenneth Zaslow, BMO Capital Markets.

(Operator Instructions)

Hi, this is Vishal Patel in for Ken. I just had one quick question. You had mentioned that you were in a more advantaged position within the egg industry post-AI. Can you provide any update on if that includes any customer wins or if your share of the market has increased?

No, it has not increased because, frankly, everyone in the category is selling everything that they can make. So when I make that comment, it's more a subjective comment about the conduct and the navigation of the AI crisis, more than a quantitative statement on where we stand today.

Okay. Thanks. I appreciate it.

I would now like to turn the call back over to Rob Vitale for any additional or closing remarks.

Thank you again, everyone, for attending the call. We recognize that this morning has become busy for all of you. Thank you. We look forward to next quarter and have a very nice Thanksgiving.

Thank you. This does conclude today's Post Holdings fourth-quarter 2015 earnings call. You may now disconnect and have a wonderful day.