Post Holdings: Reports Results for Q4 and Fiscal Year 2018

St. Louis / MO. (pfh) Post Holdings Inc., a consumer packaged goods holding company, reported results for the fourth quarter and fiscal year ended September 30, 2018. Highlights:

Fourth Quarter net sales of USD 1.6 billion; operating profit of USD 70.9 million; net loss of USD 15.6 million and Adjusted Ebitda of USD 320.6 million
Fiscal Year net sales of USD 6.3 billion; operating profit of USD 587.5 million; net earnings of USD 467.3 million and Adjusted Ebitda of USD 1.23 billion
Completed separate capitalization of 8th Avenue Food + Provisions with affiliates of Thomas H. Lee Partners on October 1, 2018
Announces intent to pursue IPO of Active Nutrition business
Fiscal year 2019 Adjusted Ebitda (non-GAAP) guidance range of USD 1.19-USD 1.24 billion, excluding 8th Avenue

Fourth Quarter Consolidated Operating Results

Net sales were USD 1,629.9 million, an increase of 12.5 percent, or USD 181.4 million, compared to the prior year period. Pro forma net sales increased 4.4 percent, or USD 68.8 million, when compared to the same period in fiscal year 2017. Gross profit was USD 478.0 million or 29.3 percent of net sales, an increase of USD 40.9 million compared to the prior year gross profit of USD 437.1 million or 30.2 percent of net sales. Gross profit for the fourth quarter of 2017 was negatively impacted by an inventory adjustment of USD 18.2 million resulting from purchase accounting and was treated as an adjustment for non-GAAP measures.

Selling, general and administrative (SG+A) expenses were USD 239.6 million or 14.7 percent of net sales, a decrease of USD 12.2 million compared to the prior year SG+A expenses of USD 251.8 million or 17.4 percent of net sales. SG+A expenses for fourth quarter 2018 and 2017 included USD 9.3 million and USD 23.0 million of transaction costs, respectively, related to the separate capitalization of 8th Avenue Food + Provisions and the acquisition of Weetabix, respectively, and were treated as adjustments for non-GAAP measures.

Operating profit was USD 70.9 million, a decrease of 38.9 percent, or USD 45.2 million, compared to the prior year period. Operating profit was negatively impacted by non-cash other intangible asset impairment of USD 124.9 million in the fourth quarter of 2018 and non-cash goodwill impairment of USD 26.5 million in the fourth quarter of 2017, which are discussed later in this release and were treated as adjustments for non-GAAP measures.

Net loss was USD 15.6 million, a decrease of 295.0 percent, or USD 23.6 million, compared to net earnings of USD 8.0 million in the prior year period. Net loss for the fourth quarter of 2018 included a USD 25.2 million gain and net earnings for the fourth quarter of 2017 included an USD 8.5 million loss, both of which primarily related to non-cash mark-to-market adjustments on interest rate swaps, which is discussed later in this release and was treated as an adjustment for non-GAAP measures. Net loss attributable to common shareholders was USD 17.6 million, or USD 0.26 per diluted common share, compared to the prior year period net earnings available to common shareholders of USD 4.7 million, or USD 0.07 per diluted common share. Adjusted net earnings were USD 81.5 million, or USD 1.08 per adjusted diluted common share, compared to the prior year period adjusted net earnings of USD 61.7 million, or USD 0.80 per adjusted diluted common share.

Adjusted Ebitda was USD 320.6 million, an increase of 11.9 percent, or USD 34.2 million, compared to the prior year period.

Fiscal Year 2018 Consolidated Operating Results

Net sales were USD 6,257.2 million, an increase of 19.7 percent, or USD 1,031.4 million, compared to the prior year. Gross profit was USD 1,866.8 million or 29.8 percent of net sales, an increase of USD 292.7 million compared to the prior year gross profit of USD 1,574.1 million or 30.1 percent of net sales.

SG+A expenses were USD 975.2 million or 15.6 percent of net sales, an increase of USD 107.8 million compared to the prior year SG+A expenses of USD 867.4 million or 16.6 percent of net sales. SG+A expenses for fiscal years 2018 and 2017 included a provision for USD 17.3 million and USD 73.6 million in legal settlements, respectively. Excluding the impact of the legal settlement provisions, current year SG+A expenses increased USD 164.1 million when compared to the prior year. The increase was primarily driven by (i) the inclusion of Weetabix and Bob Evans, (ii) increased integration expenses and (iii) a prior year benefit of USD 30.0 million of net foreign currency gains for the purchase price of Weetabix. SG+A expenses for fiscal year 2018 included USD 28.8 million of integration expenses, an increase of USD 20.0 million compared to the prior year, which were treated as an adjustment for non-GAAP measures.

Operating profit was USD 587.5 million, an increase of 12.9 percent, or USD 67.2 million, compared to the prior year. Operating profit was negatively impacted by non-cash other intangible asset impairment of USD 124.9 million in fiscal year 2018 and non-cash goodwill impairment of USD 26.5 million in fiscal year 2017, which are discussed later in this release and were treated as adjustments for non-GAAP measures.

Net earnings were USD 467.3 million, an increase of 867.5 percent, or USD 419.0 million, compared to net earnings of USD 48.3 million in the prior year. Net earnings for fiscal year 2018 included a USD 270.9 million one-time income tax net benefit, a USD 95.6 million gain primarily related to non-cash mark-to-market adjustments on interest rate swaps and a USD 31.1 million net loss on extinguishment of debt, each of which are discussed later in this release and were treated as adjustments for non-GAAP measures. Net earnings for fiscal year 2017 included a USD 222.9 million net loss on extinguishment of debt and a USD 91.8 million gain primarily related to non-cash mark-to-market adjustments on interest rate swaps, 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 457.3 million, or USD 6.16 per diluted common share, compared to the prior year net earnings available to common shareholders of USD 34.8 million, or USD 0.50 per diluted common share. Adjusted net earnings were USD 309.6 million, or USD 4.08 per diluted common share, compared to the prior year adjusted net earnings of USD 211.0 million, or USD 2.67 per adjusted diluted common share.

Adjusted Ebitda was USD 1,230.7 million, an increase of 24.4 percent, or USD 241.6 million, compared to the prior year.

Post Consumer Brands

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

Net sales were USD 471.0 million for the fourth quarter, an increase of 1.6 percent, or USD 7.5 million, compared to the prior year period, with volumes increasing 2.2 percent. Volume growth from certain licensed products, Honey Bunches of Oats and Pebbles was partially offset by volume declines from Malt-O-Meal bag cereal and private label as well as higher trade spending. Segment profit was USD 84.6 million and USD 86.3 million for fourth quarter 2018 and 2017, respectively. Segment Adjusted Ebitda was USD 114.0 million and USD 122.8 million for fourth quarter 2018 and 2017, respectively.

For fiscal year 2018, net sales were USD 1,831.7 million, an increase of 5.1 percent, or USD 89.2 million, compared to the prior year. Segment profit was USD 329.2 million, compared to USD 354.9 million in the prior year. Segment Adjusted Ebitda was USD 458.2 million, compared to USD 477.8 million in the prior year.

Weetabix

International (primarily United Kingdom) RTE cereal and muesli.

Net sales were USD 107.6 million for the fourth quarter, a decrease of 4.3 percent, or USD 4.8 million, compared to the prior year period, with volumes declining 7.9 percent. Segment profit was USD 28.6 million and USD 14.5 million for fourth quarter 2018 and 2017, respectively. Fourth quarter 2017 segment profit was negatively impacted by an inventory adjustment of USD 15.2 million resulting from purchase accounting which was treated as an adjustment to non-GAAP measures. Segment Adjusted Ebitda was USD 36.8 million and USD 37.2 million for fourth quarter 2018 and 2017, respectively.

For fiscal year 2018, net sales were USD 423.4 million, an increase of USD 311.0 million compared to the prior year. Segment profit was USD 87.2 million, compared to USD 14.5 million in the prior year. Segment Adjusted Ebitda was USD 125.9 million, compared to USD 37.2 million in the prior year.

Refrigerated Food

Refrigerated foodservice, primarily egg and potato, and refrigerated retail, inclusive of side dishes, egg, cheese and sausage.

Net sales were USD 614.2 million for the fourth quarter, an increase of 29.3 percent, or USD 139.2 million, compared to the reported prior year fourth quarter. Pro forma net sales increased 4.5 percent, or USD 26.6 million, over the same period in fiscal year 2017. Pro forma foodservice net sales (approximately 65 percent of the Refrigerated Food segment net sales) increased 7.0 percent, with pro forma foodservice volumes increasing 3.6 percent. Foodservice egg net sales increased 9.2 percent, driven by a 5.1 percent volume increase and increased market-based pricing. Pro forma retail net sales (approximately 35 percent of the Refrigerated Food segment net sales) and volumes were flat as an increase in pro forma retail side dish volume of 6.6 percent was offset by pro forma volume declines in retail egg and sausage products.

Segment profit was USD 59.3 million and USD 55.3 million for fourth quarter 2018 and 2017, respectively. Segment profit for fourth quarter 2018 was negatively impacted by a provision for USD 6.0 million for a legal settlement which was treated as an adjustment for non-GAAP measures. Segment Adjusted Ebitda was USD 113.0 million and USD 87.5 million for fourth quarter 2018 and 2017, respectively.

For fiscal year 2018, net sales were USD 2,337.9 million, an increase of 25.0 percent, or USD 467.1 million, over the reported prior year. Segment profit was USD 247.6 million, compared to USD 110.6 million in the prior year. Segment profit for fiscal year 2018 was negatively impacted by integration expenses of USD 12.7 million, a provision for USD 8.3 million for a legal settlement and an inventory adjustment of USD 4.8 million resulting from purchase accounting, each of which were treated as adjustments for non-GAAP measures. Segment profit for fiscal year 2017 was negatively impacted by a provision for USD 74.5 million in legal settlements which was treated as an adjustment for non-GAAP measures. Segment Adjusted Ebitda was USD 441.8 million, compared to USD 308.6 million in the prior year.

Active Nutrition

Protein shakes, powders and bars and nutritional supplements.

Net sales were USD 219.9 million for the fourth quarter, an increase of 13.8 percent, or USD 26.6 million, compared to the prior year period. Net sales growth was driven by 25 percent net sales growth for shake products, which was partially offset by net sales declines of bar products. Segment profit was USD 38.3 million and USD 22.3 million for fourth quarter 2018 and 2017, respectively. Segment Adjusted Ebitda was USD 44.8 million and USD 28.8 million for fourth quarter 2018 and 2017, respectively.

For fiscal year 2018, net sales were USD 827.5 million, an increase of 16.0 percent, or USD 114.3 million, over the prior year. Segment profit was USD 124.4 million, compared to USD 96.4 million in the prior year. Segment profit for fiscal year 2018 was negatively impacted by a provision for USD 9.0 million for a legal settlement which was treated as an adjustment for non-GAAP measures. Segment Adjusted Ebitda was USD 159.3 million, compared to USD 121.7 million in the prior year.

Private Brands

Nut butter, dried fruit and nut, granola and pasta business, now known as 8th Avenue.

Net sales were USD 220.8 million for the fourth quarter, an increase of 7.5 percent, or USD 15.5 million, compared to the prior year period. Volumes grew 1.1 percent driven by increases in dried fruit and nut and nut butter, which were partially offset by declines in pasta and granola. Segment profit was USD 17.0 million and USD 16.9 million for fourth quarter 2018 and 2017, respectively. Segment profit for fourth quarter 2018 was negatively impacted by USD 9.5 million in transaction expenses related to the separate capitalization of 8th Avenue. Segment Adjusted Ebitda was USD 30.5 million and USD 29.6 million for fourth quarter 2018 and 2017, respectively.

For fiscal year 2018, net sales were USD 848.9 million, an increase of 7.3 percent, or USD 57.7 million, over the prior year. Segment profit was USD 60.8 million, compared to USD 58.1 million in the prior year. Segment profit for fiscal year 2018 was negatively impacted by USD 9.5 million in transaction expenses related to the separate capitalization of 8th Avenue. Segment Adjusted Ebitda was USD 111.5 million, compared to USD 107.0 million in the prior year.

Impairment of Goodwill and Other Intangible Assets

Non-cash goodwill and other intangible asset impairment charges of USD 124.9 million and USD 26.5 million were recorded in the fourth quarter of 2018 and 2017, respectively, within the Weetabix and Active Nutrition segments, respectively. The intangible asset impairment charge in the fourth quarter of 2018 related to the Weetabix trademark and resulted from reduced branded cereal volumes related to Weetabix’s pricing reset and shifting consumer preferences to private label products. The goodwill impairment charge in the fourth quarter of 2017 resulted from a reassessment of long-term expectations for Dymatize.

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

Interest expense, net was USD 99.1 million for the fourth quarter, compared to USD 85.2 million for the prior year fourth quarter. For fiscal year 2018, interest expense, net was USD 387.3 million, compared to USD 314.8 million for fiscal year 2017. The increase for both periods primarily related to an increase in the outstanding amount of debt principal. Interest expense, net for the fourth quarter of 2018 and fiscal year 2018 included USD 4.9 million and USD 13.4 million, respectively, of interest expense payable, under certain circumstances, to former holders of shares of Bob Evans common stock who have demanded appraisal of their shares under Delaware law and have not withdrawn their demands.

Gain on extinguishment of debt, net of USD 0.4 million was recorded in the fourth quarter of 2018 in connection with Post’s early repayment through open market purchases of USD 6.5 million in total principal value of certain senior notes. Loss on extinguishment of debt, net of USD 31.1 million was recorded in fiscal year 2018 in connection with Post’s (i) redemption of its 6.00 percent senior notes, (ii) early repayment through open market purchases of USD 267.8 million in total principal value of certain senior notes and (iii) opportunistic repricing of its approximately USD 2.2 billion term loan. Loss on extinguishment of debt, net of USD 222.9 million was recorded in fiscal year 2017 in connection with the extinguishment of the entire remaining principal balance of the 7.75 percent, 6.75 percent and 7.375 percent senior notes and a portion of the principal balance of the 8.00 percent senior notes.

Income (expense) on swaps, net relates to non-cash mark-to-market adjustments and cash settlements on interest rate and cross-currency swaps. Income on swaps, net was USD 25.2 million for the fourth quarter of 2018, compared to an expense of USD 8.5 million for the fourth quarter of 2017. For fiscal year 2018, income on swaps, net was USD 95.6 million, compared to USD 91.8 million in fiscal year 2017.

Income tax expense was USD 12.5 million in the fourth quarter of 2018, compared to USD 14.4 million in the fourth quarter of 2017. For fiscal year 2018, income tax benefit was USD 204.0 million, compared to an expense of USD 26.1 million for fiscal year 2017. In fiscal year 2018, as a result of the U.S. Tax Cuts and Jobs Act, Post recorded a USD 270.9 million one-time income tax net benefit which included (i) a USD 281.2 million benefit related to an estimate of the remeasurement of Post’s existing deferred tax assets and liabilities considering both the fiscal year 2018 blended U.S. federal corporate income tax rate of 24.5 percent and a 21 percent rate for subsequent fiscal years and (ii) a USD 10.3 million expense related to an estimate of the transition tax on unrepatriated foreign earnings.

Share Repurchases

Post did not repurchase any shares of stock during the fourth quarter of fiscal year 2018. During fiscal year 2018, Post repurchased 2.8 million shares for USD 218.6 million at an average price of USD 76.19 per share. At the end of the fourth quarter of 2018, Post had USD 308.0 million remaining under its share repurchase authorization.

8th Avenue

On October 1, 2018, Post completed the previously announced transaction with affiliates of Thomas H. Lee Partners, L.P. to separately capitalize 8th Avenue, the holding company for Post’s private brands business. Effective October 1, 2018, 8th Avenue is no longer consolidated in Post’s financial statements, Post’s 60.5 percent retained interest in 8th Avenue’s common equity is accounted for using equity method accounting, and Post’s private brands business is no longer considered a reportable segment of Post.

Active Nutrition Business IPO

As announced in a separate release today, Post plans to pursue an initial public offering (IPO) of shares of common stock of a company which will be comprised of its high growth Active Nutrition business. Darcy Horn Davenport, current President of Active Nutrition, will serve as CEO of the new public company, and Rob Vitale, Post’s President and CEO, will also serve as Executive Chairman of the new public company’s board of directors. Post intends to sell approximately 20 percent of the ownership of the new public company. The transaction is expected to be completed in the second half of fiscal year 2019, subject to prevailing market and other conditions and receipt of other required approvals.

There can be no assurance that the IPO of Post’s Active Nutrition business will occur on the anticipated timeline, if at all. There can be no guarantees that Post or the Active Nutrition business will realize the expected benefits of the potential IPO. Post does not intend to comment on or provide updates regarding these matters unless and until it determines that further disclosure is appropriate or required based on the then-current facts and circumstances. This release does not constitute an offer to sell or the solicitation of an offer to buy any security and shall not constitute an offer, solicitation or sale in any jurisdiction in which such offering, solicitation or sale would be unlawful.

Outlook

Post management expects fiscal year 2019 Adjusted Ebitda to range between USD 1.19-USD 1.24 billion, which excludes any earnings from Post’s investment in 8th Avenue which will be accounted for using equity method accounting.

In fiscal year 2019, Post management expects to incur the following costs, which are treated as adjustments to non-GAAP measures:

USD 15-USD 18 million of restructuring and plant closure costs associated with the closure of certain cereal facilities, comprised of severance, retention and related expenses and accelerated depreciation; and
USD 6-USD 8 million of integration costs, comprised of severance, retention and third party consulting expenses.

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

USD 80-USD 85 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
USD 20-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 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, assets held for sale, mark-to-market adjustments on commodity and foreign exchange hedges and other charges reflected in the Company’s reconciliation of historical numbers, the amounts of which, based on historical experience, could be significant.

8th Avenue Outlook

For 8th Avenue, Post management expects fiscal year 2019 Adjusted Ebitda to range between USD 110-USD 120 million. As of October 1, 2018, 8th Avenue is capitalized with USD 648 million of senior secured debt and USD 250 million of preferred equity.

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 and other charges reflected in 8th Avenue’s reconciliation of historical numbers, the amounts of which, based on historical experience, could be significant.

Use of Non-GAAP Measures

The Company uses certain non-GAAP measures in this release to supplement the financial measures prepared in accordance with U.S. generally accepted accounting principles (GAAP). These non-GAAP measures include total segment profit, Adjusted net earnings, Adjusted diluted earnings per common share, Adjusted Ebitda and segment Adjusted Ebitda.

Management uses certain of these non-GAAP measures, including Adjusted Ebitda and segment Adjusted Ebitda, as key metrics in the evaluation of underlying Company and segment performance, in making financial, operating and planning decisions and, in part, in the determination of cash bonuses for its executive officers and employees. Management believes the use of these non-GAAP measures provides increased transparency and assists investors in understanding the underlying operating performance of the Company and its segments and in the analysis of ongoing operating trends. Non-GAAP measures are not prepared in accordance with GAAP, as they exclude certain items as described later in this release. These non-GAAP measures may not be comparable to similarly titled measures of other companies.