Post Holdings: Reports Second Quarter 2018 Results

St. Louis / MO. (pfh) Post Holdings Inc., a consumer packaged goods holding company, reported results for the second fiscal quarter ended March 31, 2018. Highlights:

  • Net sales of USD 1.6 billion
  • Operating profit of USD 164.3 million; net earnings of USD 91.5 million and Adjusted Ebitda of USD 314.3 million
  • Completed the acquisition of Bob Evans on January 12, 2018
  • Affirmed fiscal year 2018 Adjusted Ebitda (non-GAAP) guidance range of USD 1.22- USD 1.25 billion

Second Quarter Consolidated Operating Results

Net sales were USD 1,586.1 million, an increase of 26.3 percent, or USD 330.7 million, compared to the prior year period. Pro forma net sales increased 7.5 percent, or USD 111.4 million, when compared to the same period in fiscal year 2017. Gross profit was USD 475.7 million or 30.0 percent of net sales, an increase of USD 111.6 million compared to the prior year gross profit of USD 364.1 million or 29.0 percent of net sales.

Selling, general and administrative (SG+A) expenses were USD 264.3 million or 16.7 percent of net sales, an increase of USD 77.0 million compared to the prior year SG+A expenses of USD 187.3 million or 14.9 percent of net sales. The increase was driven by (i) the inclusion of Weetabix and Bob Evans Farms Inc. and (ii) increased transaction and integration expenses. Second quarter 2018 SG+A expenses included USD 20.8 million of transaction expenses, an increase of USD 18.2 million compared to the prior year period, which primarily related to success fees paid in conjunction with the close of the acquisition of Bob Evans in January 2018, and USD 13.2 million of integration expenses, an increase of USD 8.9 million compared to the prior year period. Transaction and integration expenses were treated as adjustments for non-GAAP measures.

Operating profit was USD 164.3 million, an increase of 19.5 percent, or USD 26.8 million, compared to the prior year period. Net earnings were USD 91.5 million, an increase of USD 93.6 million, compared to a net loss of USD 2.1 million in the prior year period. Net earnings available to common shareholders were USD 88.9 million, or USD 1.20 per diluted common share. Net earnings and net earnings available to common shareholders included a USD 50.5 million gain 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. Adjusted net earnings were USD 80.6 million, or USD 1.06 per diluted common share.

Adjusted Ebitda was USD 314.3 million, an increase of 37.5 percent, or USD 85.8 million, compared to the prior year period.

Six Month Consolidated Operating Results

Net sales for the six months ended March 31, 2018 were USD 3,019.2 million, an increase of 20.5 percent, or USD 514.0 million, compared to the prior year period. Gross profit for the six month period was USD 927.4 million or 30.7 percent of net sales, an increase of USD 184.1 million compared to the prior year gross profit of USD 743.3 million or 29.7 percent of net sales.

SG+A expenses for the six month period were USD 510.0 million or 16.9 percent of net sales, an increase of USD 58.6 million compared to the prior year SG+A expenses of USD 451.4 million or 18.0 percent of net sales. SG+A expenses included a provision for USD 11.0 million and USD 73.6 million in legal settlements for the six months ended March 31, 2018 and 2017, respectively. Excluding the impact of the legal settlement provisions, current year SG+A expenses increased USD 121.2 million when compared to the prior year period. The increase was primarily driven by (i) the inclusion of Weetabix and Bob Evans and (ii) increased transaction and integration expenses. SG+A expenses for the six months ended March 31, 2018 included USD 23.8 million of transaction expenses, an increase of USD 21.1 million compared to the prior year period, which primarily related to success fees paid in conjunction with the close of the acquisition of Bob Evans in January 2018, and USD 23.8 million of integration expenses, an increase of USD 19.0 million compared to the prior year period. Transaction and integration expenses were treated as adjustments for non-GAAP measures.

Operating profit was USD 328.8 million for the six month period, an increase of 53.9 percent, or USD 115.1 million, compared to the prior year period. Net earnings were USD 386.4 million for the six month period, an increase of 287.6 percent, or USD 286.7 million, compared to net earnings of USD 99.7 million in the prior year period. For the six months ended March 31, 2018, net earnings available to common shareholders were USD 380.4 million, or USD 5.04 per diluted common share. Net earnings and net earnings available to common shareholders included a USD 265.3 million one-time income tax net benefit, a USD 53.2 million gain primarily related to non-cash mark-to-market adjustments on interest rate swaps and a USD 37.6 million loss on extinguishment of debt, each of which are discussed later in this release and were treated as adjustments for non-GAAP measures. Adjusted net earnings were USD 148.5 million, or USD 1.94 per adjusted diluted common share.

Adjusted Ebitda was USD 595.9 million for the six month period, an increase of 29.9 percent, or USD 137.3 million, compared to the prior year period.

Segment Results

Effective as of the quarter ended March 31, 2018, Post changed its reportable segments as the Company moved granola and pasta from the Post Consumer Brands and legacy Michael Foods Group segments, respectively, to the Private Brands segment and established the Refrigerated Food segment, which includes the remainder of the legacy Michael Foods Group segment and Bob Evans. See the historical segment information tables presented later in this release for the adjusted presentation of certain historical periods aligned with this segment reporting structure.

Post Consumer Brands

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

Net sales were USD 462.3 million for the second quarter, an increase of 7.2 percent, or USD 31.2 million, compared to the reported prior year second quarter. Pro forma net sales increased 0.4 percent, or USD 1.9 million, over the same period in fiscal year 2017, with pro forma volumes increasing 1.8 percent. Volume growth from licensed products, Honey Bunches of OatsMalt-O-Meal bag cereal, government bid business and private label was partially offset by volume declines of adult and kid classic branded products and higher trade spending. Segment profit was USD 91.1 million and USD 90.1 million for second quarter 2018 and 2017, respectively. Segment Adjusted Ebitda was USD 123.8 million and USD 120.8 million for second quarter 2018 and 2017, respectively.

For the six months ended March 31, 2018, net sales were USD 894.3 million, an increase of 5.0 percent, or USD 42.6 million, compared to the prior year period. Segment profit was USD 161.3 million, compared to USD 171.7 million in the prior year period. Segment Adjusted Ebitda was USD 228.6 million, compared to USD 229.7 million in the prior year period.

Weetabix

International (primarily United Kingdom) RTE cereal and muesli.

Net sales were USD 109.0 million for the second quarter. Pro forma net sales increased 15.3 percent, or USD 14.5 million, over the same period in fiscal year 2017, with pro forma volumes declining 1.8 percent. Pro forma net sales benefitted primarily from a favorable foreign exchange translation rate compared to the prior year period. Segment profit was USD 15.7 million and segment Adjusted Ebitda was USD 28.2 million.

For the six months ended March 31, 2018, net sales were USD 208.7 million. Segment profit was USD 32.5 million and segment Adjusted Ebitda was USD 53.8 million.

Refrigerated Food

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

Net sales were USD 600.0 million for the second quarter, an increase of 32.0 percent, or USD 145.4 million, compared to the reported prior year second quarter. Pro forma net sales increased 8.8 percent, or USD 49.9 million, over the same period in fiscal year 2017. Pro forma foodservice net sales increased 11.3 percent, with pro forma foodservice volumes increasing 6.1 percent. Foodservice egg net sales increased 12.0 percent, driven by a 5.7 percent volume increase and increased market-based pricing. Pro forma retail net sales increased 4.7 percent, with pro forma retail volumes increasing 4.6 percent, driven by an increase in pro forma retail side dish volume of 14.2 percent. Volume information for additional products is disclosed in a table presented later in this release.

Segment profit was USD 62.7 million and USD 37.1 million for second quarter 2018 and 2017, respectively. Second quarter 2018 segment profit was negatively impacted by integration expenses of USD 9.4 million, an inventory adjustment of USD 4.8 million resulting from purchase accounting and transaction expenses of USD 2.4 million, each of which were treated as adjustments for non-GAAP measures. Segment Adjusted Ebitda was USD 118.9 million and USD 68.1 million for second quarter 2018 and 2017, respectively.

For the six months ended March 31, 2018, net sales were USD 1,110.6 million, an increase of 19.3 percent, or USD 179.3 million, over the reported prior year period. Segment profit was USD 131.8 million, compared to USD 14.1 million in the prior year period. Segment profit for the six months ended March 31, 2018 was negatively impacted by integration expenses of USD 9.9 million, an inventory adjustment of USD 4.8 million resulting from purchase accounting and transaction expenses of USD 2.4 million, each of which were treated as adjustments for non-GAAP measures. Segment profit for the six months ended March 31, 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 219.9 million, compared to USD 148.7 million in the prior year period.

Active Nutrition

Protein shakes, bars and powders and nutritional supplements.

Net sales were USD 205.2 million for the second quarter, an increase of 15.7 percent, or USD 27.9 million, over the prior year second quarter. Net sales growth was driven by 34 percent net sales growth for shake products, which was partially offset by net sales declines of powder and bar products. Segment profit was USD 26.1 million and USD 21.2 million for second quarter 2018 and 2017, respectively. Segment Adjusted Ebitda was USD 32.5 million and USD 27.5 million for second quarter 2018 and 2017, respectively.

For the six months ended March 31, 2018, net sales were USD 391.2 million, an increase of 18.1 percent, or USD 60.0 million, over the prior year period. Segment profit was USD 45.9 million, compared to USD 46.1 million in the prior year period. Segment profit for the six months ended March 31, 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 67.8 million, compared to USD 58.6 million in the prior year period.

Private Brands

Nut butter, healthy snacks (granola and dried fruit and nut) and pasta.

Net sales were USD 212.6 million for the second quarter, an increase of 9.8 percent, or USD 19.0 million, compared to the prior year second quarter. Volumes grew 9.2 percent, driven by increases in all product lines. Segment profit was USD 14.2 million and USD 15.1 million for second quarter 2018 and 2017, respectively. Segment Adjusted Ebitda was USD 26.1 million and USD 27.1 million for second quarter 2018 and 2017, respectively.

For the six months ended March 31, 2018, net sales were USD 419.0 million, an increase of 6.5 percent, or USD 25.4 million, over the prior year period. Segment profit was USD 31.1 million, compared to USD 28.1 million in the prior year period. Segment Adjusted Ebitda was USD 56.3 million, compared to USD 52.3 million in the prior year period.

Interest, Loss on Extinguishment of Debt, Other Income and Income Tax

Interest expense, net was USD 98.8 million for the second quarter, compared to USD 80.2 million for the prior year second quarter. For the six months ended March 31, 2018, interest expense, net was USD 189.3 million, compared to USD 153.1 million for the six months ended March 31, 2017. The increase for both periods primarily related to an increase in the outstanding amount of debt principal, partially offset by a decrease in the weighted-average interest rate. Interest expense, net for the second quarter of 2018 and the six months ended March 31, 2018 included USD 3.8 million 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.

Loss on extinguishment of debt, net of USD 0.3 million and USD 62.5 million was recorded in the second quarter of 2018 and 2017, respectively, and USD 37.6 million and USD 62.5 million in the six months ended March 31, 2018 and 2017, respectively. The net loss in the second quarter of 2018 was recorded in connection with (i) an opportunistic repricing of Post’s approximately USD 2.2 billion term loan, which reduced the interest rate applicable to the term loan by 25 basis points (0.25 percent), and (ii) Post’s early repayment through open market purchases of USD 112.0 million in total principal value of its 5.75 percent senior notes due 2027 and 8.00 percent senior notes due 2025. Additionally, the six months ended March 31, 2018 included a loss recorded in the first quarter of 2018 in connection with Post’s redemption of its 6.00 percent senior notes due 2022. The loss in the second quarter of 2017 and the six months ended March 31, 2017 was recorded in connection with Post’s redemption of its 6.75 percent senior notes due 2021 and 7.375 percent senior notes due 2022.

Other income, net relates to non-cash mark-to-market adjustments and cash settlements on interest rate swaps. Other income, net was USD 50.5 million for the second quarter of 2018, compared to USD 1.0 million for the second quarter of 2017. For the six months ended March 31, 2018, other income, net was USD 53.2 million, compared to USD 145.5 million in the six months ended March 31, 2017.

Income tax expense was USD 23.9 million in the second quarter of 2018, an effective income tax rate of 20.7 percent, compared to a benefit of USD 2.1 million in the second quarter of 2017, an effective income tax rate of 50.0 percent. For the six months ended March 31, 2018, income tax benefit was USD 231.9 million, compared to an expense of USD 43.9 million and an effective income tax rate of 30.6 percent for the six months ended March 31, 2017. In the six months ended March 31, 2018, as a result of the U.S. Tax Cuts and Jobs Act, Post recorded a USD 265.3 million one-time income tax net benefit which included (i) a USD 272.4 million benefit related to an estimate of the remeasurement of Post’s existing deferred tax assets and liabilities considering both the expected fiscal year 2018 blended U.S. federal income corporate tax rate of approximately 24.5 percent and a 21 percent rate for subsequent fiscal years and (ii) a USD 7.1 million expense related to an estimate of the transition tax on unrepatriated foreign earnings.

Share Repurchases

During the second quarter of fiscal year 2018, Post repurchased 1.1 million shares for USD 82.8 million at an average price of USD 74.01 per share. During the six months ended March 31, 2018, Post repurchased 1.8 million shares for USD 138.8 million at an average price of USD 75.57 per share.

Recent Announcements

On January 12, 2018, Post completed the acquisition of Bob Evans, a leading producer and distributor of refrigerated potato, pasta and vegetable-based side dishes, pork sausage and a variety of refrigerated and frozen convenience food items.

On March 28, 2018, 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 for its private brands business. Post continues to evaluate strategic alternatives for its private brands business, as announced on January 11, 2018, and there can be no assurance that Post’s evaluation of strategic alternatives will result in any transaction or other action by Post.

On May 2, 2018, Post announced that its Board of Directors had approved a new USD 350 million share repurchase authorization, with repurchases occurring over a two year period beginning on May 7, 2018. As of May 2, 2018, Post had repurchased USD 488 million under its previous stock repurchase authorizations.

Outlook

Post management has affirmed its fiscal year 2018 Adjusted Ebitda range of USD 1.22- USD 1.25 billion, with modest favorability to the fourth quarter. In fiscal year 2018, Post management expects to incur the following costs, which are treated as adjustments to non-GAAP measures:

  • USD 25- USD 30 million of integration costs, comprised of severance, retention and third party consulting expenses; and
  • USD 5- USD 7 million of restructuring and plant closure costs associated with the closure of the Clinton cereal facility, comprised of severance, retention and related expenses and accelerated depreciation.

Post management has updated its fiscal year 2018 capital expenditures range to be between USD 245- USD 255 million. This includes requirements to complete the start-up and transfer of production to other facilities related to the Clinton cereal facility closure and USD 45- USD 50 million related to the previously announced cage-free housing conversion at the Bloomfield, Nebraska facility.

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.

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