Post Holdings Inc (POST) 2012 Q3 法說會逐字稿

Welcome to Post Holdings' third quarter earnings conference call and webcast. Hosting the call today from Post is Terry Block, President and Chief Executive Operating Officer and Rob Vitale, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 12.00. The dial in number is 800-585-8367, and PIN number 17918478. 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 directions. You may begin.

Thank you. Good morning, everyone. Welcome to Post Holdings' conference call to discuss results for the third fiscal quarter-ended June 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 through the first three quarters of our fiscal year. 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 obligation to update or revise the statements.

All forward-looking statements are expressly qualified in their entirety by this cautionary statement. While evaluating Posts' 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 morning. Thank you for joining us today on our earnings call to review our fiscal 2012 third quarter.

We continue to make progress at Post, as our sales trends become less negative and we close in on the gaps between our year-ago comparisons. We are gaining confidence that our efforts at stabilizing share and revenues are setting a foundation for our future growth based on product, brand building and customer management competencies.

The strategic direction put in place over the past six months is beginning to contribute to improved business dynamics and the shared cultural renewal across the organization. This includes optimally operating the business for the long-term, while addressing short-term disruptions when appropriate. We're avoiding chasing a number that would hamper execution of our strategies. As we have stated, our strategy is to rebuild the strength of our brands through ongoing and impactful marketing, in order to first stabilize and then grow Post revenue and market share.

What we have done recently is really examined the intersection of a very sophisticate and insightful consumer segmentation and deep study of capacity utilization. Looking at both segmentation and utilization together, has shown us a map of expansive thinking around brands, forums and price points. Specifically, we are executing an approach of meets, beats and bests.

Let me explain further, meets, beats and bests marketing is being implemented to improve the engagement Post has with our retail customers and to expand the breadth of the portfolio's appeal. For meets, we will better address the economically stressed consumer who now comprises over 25% of the households in the United States. We have introduced into a test market, with limited exposure, a quality line of everyday value priced cereals under the Good Morenings banner. Product just began shipping in June and it's much too early to have a read on consumer acceptance; however, plans are to expand Good Morenings nationally in January 2013.

So we're launching products to meet consumer needs at attractive price points. We're also improving our core brands so they beat consumer expectations. Let's dive deeper into our business and how our brands will beat consumer expectations.

We absolutely recognize that to stabilize and grow the business, the negative trends that both Honey Bunches of Oats and Pebbles are experiencing must be remedied. Fiscal year-to-date, these businesses are down 0.4 of a share point. First and foremost with HBO, as I said just two months ago, it's too early to judge results of our HBO efforts, especially in context of the heavy promotional support that occurred last year in advance of a June 2011 price advance.

Packaging changes, calling out the product enhancement, now with more granola bunches which are the real pleasers in the product and television support for the increase in HBO granola have been visible to the consumers only for the past three months. If you dig deeper into HBO, you'll see that retail consumption as measured by Nielsen for core flavors, honey roasted and almond which represent 74% of the business is flat fiscal year-to-date. Furthermore, the HBO innovation from the past two years of fruit blends and raisin are each contributing positively towards the brand.

Our HBO team is working to enhance what's growing and replace what's not with more productive items. We've identified plans to strengthen the consumer positioning of HBO and have product improvements and line extensions to phase in over the next 24 months as we seek to reignite growth of HBO. Starting with the on-trend flavor addition of Mango Coconut in January 2013.

Pebbles has been disappointing year-to-date. To address this downturn, we have revamped programming the last four months of the year and are introducing a more chocolatey flavor to Cocoa Pebbles. For those consumers who enjoy a chocolate flavored cereal, this product is much improved and remains gluten free. Our testing indicates that we are beating consumer expectations.

The performance of Grape-Nuts is shaping up to be our turnaround story of the year. Fiscal year-to-date, as measured by Nielsen, the brand is up 2.7% with strong base business growth. This has been accomplished with a very modest increase in consumer support.

Going forward, we are managing the brand to capitalize on these positive trends with a stronger product positioning, an improved mainline product and the launch of a new product in January 2013 called Grape-Nuts Fit. Grape-Nuts Fit, which is currently being presented to our customers, combines the heritage of traditional Grape-Nuts with a texture and flavor that needs to be tasted to be appreciated. Getting this product into the hands of the target audience will be Job-One because the product speaks for itself after use.

While we lost some distribution on the weaker line extensions of Shredded Wheat, Shredded Wheat's mainline business is stabilizing, growing 1.5% in retail consumption fiscal year-to-date, again with a modest increase in consumer support. The results speak to the latent strength in this brand name and the meaningfulness of the product benefits, communicating this more strongly to consumers will become Job-One for Shredded Wheat.

Post Raisin Bran is at a crossroads. It absolutely needs to provide a better value to our consumers to separate it from its competitors and do this in such a way that it pleases the consumers, who after all purchase and consume Raisin Bran because they simply like raisins added to their cereal. Beginning this fall, we are meaningfully increasing the number of raisins in Post Raisin Bran and calling this out graphically on package and through consumer promotion.

For our best product offering, Great Grains is a prime example. It has a less processed positioning and continues to outperform the category, growing 9.8% fiscal year-to-date as measured by Nielsen. The less processed positioning is meaningful and resonates with consumers, especially when supported with great advertising and a product lineup that delivers against the consumers' expectations. Adding to the product lineup, are two line extensions that will begin shipping nationally in January, Cinnamon Hazel Nut and Honey Oats and Seeds. Great Grains is on trend for consumers seeking for healthy cereal alternatives.

A core strategy of the turnaround is to improve the output and effectiveness of the Post R&D efforts across our meets, beats and bests approach. The preceding comments provide a glimpse into the execution against this strategy, keeping in mind that we've only been at it for about six months.

We realize that brand building starts with product. We will continue to increase the intensity placed behind innovation and renovation, that will enhance the market position of our iconic brands and expand where the consumer judges our brands can meaningfully transfer positioning and brand promise. Additionally, we are pursuing acquisition opportunities that will strengthen our current offerings or enable us to expand into complementary packaged goods businesses.

Our US share, based on revenue and an expanded tracking universe that now includes Walmart, clubs and dollar channels, was 10.3% for the quarter and 10.5% fiscal year-to-date. As of June 30, 2012, Nielsen reported category volume and sales data changed from including only food, drug and mass, to an expanded all outlets combined which now includes Walmart, club stores and certain other retailers. We had previously stated market share goals of stabilizing in the 11% to 11.5% range which translates to 10.5% to 11% in the new Nielsen reporting universe, since we are under-represented in the new reported channels. Finally, as we are all concerned with the weather conditions and their effect on our commodity pricing, we are taking the steps necessary to factor these issues in our 2013 planning.

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

Thanks, Terry. Good morning, everyone.

Revenue for the RTE category, as a whole, was flat for the quarter-ended June 30, 2012 compared to the same period a year ago. Category pound volume declined almost 4%, but higher everyday and promoted prices offset the volume decline. For Post, third quarter net sales were $241.9 million down 2.3% from the previous year quarter, comprised of a 5.5% decrease in overall volume, partially offset by higher average selling prices.

On a volume basis for the quarter, Honey Bunches of Oats and Pebbles, our largest brands, were down 6.6% and 15.3% respectively versus the same time period a year ago. On the other hand, Great Grains and Grape-Nuts increased 1.5% and 5.9% respectively.

Post has incurred increased manufacturing costs throughout fiscal 2012. The increases are attributable to higher ingredient costs and under absorption of fixed overhead. While as a result, gross profit margin has been under pressure all year, it shows sequential improvement in the third quarter.

Gross profit margin was 45.4%, down from 46% in 2011, but up from 44.3% in the second quarter of 2012. The sequential increase in gross margin results from improved effectiveness of trade spending yielding higher average net selling prices.

SG&A as a percentage of net sales increased from 25.1% in the prior year quarter to 26.9% in the current year quarter. The key drivers of the increase were incremental corporate costs and $2.4 million in costs incurred related to the separation from Ralcorp.

During the quarter, Advertising & Consumer costs decreased from $31.2 million to $28.1 million; however, the reduction is a timing shift from Q3 to Q4. Post remains committed to supporting its brand equities through an ongoing and robust A&C effort.

Adjusted EBITDA for the quarter was $61.4 million, a 5.1% decrease from the prior year, but a sequential increase of approximately 13.5% from the second quarter of 2012. A reconciliation of adjusted EBITDA to GAAP net earnings is included in our press release issued last Thursday. For the nine-months ended June 30, 2012, adjusted EBITDA was $161.1 million versus $192.2 million in the prior year. As a percentage of net sales, adjusted EBITDA was 25.4% for the third quarter and 22.6% year-to-date.

Adjusted EBITDA margin improved sequentially from 21.2% in the second quarter, driven by the higher average net pricing and the delay of A&C to Q4. We expect to see an EBITDA margin in Q4 below Q3 though above the year-to-date average.

Income tax expense for the third quarter of fiscal 2012 was $9.6 million which represents an effective income tax rate of approximately 38% for the quarter, up from approximately 33% in Q3 2011. As expected, our previous quarter's higher tax rate of 45% is normalizing. We now expect an effective tax rate in Q4 of 37.5% and then an effective tax rate between 32% and 35% for fiscal 2013.

On an adjusted basis, net earnings for the third quarter 2012 were $17.6 million or $0.51 per diluted share. We define adjusted net earnings to exclude certain non-cash and one-time costs. A reconciliation of adjusted net earnings to GAAP net earnings is also included in last week's press release.

Year-to-date capital expenditures were $22.3 million. Full year capital spending is still expect to be in the range of $24 million to $26 million, exclusive of $8 million spent to establish Post as a stand-alone Company. Additionally, on an annualized basis, debt interest expense should be approximately $60 million to $61 million.

Post Management continues to support its guidance of fiscal 2012 adjusted EBITDA of $200 million to $210 million and $210 million to $220 million adjusted EBITDA for the 12-months following the separation from Ralcorp. Looking forward to 2013, we expect to see meaningful ingredient cost inflation. As you all know, the crop outlook remains volatile. Post's ability to maintain margins via cost reduction and price movements will, in large part, depend on what happens with crop prices from now through mid fiscal 2013.

We continually attempt to identify opportunities to mitigate increased costs. While early in the planning cycle, fiscal 2013 is shaping up to be another challenging year for the category with an economically stressed consumer and potential food inflation posing a headwind to volume growth.

I will close with an update on the restatement of our financial statements for the year-ended September 30, 2011 and the fiscal quarter-ended December 31, 2011. Ralcorp has postponed the filing of its quarterly report on Form 10-Q for the second quarter-ended March 31, 2012 and the third quarter-ended June 30, 2012 in order to conclude both the internal and external in-depth reviews associated with its previously announced financial restatements. We are still not aware of any issues from Ralcorp's review which would affect Post beyond the correction of the non-cash goodwill impairment charge previously reported. However, until Ralcorp completes its restatement we are not in a position to complete our restatement filings.

Post Management expects to complete its filings as soon as practicable, after Ralcorp completes its filings. Ralcorp has announced it expects to complete the restatements in the near future, but has not provided a specific date.

Thank you for your time this morning.

Thank you everyone for listening to our call. We look forward to more updates next quarter.

Thank you. This concludes today's conference call. You may now disconnect.