Post Holdings: Reports Results for Q1 of Fiscal 2019

St. Louis / MO. (pfh) Post Holdings Inc., a consumer packaged goods holding company, reported results for the first fiscal quarter ended December 31, 2018. Highlights: Net sales of USD 1.4 billion. Operating profit of USD 293.9 million; net earnings of USD 125.6 million and Adjusted Ebitda of USD 292.5 million. Updated fiscal year 2019 Adjusted Ebitda (non-GAAP) guidance range of USD 1.20-USD 1.24 billion.

Financial results for the first quarter of fiscal year 2019 reflect the separate capitalization of 8th Avenue Food + Provisions Inc. («8th Avenue»), the holding company for Post’s historical private brands business, effective October 1, 2018, with Post’s 60.5 percent retained interest in 8th Avenue’s common equity accounted for using equity method accounting. Additionally, financial results for the first quarter of fiscal year 2019 include results from Bob Evans Farms Inc. («Bob Evans»), which was acquired on January 12, 2018.

First Quarter Consolidated Operating Results

Net sales were USD 1,411.3 million, a decrease of 1.5 percent, or USD 21.8 million, compared to the prior year period. Pro forma net sales (as defined later in this release under «Pro Forma Information») increased 3.1 percent, or USD 42.7 million, when compared to the same period in fiscal year 2018. Gross profit was USD 426.5 million, or 30.2 percent of net sales, a decrease of USD 22.0 million compared to the prior year gross profit of USD 448.5 million, or 31.3 percent of net sales.

Selling, general and administrative (SG+A) expenses were USD 217.1 million, or 15.4 percent of net sales, a decrease of USD 28.9 million compared to the prior year SG+A expenses of USD 246.0 million, or 17.2 percent of net sales. SG+A expenses for the first quarter of 2019 included USD 10.7 million of transaction costs primarily related to the separate capitalization of 8th Avenue and were treated as adjustments for non-GAAP measures. SG+A expenses for the first quarter of 2018 included USD 10.6 million of integration expenses and a provision for USD 9.0 million in legal settlements, both of which were treated as adjustments for non-GAAP measures.

Operating profit was USD 293.9 million, an increase of 82.5 percent, or USD 132.9 million, compared to the prior year period operating profit of USD 161.0 million which included segment profit of USD 16.9 million attributable to the historical private brands business. Operating profit for the first quarter of 2019 included a USD 124.7 million gain related to the separate capitalization of 8th Avenue which was treated as an adjustment for non-GAAP measures.

Net earnings were USD 125.6 million, a decrease of 57.4 percent, or USD 169.3 million, compared to the prior year period. Net earnings for the first quarter of 2019 included a loss of USD 51.7 million 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 earnings for the first quarter of 2018 included a USD 263.6 million one-time income tax net benefit and a USD 37.3 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 123.6 million, or USD 1.67 per diluted common share, compared to the prior year period net earnings available to common shareholders of USD 291.5 million, or USD 3.82 per diluted common share. Adjusted net earnings were USD 83.3 million, or USD 1.11 per adjusted diluted common share, compared to the prior year period adjusted net earnings of USD 67.9 million, or USD 0.88 per adjusted diluted common share.

Adjusted Ebitda was USD 292.5 million, an increase of 3.9 percent, or USD 10.9 million, compared to the prior year period Adjusted Ebitda of USD 281.6 million which included USD 30.2 million attributable to the historical private brands business.

Segment Results

During the first quarter of 2019, Post reorganized its reported segments by separating the legacy Refrigerated Food segment into two segments: Foodservice and Refrigerated Retail.

Post Consumer Brands

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

Net sales were USD 455.3 million, an increase of 5.4 percent, or USD 23.3 million, compared to the prior year period. Volume growth of 4.8 percent was driven primarily by certain licensed products, Honey Bunches of Oats and Pebbles. Segment profit was USD 84.0 million and USD 70.2 million for first quarter 2019 and 2018, respectively. Segment Adjusted Ebitda was USD 113.6 million and USD 104.8 million for first quarter 2019 and 2018, respectively.

Weetabix

International (primarily United Kingdom) RTE cereal and muesli.

Net sales were USD 100.9 million, an increase of 1.2 percent, or USD 1.2 million, compared to the prior year period, with volumes declining 3.3 percent. Segment profit was USD 18.9 million and USD 16.8 million for first quarter 2019 and 2018, respectively. Segment Adjusted Ebitda was USD 27.1 million and USD 25.6 million for first quarter 2019 and 2018, respectively.

Foodservice

Primarily egg and potato products.

Net sales were USD 408.1 million, an increase of 10.6 percent, or USD 39.2 million, compared to the reported prior year first quarter. Pro forma net sales increased 4.1 percent, or USD 16.2 million, over the same period in fiscal year 2018. Pro forma volumes increased 5.1 percent, driven by a 5.8 percent increase in egg volumes and a 4.6 percent increase in potato volumes. Segment profit was USD 52.7 million and USD 45.9 million for first quarter 2019 and 2018, respectively. Segment Adjusted Ebitda was USD 77.1 million and USD 69.8 million for first quarter 2019 and 2018, respectively.

Refrigerated Retail

Inclusive of side dishes, egg, cheese and sausage products.

Net sales were USD 261.6 million, an increase of 84.6 percent, or USD 119.9 million, compared to the reported prior year first quarter. Pro forma net sales increased 0.2 percent, or USD 0.5 million, over the same period in fiscal year 2018. Pro forma volumes increased 3.2 percent, driven by a 7.0 percent increase in pro forma side dish volumes. Volume information for additional products is disclosed in a table presented later in this release. Segment profit was USD 30.5 million and USD 23.2 million for first quarter 2019 and 2018, respectively. Segment Adjusted Ebitda was USD 48.0 million and USD 31.2 million for first quarter 2019 and 2018, respectively.

Active Nutrition

Protein shakes and other ready-to-drink beverages, powders and bars and nutritional supplements.

Net sales were USD 185.8 million, flat compared to the prior year period, as net sales growth in shake, other ready-to-drink and powder products was offset by declines in bar products. Shake net sales grew 3.8 percent, a deceleration from recent periods resulting from short-term capacity constraints. Segment profit was USD 35.2 million and USD 19.8 million for first quarter 2019 and 2018, respectively. Segment profit for the first quarter of 2018 was negatively impacted by a provision for USD 9.0 million for a legal settlement. Segment Adjusted Ebitda was USD 41.6 million and USD 35.3 million for first quarter 2019 and 2018, respectively.

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

Interest expense, net was USD 59.4 million for the first quarter of 2019, compared to USD 90.5 million for the first quarter of 2018. Interest expense, net for the first quarter of 2019 included i) a gain of USD 30.1 million resulting from the reclassification of gains previously recorded in accumulated other comprehensive loss to interest expense and ii) USD 4.3 million of 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. During the first quarter of 2019, Post i) settled with one such former stockholder and ii) pre-paid the USD 77.00 per share merger consideration related to claims from the remaining former stockholders, which together resulted in total payments of USD 257.6 million.

Loss on extinguishment of debt, net of USD 6.1 million was recorded in the first quarter of 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 37.3 million was recorded in the first quarter of 2018 in connection with Post’s redemption of its 6.00 percent senior notes.

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 51.7 million for the first quarter of 2019, compared to income of USD 2.7 million for the first quarter of 2018.

Income tax expense was USD 43.8 million in the first quarter of 2019, an effective income tax rate of 24.3 percent, compared to a benefit of USD 255.8 million in the first quarter of 2018. In connection with the U.S. Tax Cuts and Jobs Act, Post recorded a USD 263.6 million one-time income tax net benefit in the first quarter of 2018.

Share Repurchases

During the first quarter of 2019, Post repurchased 0.3 million shares for USD 25.3 million at an average price of USD 88.12 per share. At the end of the first quarter of 2019, Post had USD 282.7 million remaining under its share repurchase authorization.

Recent Announcements

On January 10, 2019, Post announced it gave notice for the redemption of all outstanding shares of its 2.5 percent Series C Cumulative Perpetual Convertible Preferred Stock with a redemption date of February 15, 2019.

Outlook

Post management has updated its fiscal year 2019 Adjusted Ebitda range to be between USD 1.20-USD 1.24 billion, which excludes any earnings from Post’s investment in 8th Avenue.

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

  • USD 17-USD 19 million of restructuring and plant closure costs associated with the closure of certain cereal facilities, comprised of severance, retention and related expenses, adjustments on assets held for sale and accelerated depreciation; and
  • USD 2-USD 3 million of integration costs, comprised of severance, retention and third party consulting expenses.

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.»

Fiscal Year 2018 Reclassification

Certain financial amounts for fiscal year 2018 were reclassified to reflect the exclusion of all components of net periodic benefit cost, with the exception of service cost, from operating profit in accordance with the provisions of Accounting Standards Update 2017-07, «Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.» The reclassified amounts are reported in the Condensed Consolidated Statements of Operations in «Other income, net.» These reclassifications had no impact on net earnings as previously reported.

8th Avenue Standalone Financial Information and Outlook

A business separately capitalized by Post and Thomas H. Lee Partners, L.P. («THL»), in which Post and THL own 60.5 percent and 39.5 percent, respectively, 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).

Net sales were USD 214.1 million, an increase of 3.7 percent, or USD 7.7 million, compared to the prior year period. Net loss was USD 4.5 million and Adjusted Ebitda was USD 22.9 million. As of December 31, 2018, 8th Avenue is capitalized with USD 648 million of senior secured debt and USD 250 million of preferred equity. Summarized financial information for 8th Avenue is disclosed later in this release.

For 8th Avenue, Post management continues to expect fiscal year 2019 Adjusted Ebitda to range between USD 110-USD 120 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 and other charges reflected in 8th Avenue’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.»

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 for the Company and 8th Avenue, and segment Adjusted Ebitda. The reconciliation of each of these non-GAAP measures to the most directly comparable GAAP measure is provided later in this release under «Explanation and Reconciliation of Non-GAAP Measures.»

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.

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