Post Holdings: Reports Q2 Fiscal 2019 Results

St. Louis / MO. (pfh) Post Holdings Inc., a consumer packaged goods holding company, reported results for the second fiscal quarter ended March 31, 2019. Highlights:

Net sales of USD 1.4 billion
Operating profit of USD 186.3 million; net earnings of USD 44.0 million and Adjusted Ebitda of USD 298.9 million
Reaffirmed fiscal year 2019 Adjusted Ebitda (non-GAAP) guidance range of USD 1.20-USD 1.24 billion

Basis of Presentation

Financial results reflect the separate capitalization of 8th Avenue Food + Provisions, Inc. («8th Avenue»), the holding company for Post’s historical private brands business, with Post’s retained interest in 8th Avenue’s common equity accounted for using equity method accounting, effective October 1, 2018. Additionally, financial results include results from Bob Evans Farms, Inc. («Bob Evans») as of its acquisition date of January 12, 2018.

Second Quarter Consolidated Operating Results

Net sales were USD 1,387.8 million, a decrease of 12.5 percent, or USD 198.3 million, compared to the prior year period. Pro forma net sales were flat when compared to the same period in fiscal year 2018. Gross profit was USD 451.3 million, or 32.5 percent of net sales, a decrease of USD 21.1 million compared to the prior year gross profit of USD 472.4 million, or 29.8 percent of net sales.

Selling, general and administrative (SG+A) expenses were USD 225.8 million, or 16.3 percent of net sales, a decrease of USD 38.8 million compared to the prior year SG+A expenses of USD 264.6 million, or 16.7 percent of net sales. SG+A expenses for the second quarter of 2018 included USD 20.8 million of transaction expenses, which primarily related to success fees paid in conjunction with the close of the acquisition of Bob Evans, and USD 13.2 million of integration expenses, both of which were treated as adjustments for non-GAAP measures.

Operating profit was USD 186.3 million, an increase of 15.9 percent, or USD 25.6 million, compared to the prior year period operating profit of USD 160.7 million, which included segment profit of USD 14.2 million attributable to the historical private brands business.

Net earnings were USD 44.0 million, a decrease of 51.9 percent, or USD 47.5 million, compared to the prior year period net earnings of USD 91.5 million. Net earnings included a USD 63.0 million loss in the second quarter of 2019 and a USD 50.5 million gain in the second quarter of 2018, both of which primarily related to non-cash mark-to-market adjustments on interest rate swaps, which are discussed later in this release and were treated as adjustments for non-GAAP measures. Net earnings available to common shareholders were USD 43.0 million, or USD 0.58 per diluted common share, compared to the prior year period net earnings available to common shareholders of USD 88.9 million, or USD 1.20 per diluted common share. Adjusted net earnings were USD 96.5 million, or USD 1.28 per diluted common share, compared to the prior year period Adjusted net earnings of USD 80.6 million, or USD 1.06 per diluted common share.

Adjusted Ebitda was USD 298.9 million, a decrease of 4.9 percent, or USD 15.4 million, compared to the prior year period Adjusted Ebitda of USD 314.3 million, which included USD 26.1 million attributable to the historical private brands business.

Six Month Consolidated Operating Results

Net sales were USD 2,799.1 million, a decrease of 7.3 percent, or USD 220.1 million, compared to the prior year period. Gross profit was USD 877.8 million, or 31.4 percent of net sales, a decrease of USD 43.1 million compared to the prior year gross profit of USD 920.9 million, or 30.5 percent of net sales.

SG+A expenses were USD 442.9 million, or 15.8 percent of net sales, a decrease of USD 67.7 million compared to the prior year SG+A expenses of USD 510.6 million, or 16.9 percent of net sales. SG+A expenses for the six months ended March 31, 2019 included USD 14.6 million of transaction costs primarily related to the separate capitalization of 8th Avenue, which were treated as an adjustment for non-GAAP measures. SG+A expenses for the six months ended March 31, 2018 included USD 23.8 million of transaction expenses, which primarily related to success fees paid in conjunction with the close of the acquisition of Bob Evans, USD 23.8 million of integration expenses and a provision for USD 11.0 million in legal settlements, all of which were treated as adjustments for non-GAAP measures.

Operating profit was USD 480.2 million, an increase of 49.3 percent, or USD 158.5 million, compared to the prior year period operating profit of USD 321.7 million, which included segment profit of USD 31.1 million attributable to the historical private brands business. Operating profit for the six months ended March 31, 2019 included a USD 127.3 million gain related to the separate capitalization of 8th Avenue, which was treated as an adjustment for non-GAAP measures.

Net earnings were USD 169.6 million, a decrease of 56.1 percent, or USD 216.8 million, compared to the prior year period net earnings of USD 386.4 million. Net earnings included a USD 114.7 million loss in the six months ended March 31, 2019 and a USD 53.2 million gain in the six months ended March 31, 2018, both of which primarily related to non-cash mark-to-market adjustments on interest rate swaps, which are discussed later in this release and were treated as adjustments for non-GAAP measures. Net earnings for the six months ended March 31, 2018 included a USD 265.3 million one-time income tax net benefit and a USD 37.6 million loss related to early extinguishment of debt, both of which are discussed later in this release and were treated as adjustments for non-GAAP measures. Net earnings available to common shareholders were USD 166.6 million, or USD 2.26 per diluted common share, compared to the prior year period net earnings available to common shareholders of USD 380.4 million, or USD 5.04 per diluted common share. Adjusted net earnings were USD 179.8 million, or USD 2.39 per diluted common share, compared to the prior year period Adjusted net earnings of USD 148.5 million, or USD 1.94 per diluted common share.

Adjusted Ebitda was USD 591.4 million, a decrease of 0.8 percent, or USD 4.5 million, compared to the prior year period Adjusted Ebitda of USD 595.9 million, which included USD 56.3 million attributable to the historical private brands business.

Post Consumer Brands

North American ready-to-eat («RTE») cereal.

Net sales were USD 459.1 million, a decrease of 0.7 percent, or USD 3.2 million, compared to the prior year period. Volumes declined 3.6 percent as growth in private label and certain licensed products was more than offset by declines in Honey Bunches of Oats, Malt-O-Meal bag cereal and Great Grains. Segment profit was USD 83.2 million, a decrease of 8.7 percent, or USD 7.9 million, compared to the prior year period. Segment Adjusted Ebitda was USD 113.1 million, a decrease of 8.6 percent, or USD 10.7 million, compared to the prior year period.

For the six months ended March 31, 2019, net sales were USD 914.4 million, an increase of 2.2 percent, or USD 20.1 million, compared to the prior year period. Segment profit was USD 167.2 million, an increase of 3.7 percent, or USD 5.9 million, compared to the prior year period. Segment Adjusted Ebitda was USD 226.7 million, a decrease of 0.8 percent, or USD 1.9 million, compared to the prior year period.

Weetabix

International (primarily United Kingdom) RTE cereal and muesli.

Net sales were USD 104.1 million, a decrease of 4.5 percent, or USD 4.9 million, compared to the prior year period, reflecting 8 percent improved average net pricing which was offset by a 5.8 percent volume decline and an unfavorable foreign exchange rate. Segment profit was USD 23.6 million, an increase of 50.3 percent, or USD 7.9 million, compared to the prior year period. Segment Adjusted Ebitda was USD 32.0 million, an increase of 13.5 percent, or USD 3.8 million, compared to the prior year period.

For the six months ended March 31, 2019, net sales were USD 205.0 million, a decrease of 1.8 percent, or USD 3.7 million, compared to the prior year period. Segment profit was USD 42.5 million, an increase of 30.8 percent, or USD 10.0 million, compared to the prior year period. Segment Adjusted Ebitda was USD 59.1 million, an increase of 9.9 percent, or USD 5.3 million, compared to the prior year period.

Foodservice

Primarily egg and potato products.

Net sales were USD 389.1 million, an increase of 2.3 percent, or USD 8.9 million, compared to the reported prior year period. Pro forma net sales increased 1.6 percent, or USD 6.0 million, over the same period in fiscal year 2018. Pro forma volumes increased 0.9 percent, driven by increases of 1.4 percent in egg volumes and 1.5 percent in pro forma potato volumes, which were partially offset by a decline in all other products. The references to pro forma net sales and volumes are defined later in this release under «Pro Forma Information.» Segment profit was USD 47.4 million, an increase of 10.5 percent, or USD 4.5 million, compared to the reported prior year period. Segment Adjusted Ebitda was USD 75.9 million, an increase of 10.5 percent, or USD 7.2 million, compared to the reported prior year period.

For the six months ended March 31, 2019, net sales were USD 797.2 million, an increase of 6.4 percent, or USD 48.1 million, compared to the reported prior year period. Segment profit was USD 100.1 million, an increase of 12.7 percent, or USD 11.3 million, compared to the reported prior year period. Segment Adjusted Ebitda was USD 153.0 million, an increase of 10.5 percent, or USD 14.5 million, compared to the reported prior year period.

Refrigerated Retail

Side dishes, egg, cheese and sausage products.

Net sales were USD 219.5 million, a decrease of 0.1 percent, or USD 0.3 million, compared to the reported prior year period. Pro forma net sales decreased 4.4 percent, or USD 10.1 million, over the same period in fiscal year 2018. Pro forma volumes decreased 1.3 percent as a pro forma 5.5 percent increase in side dish volumes was more than offset by declines in all other products (disclosed in a table presented later in this release). The references to pro forma net sales and volumes are defined later in this release under «Pro Forma Information.» Segment profit was USD 26.5 million, an increase of 33.8 percent, or USD 6.7 million, compared to the reported prior year period. Segment profit for the second quarter of 2018 was negatively impacted by integration expenses of USD 8.6 million, an inventory adjustment of USD 4.1 million resulting from purchase accounting and transaction expenses of USD 2.4 million, each of which was treated as an adjustment for non-GAAP measures. Segment Adjusted Ebitda was USD 47.3 million, a decrease of 5.8 percent, or USD 2.9 million, compared to the reported prior year period.

For the six months ended March 31, 2019, net sales were USD 481.1 million, an increase of 33.1 percent, or USD 119.6 million, compared to the reported prior year period. Segment profit was USD 57.0 million, an increase of 32.6 percent, or USD 14.0 million, compared to the reported prior year period. Segment profit for the six months ended March 31, 2018 was negatively impacted by integration expenses of USD 9.1 million, an inventory adjustment of USD 4.1 million resulting from purchase accounting and transaction expenses of USD 2.4 million, each of which was treated as an adjustment for non-GAAP measures. Segment Adjusted Ebitda was USD 95.3 million, an increase of 17.1 percent, or USD 13.9 million, compared to the reported prior year period.

Active Nutrition

Ready-to-drink («RTD») protein shakes, other RTD beverages, powders and nutrition bars.

Net sales were USD 216.5 million, an increase of 5.5 percent, or USD 11.3 million, compared to the prior year period as growth in sales and volumes for RTD protein shakes and powders was partially offset by declines in nutrition bars. RTD protein shake net sales grew 13 percent, with volumes up 4.8 percent. Segment profit was USD 44.0 million, an increase of 68.6 percent, or USD 17.9 million, compared to the prior year period. Segment Adjusted Ebitda was USD 50.4 million, an increase of 55.1 percent, or USD 17.9 million, compared to the prior year period.

For the six months ended March 31, 2019, net sales were USD 402.3 million, an increase of 2.8 percent, or USD 11.1 million, compared to the prior year period. Segment profit was USD 79.2 million, an increase of 72.5 percent, or USD 33.3 million, compared to the prior year period. Segment profit for the six months ended March 31, 2018 was negatively impacted by a provision of USD 9.0 million for a legal settlement, which was treated as an adjustment for non-GAAP measures. Segment Adjusted Ebitda was USD 92.0 million, an increase of 35.7 percent, or USD 24.2 million, compared to the prior year period.

Interest, Loss on Extinguishment of Debt, Expense (Income) on Swaps and Income Tax

Interest expense, net was USD 85.5 million for the second quarter of 2019, compared to USD 98.8 million for the second quarter of 2018. For the six months ended March 31, 2019, interest expense, net was USD 144.9 million, compared to USD 189.3 million for the six months ended March 31, 2018. Interest expense, net for the six months ended March 31, 2019 included a gain of USD 30.5 million resulting from the reclassification of gains previously recorded in accumulated other comprehensive loss to interest expense. The remaining decrease for both periods was primarily driven by reductions in the principal balance of debt outstanding resulting from repayments and repurchases of certain debt in fiscal years 2018 and 2019. Interest expense, net included interest expense payable, under certain circumstances, to former holders of shares of Bob Evans common stock who demanded appraisal of their shares under Delaware law and had not withdrawn their demands, of USD 0.4 million in the second quarter of 2019, USD 4.7 million in the six months ended March 31, 2019 and USD 3.8 million in both the three and six months ended March 31, 2018.

Loss on extinguishment of debt, net of USD 6.1 million was recorded in the six months ended March 31, 2019 in connection with (i) Post’s repayment of USD 863.0 million in total principal value of its term loan, (ii) the assignment of debt to 8th Avenue related to its separate capitalization and (iii) Post’s open market purchases of USD 60.0 million in total principal value of certain senior notes. Loss on extinguishment of debt, net of USD 0.3 million was recorded in the second quarter of 2018 in connection with (i) an opportunistic repricing of Post’s term loan and (ii) Post’s open market purchases of USD 112.0 million in total principal value of certain senior notes. Loss on extinguishment of debt, net of USD 37.6 million was recorded in the six months ended March 31, 2018 in connection with Post’s redemption of its 6.00 percent senior notes and the items discussed above in the second quarter of 2018.

Expense (income) on swaps, net relates to non-cash mark-to-market adjustments and cash settlements on interest rate swaps. Expense on swaps, net was USD 63.0 million for the second quarter of 2019, compared to income of USD 50.5 million for the second quarter of 2018. For the six months ended March 31, 2019, expense on swaps, net was USD 114.7 million, compared to income of USD 53.2 million in the six months ended March 31, 2018.

Income tax benefit was USD 11.6 million in the second quarter of 2019, an effective income tax rate of negative 28.0 percent, compared to an expense of USD 23.9 million in the second quarter of 2018, an effective income tax rate of 20.7 percent. For the six months ended March 31, 2019, income tax expense was USD 32.2 million, an effective income tax rate of 14.5 percent, compared to a benefit of USD 231.9 million in the six months ended March 31, 2018. The effective income tax rate in both of the fiscal year 2019 periods differed significantly from the statutory rate as a result of discrete items occurring in the second quarter of 2019, primarily relating to excess tax benefits for share-based payments. In connection with the U.S. Tax Cuts and Jobs Act, Post recorded a USD 265.3 million one-time income tax net benefit in the six months ended March 31, 2018.

Share Repurchases

During the second quarter of 2019, Post repurchased 0.4 million shares for USD 40.5 million at an average price of USD 97.66 per share. During the six months ended March 31, 2019, Post repurchased 0.7 million shares for USD 65.8 million at an average price of USD 93.75 per share. At the end of the second quarter of 2019, Post had USD 242.3 million remaining under its share repurchase authorization.

Recent Announcements

In a separate release issued earlier today, Post announced that it has reached an agreement to acquire the private label ready-to-eat («RTE») cereal business of TreeHouse Foods (the «TreeHouse RTE cereal business»). The transaction is expected to be completed in the third calendar quarter (Post’s fourth fiscal quarter), subject to customary closing conditions including the expiration of waiting periods under U.S. antitrust laws.

On April 8, 2019, Post announced that one of its subsidiaries had confidentially submitted a draft registration statement on Form S-1 to the Securities and Exchange Commission (the «SEC») related to its proposed initial public offering of its active nutrition business (the «Active Nutrition business»). There can be no assurance that the confidential submission of a draft registration statement on Form S-1 will result in any transaction or other action by Post.

Outlook

Post management has reaffirmed its fiscal year 2019 Adjusted Ebitda range of USD 1.20-USD 1.24 billion, which excludes any losses from Post’s investment in 8th Avenue and any contribution from the acquisition of the TreeHouse RTE cereal business.

In fiscal year 2019, Post management expects to incur USD 19-USD 21 million of restructuring and plant closure costs associated with the closure of certain cereal facilities, which are treated as adjustments to non-GAAP measures and comprised of severance, retention and related expenses, adjustments on assets held for sale and accelerated depreciation.

Post management continues to expect fiscal year 2019 capital expenditures to range between USD 300-USD 310 million, including the following:

approximately USD 80 million related to the previously announced new precooked egg facility in Norwalk, Iowa;
approximately USD 30 million related to the previously announced cage-free housing conversion at the Bloomfield, Nebraska facility; and
approximately USD 25 million to upgrade certain manufacturing product lines in Corby, U.K. into a single facility and to complete the start-up and transfer of production to other facilities related to the Clinton, Massachusetts cereal facility closure.

The Company provides Adjusted Ebitda guidance only on a non-GAAP basis and does not provide a reconciliation of its forward-looking Adjusted Ebitda non-GAAP guidance measure to the most directly comparable GAAP measure due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation, including adjustments that could be made for gain on sale of business, non-cash mark-to-market adjustments and cash settlements on interest rate swaps, provision for legal settlement, transaction and integration costs, restructuring and plant closure costs, mark-to-market adjustments on commodity and foreign exchange hedges, assets held for sale and other charges reflected in the Company’s reconciliation of historical numbers, the amounts of which, based on historical experience, could be significant. For additional information regarding Post’s non-GAAP measures, see the related explanations presented under «Use of Non-GAAP Measures.»

8th Avenue Standalone Financial Information and Outlook

A business separately capitalized by Post and Thomas H. Lee Partners, L.P. («THL»), in which Post owns 60.5 percent, and THL and members of the 8th Avenue management team collectively own 39.5 percent, of the common equity of 8th Avenue, the holding company for Post’s historical private brands business (nut butter, dried fruit and nut, granola and pasta).

For the second quarter of 2019, net sales were USD 213.7 million, net loss was USD 4.2 million and Adjusted Ebitda was USD 24.6 million. For the six months ended March 31, 2019, net sales were USD 427.8 million, net loss was USD 8.7 million and Adjusted Ebitda was USD 47.5 million. As of March 31, 2019, 8th Avenue is capitalized with USD 661.7 million of senior secured debt, USD 250 million in principal amount of preferred equity and USD 14.1 million of accumulated, but unpaid, preferred dividends. Summarized financial information for 8th Avenue is disclosed later in this release.

For 8th Avenue, Post management has updated its fiscal year 2019 Adjusted Ebitda range to be between USD 100-USD 105 million.

Post provides Adjusted Ebitda guidance for 8th Avenue only on a non-GAAP basis and does not provide a reconciliation of its forward-looking Adjusted Ebitda non-GAAP guidance measure to the most directly comparable GAAP measure due to the inherent difficulty in forecasting and quantifying certain amounts that are necessary for such reconciliation, including transaction and integration costs, non-cash stock based compensation and other charges reflected in 8th Avenue’s reconciliation of historical numbers, the amounts of which, based on historical experience, could be significant.